You Can Only Burn Me Once

Fool me once, shame on me.  Fool me twice, shame on you.  Fool me twelve times, who’s getting the blame this time?

When Alberta last went through a sea change in government, Alberta was a much different place.  We were primarily an agricultural economy, with energy revenues becoming more and more important to our well being.  I honestly don’t know what life was under Social Credit.  I do know that in the mid 80’s one of the most influential people of my childhood ran for Social Credit and got trounced soundly.

Make no mistake, we’re experiencing great change right now.  Our attempts to diversify from a single resourced-based economy has shifted to a different single resourced-based economy.  For good or for worse, over the past forty years we have collectively failed to diversify our economy beyond one or two main pillars.

As our government demonstrated so clearly over the past few years, we have not been shown great foresight into the management of our resources. Government has failed to demonstrate even an understanding of the fundamental driver of our economy.

Natural gas was the engine behind Alberta’s growth after the turn of the century.  Ask yourself the question honestly:  Do you understand pricing in the natural gas market?  How well do you remember historical natural gas pricing?  We lived on that boom for some ten years.  Today the price of natural gas is in the crapper (pun fully intended) and it’s the oil sands that are the leading generator of economic growth.

Well, that’s my understanding of the story.  To make sure I wasn’t spouting complete and utter nonsense I decided that I’d first do a little of that “fact checking” that bloggers like me are so loathe to do.

I started off with Government of Alberta’s Historical Royalty Data page.  Granted, I was looking specifically for a summary chart of historical natural gas royalty revenues.  I have no polite way to say this, I’ve just spent two hours going through the spreadsheet presenting revenues collected, and the very fascinating (also detailed, technical and extremely complicated) Natural Gas Royalty Report 2010, and I have more questions than answers.

Make no mistake whatsoever.  I am not a natural gas analyst and in absolutely no way do I consider myself expert enough to be able to give you a clear, cogent review after less than an evening of poking through the data.  I am, however, a scientist at heart and I feel very comfortable being able to sift through the data to gain an understanding of what the numbers mean.  It will take a lot of time, there’s an awful lot there to digest.  This is not the sort of job you tackle on whimsey.  There is much there to understand, there is much there that is significant.  The longer I sifted through data the more trends I felt I was beginning to spot.

I am going to reiterate two extremely important points:
1) I am not an expert, I was simply trying to illustrate a point I was hoping to make
2) The more I looked into the detail the further I narrowed down my field of view.  There is so very much here to understand that I kept cutting back further and further.

In doing so I’m demonstrating a very different point than I originally was trying to make.  The royalty framework is complex.  Oil and gas revenues are dependent upon many factors, not simply how much of a given quantity of substance pulled from the ground.

Only the most foolhardy of governments would consider rushing headlong into massive changes in the structure without significant consultations with the people most affected by the changes.  Yet they did precisely that.  Do we have massive problems with minimally constrained growth?  Yes.  Do we need to significantly change how the province deals with municipalities?  Absolutely, yes.  (Everything I’ve heard about Fort McMurray is that they’ve severely suffered from unconstrained growth and lack of services, and yet it’s consistently mentioned as a great place to live and work.  I find myself tempted, if my kids weren’t here in Calgary.)  Are we getting fair value for our resources?  I honestly don’t know.

This is a complex framework.  It developed over many, many years in response to fixing specific problems.  It’s okay to tackle problems that arise from growth in our oil and gas sector.  But solutions need to be found that don’t upset the entire balance of what we’ve been trying to accomplish.  Nobody is smarter than forty years of collective problem solving, nor is the royalty framework the be-all-and-end-all of Alberta’s economy.  Some things need to be addressed slowly, carefully and with clarity and visibility of as many consequences as we can forecast.  Businesses need reliable, predictable data to work with planning five and ten year projects.  Government needs a stable, reliable source of revenue to provide services we demand.  The public - us, the people - need to have an honest understanding of the issues at play.

How confident do you feel about predicting natural gas prices?  If only for demonstrative purposes, this graphic shows vast variation in the historic price of natural gas.

Actual and forecast prices of natural gas in Alberta.  Source:  I strongly recommend taking a broader look at the data provided, it is very interesting and well presented.

Would you bet your home on getting your prediction correct?  That’s precisely the volatility we face each and every year when we estimate our royalty revenues.  Low ball our prediction and have a good year for commodity prices and we get record surpluses.  Over-estimate prices and we can be in for a painful period where the government cries poor.

There’s a fundamental idea I try to live by - or at least it’s a goal of mine, if only I could catch up.  Live off the interest, don’t live off the principal.  It’s a fundamental shift in our thinking, but we need to stop relying on the volatile commodity market as the main source of our revenue.  Yes, we need to give up this silly notion that our taxes are the lowest in Canada.  Do we want bragging rights or do we want sound budgeting?  Ultimately, we’re going to spend the same amount of money.  We need to ensure that the money comes from stable, predictable sources so that we can start making better predictions in our budgets.  We need to be clear and open about what our costs are and what our spending shall be.

This brings about a whole bunch of side benefits.

I.  Oil and natural gas are non-renewable resources.  We’ve been blessed with abundant supplies, but when they’re gone, they’re gone.  We may not even be able to extract and use or sell all we have available as environmental concerns drive the search for new sources of energy.  We have to take serious consideration of whether or not we are getting fair value in exchange for our resources.  We really need to take into consideration the costs of monitoring our environment, the inevitable future rise in commodity prices (the longer it sits, the more we’re going to make from it - unless we can no longer sell it at all down the road for whatever reason), the heightened costs of extraction of non-conventional energy sources may make acquiring our resources more costly, failure to research better means of extraction now will make things much more costly down the road.  Not being dependent upon oil and gas as a primary driver frees us from the ups and downs of the market.

II.  Diversification of our economy has been something we’ve been warned to do for - well, for as long as I’ve ever been alive.  We need healthier choices in our economy.  At one point, Alberta was entirely reliant upon how our agriculture did, now it’s become oil and gas revenues.  Breaking free from a single source of income and spreading it across several sectors of the economy means that when one aspect of our economy is tanking, we have another industry that can pick up the slack.  Albertans are bright and industrious people with fabulous ideas going forward.  Simply by becoming less reliant on petroleum revenues we do less squelching of other industries that get created, bloom and eventually move from Alberta.  Keep all the benefits of oil and gas revenue, reinvest them in ourselves for our own future.

III.  Inter-generational equity and fairness is going to increase significantly.  Do you know what my mother paid for tuition in the early 1980’s at the same university I attended?  She paid just a little over $300 a semester, let’s call it $700 annually as a full time undergraduate student.  In 2010-2011, we’re looking at $5,238 according to the University of Calgary.  I can only imagine what my children are going to face.  A highly educated population is one of the strengths of Alberta.  Why would we endanger that when our education benefits us all?

Pollution left behind after resource extraction needs to be dealt with.  It is better to deal with cleanup immediately subsequent to extraction and not years or generations afterwards.  Lynnwood Ridge is a cost that my generation has to bear, I want to be as sure as possible I’m not leaving similar messes for my children.  Putting aside a pool of money that was generated from oil and gas revenues is a more ethical, more proactive, more reasonable means to pay for those future costs when they arise.  If we caught them all when they happened, there’s more in the pool for Albertans in the future.  If we miss one or two, we’re not dumping the burden of the cost onto our children.

I honestly believe this was the goal of the Heritage Savings Trust Fund.  Norway started their Government Pension Fund in 1990 - fourteen years after we created the HSTF and, ironically, three years after we stopped adding revenues to it.  They have done spectacularly well and I would so much rather have problems of deciding ethical investments and spending the interest than the problems of catching up with overheated growth and community need that we have in Alberta.  We could have been significantly ahead of Norway instead of where we are today.  Our government has not leveraged our resources well.

So today, in the midst of an election, we are being wooed by big promises about how to spend our own wealth.  These are the very same people who have ignored what saving for the future can generate and sound principals of budgeting.  I am categorically not willing to trust anyone throwing around big election promises to be fiscally responsible into the future.

Want to be small-c conservative?  Act the part and do it right now during the election.  It’s pretty shameful to have big spending thrown around without metrics and standards laid out ahead of time.  That is not accountability, that’s just electioneering in the old vein.  Being fiscally accountable is a very large reason of why I’m a member of the Alberta Party and why the left / right tar brushing does not wash for me.

Alberta’s non-renewable resources are burned once and then they’re gone.  Remember how this post started?

My trust in the government’s ability to budget has been burned up and expended.  My trust in the government’s ability to present open and transparent data from which we can get an honest and sound financial picture is gone as well.

There’s only so many times we can be fooled until the political capital has been used up.  It’s time for something better, more forward thinking, more open, more transparent, and much more accountable to Albertans.

Next up:  Represent me, really me.