Alberta’s Fiscal Crisis Is Self-Inflicted
The petrostate’s fortunes ride on the oil price roller-coaster. That could derail the UCP.
Andrew Nikiforuk
?Danielle Smith has two big, oily problems.
The first is a $9-billion deficit with projections of multibillion-dollar deficits for the next two years in a row. All are the result of bad policy choices made by Premier Smith and her government.
The second is something she never imagined.
Her fellow sower of revolutionary chaos, Donald Trump, has declared that he wants to push oil prices down to the $50-a-barrel range to lower transportation and food prices for his restive subjects.
He plans to do that by commandeering Venezuelan oil and feeding it to U.S. coastal refineries.
If all goes relatively smoothly (and that is a big if) Trump’s Venezuela plan could conceivably up the country’s production, adding 300,000 to 500,000 barrels a day to world production by 2027.
Such a development could affect the pricing of a significant amount of diluted bitumen flowing to the United States, and not in a good way for oilsands producers.
Meanwhile oil prices have been falling for a year. No surprise there. That’s what oil prices do. The price of the world’s most volatile commodity behaves like a yo-yo. Last year prices started around $70 a barrel. Now they are hovering around $60. Given that 25 per cent of Alberta’s budget comes from oil and gas revenues, the province now faces another predictable fiscal crisis.
Every time the price of oil drops by US$1, the province loses C$750 million to $850 million in income from royalties.
If Trump succeeds in dropping oil prices to $50 a barrel (and who knows what the orange monarch will do next) the Alberta government stands to lose tens of billions. That means even bigger deficits and a political crisis of enormous proportions.
Smith’s government, however, was in deep trouble long before Trump started to muse about $50 oil — a highly problematic price for many oil companies and petrostates, by the way.
Although Smith pretends to be a fiscal conservative, it’s all a grand performance. In reality she is really just another petro-politician like Margaret Thatcher ([url]https://www.theguardian.com/commentisfree/2013/apr/19/north-sea-oil-80s-boom[/url]) or Hugo Chávez. They, too, spent oil money like there was no tomorrow for their respective ideological projects, whether of the right or left.
Since 2021, operating spending by the United Conservative Party government (excluding COVID assistance) has jumped by $15.5 billion, or 31 per cent.
Much of the spending has been on disruptive schemes such as reorganizing Alberta Health Services because Smith didn’t like the way it managed the pandemic.
Or holding a referendum on separating from Canada. Or ditching the Canada Pension Plan. Or building a made-in-Alberta police force. Or hiring ideological flunkies to produce ingratiating reports on the oil industry.
Or hiring lawyers to blame Ottawa for Alberta’s homegrown fiscal incompetence. When roller-coaster oil prices throw a wrench into things, every petro-politician, from Trump to Putin to Smith, plays the blame game.
It is also notable that the Alberta government’s debt interest costs (per person) stood at $187 in 2014. But under Danielle Smith the province’s debt has grown so fast that it has reached nearly $600 per person. Even the right-wing Fraser Institute is appalled ([url]https://www.fraserinstitute.org/commentary/albertans-will-pay-smith-governments-red-ink[/url]), and that’s saying something. These figures, by the way, do not include ([url]https://thetyee.ca/Analysis/2019/02/04/Alberta-Mega-Oil-Gas-Liability/[/url]) more than $200 billion in unfunded liabilities for the cleanup costs of abandoned oil wells and retired oilsands mining projects.
Just three years ago the Alberta government needed $70 a barrel to balance its budget. According to Lennie Kaplan, a former senior bureaucrat with the Alberta government, its dependency on oil revenues keeps growing: now it needs prices in excess of $74 a barrel ([url]https://edmontonsbusiness.ca/business/alberta-government-finances-face-another-fiscal-reckoning/[/url]) to stay afloat. Period.
Now add falling prices and Trump’s scheme to lower oil prices even further with pillaged crude from Venezuela.
The solution to Alberta’s ruinous fiscal roller-coaster is well known yet hotly denied ([url]https://energynow.ca/2020/08/the-only-thing-alberta-and-norway-have-in-common-is-lousy-weather-stop-all-comparisons-please-david-yager/[/url]) by representatives of Smith’s government.
Norway recognized the volatility of the commodity in the 1970s and decided it could not responsibly run a government on such erratic revenue streams. So it decided to save its resource income, take the oil money off the table and place it into a savings fund.
As a result, Norway runs on taxes and therefore its government represents the people who pay those taxes instead of oil and gas companies.
In any given year the Norwegian government can spend only four per cent of that fund’s income. Had Alberta’s politicians stuck to this approach with the Alberta Heritage Savings Trust Fund, as Premier Peter Lougheed originally proposed before Norway copied his idea, Alberta would have ([url]https://albertaviews.ca/getting-off-the-roller-coaster/[/url]) a rainy-day bank account worth nearly $700 billion. And that bank account would this year generate a four per cent yield of $28 billion for the government.
Long ago the U.S. political scientist Terry Lynn Karl warned there is only one political window for change in a petrostate, and that’s when oil prices fall. At that point the ineptitude of oil-addled elites becomes most glaring to citizens in the form of massive deficits, crazy spending schemes, butchered government services and chaos-making projects such as separation and tax-funded pipelines.
Like clockwork, that turbulent time has come once again. When oil prices crashed in 2014, Alberta’s resource revenues sank from $8.9 billion to less than $2.8 billion, unmasking the rank incompetence of the Progressive Conservative government. (Venezuela and Iran, two ruinous petrostates, experienced similar consequences and political unrest.) That window explains why Albertans unexpectedly elected an NDP government, which, unfortunately, chose not to address the province’s boom-and-bust problem.
Now Smith faces a self-inflicted fiscal crisis compounded by her obsession with separation, a scheme that would cost the province $130 billion ([url]https://troymedia.com/politicslaw/alberta-politics/alberta-separation-could-cost-130-billion-over-the-next-decade/[/url]) in lost economic activity over the next decade.
Smith gambled that strong oil prices would deliver her chaos-making government a safe ride on the roller-coaster. But if Trump’s Venezuela gambit succeeds, Smith’s increasingly unpopular government could find itself flying off the track all together.
?
?
The petrostate’s fortunes ride on the oil price roller-coaster. That could derail the UCP.
Andrew Nikiforuk
?Danielle Smith has two big, oily problems.
The first is a $9-billion deficit with projections of multibillion-dollar deficits for the next two years in a row. All are the result of bad policy choices made by Premier Smith and her government.
The second is something she never imagined.
Her fellow sower of revolutionary chaos, Donald Trump, has declared that he wants to push oil prices down to the $50-a-barrel range to lower transportation and food prices for his restive subjects.
He plans to do that by commandeering Venezuelan oil and feeding it to U.S. coastal refineries.
If all goes relatively smoothly (and that is a big if) Trump’s Venezuela plan could conceivably up the country’s production, adding 300,000 to 500,000 barrels a day to world production by 2027.
Such a development could affect the pricing of a significant amount of diluted bitumen flowing to the United States, and not in a good way for oilsands producers.
Meanwhile oil prices have been falling for a year. No surprise there. That’s what oil prices do. The price of the world’s most volatile commodity behaves like a yo-yo. Last year prices started around $70 a barrel. Now they are hovering around $60. Given that 25 per cent of Alberta’s budget comes from oil and gas revenues, the province now faces another predictable fiscal crisis.
Every time the price of oil drops by US$1, the province loses C$750 million to $850 million in income from royalties.
If Trump succeeds in dropping oil prices to $50 a barrel (and who knows what the orange monarch will do next) the Alberta government stands to lose tens of billions. That means even bigger deficits and a political crisis of enormous proportions.
Smith’s government, however, was in deep trouble long before Trump started to muse about $50 oil — a highly problematic price for many oil companies and petrostates, by the way.
Although Smith pretends to be a fiscal conservative, it’s all a grand performance. In reality she is really just another petro-politician like Margaret Thatcher ([url]https://www.theguardian.com/commentisfree/2013/apr/19/north-sea-oil-80s-boom[/url]) or Hugo Chávez. They, too, spent oil money like there was no tomorrow for their respective ideological projects, whether of the right or left.
Since 2021, operating spending by the United Conservative Party government (excluding COVID assistance) has jumped by $15.5 billion, or 31 per cent.
Much of the spending has been on disruptive schemes such as reorganizing Alberta Health Services because Smith didn’t like the way it managed the pandemic.
Or holding a referendum on separating from Canada. Or ditching the Canada Pension Plan. Or building a made-in-Alberta police force. Or hiring ideological flunkies to produce ingratiating reports on the oil industry.
Or hiring lawyers to blame Ottawa for Alberta’s homegrown fiscal incompetence. When roller-coaster oil prices throw a wrench into things, every petro-politician, from Trump to Putin to Smith, plays the blame game.
It is also notable that the Alberta government’s debt interest costs (per person) stood at $187 in 2014. But under Danielle Smith the province’s debt has grown so fast that it has reached nearly $600 per person. Even the right-wing Fraser Institute is appalled ([url]https://www.fraserinstitute.org/commentary/albertans-will-pay-smith-governments-red-ink[/url]), and that’s saying something. These figures, by the way, do not include ([url]https://thetyee.ca/Analysis/2019/02/04/Alberta-Mega-Oil-Gas-Liability/[/url]) more than $200 billion in unfunded liabilities for the cleanup costs of abandoned oil wells and retired oilsands mining projects.
Just three years ago the Alberta government needed $70 a barrel to balance its budget. According to Lennie Kaplan, a former senior bureaucrat with the Alberta government, its dependency on oil revenues keeps growing: now it needs prices in excess of $74 a barrel ([url]https://edmontonsbusiness.ca/business/alberta-government-finances-face-another-fiscal-reckoning/[/url]) to stay afloat. Period.
Now add falling prices and Trump’s scheme to lower oil prices even further with pillaged crude from Venezuela.
The solution to Alberta’s ruinous fiscal roller-coaster is well known yet hotly denied ([url]https://energynow.ca/2020/08/the-only-thing-alberta-and-norway-have-in-common-is-lousy-weather-stop-all-comparisons-please-david-yager/[/url]) by representatives of Smith’s government.
Norway recognized the volatility of the commodity in the 1970s and decided it could not responsibly run a government on such erratic revenue streams. So it decided to save its resource income, take the oil money off the table and place it into a savings fund.
As a result, Norway runs on taxes and therefore its government represents the people who pay those taxes instead of oil and gas companies.
In any given year the Norwegian government can spend only four per cent of that fund’s income. Had Alberta’s politicians stuck to this approach with the Alberta Heritage Savings Trust Fund, as Premier Peter Lougheed originally proposed before Norway copied his idea, Alberta would have ([url]https://albertaviews.ca/getting-off-the-roller-coaster/[/url]) a rainy-day bank account worth nearly $700 billion. And that bank account would this year generate a four per cent yield of $28 billion for the government.
Long ago the U.S. political scientist Terry Lynn Karl warned there is only one political window for change in a petrostate, and that’s when oil prices fall. At that point the ineptitude of oil-addled elites becomes most glaring to citizens in the form of massive deficits, crazy spending schemes, butchered government services and chaos-making projects such as separation and tax-funded pipelines.
Like clockwork, that turbulent time has come once again. When oil prices crashed in 2014, Alberta’s resource revenues sank from $8.9 billion to less than $2.8 billion, unmasking the rank incompetence of the Progressive Conservative government. (Venezuela and Iran, two ruinous petrostates, experienced similar consequences and political unrest.) That window explains why Albertans unexpectedly elected an NDP government, which, unfortunately, chose not to address the province’s boom-and-bust problem.
Now Smith faces a self-inflicted fiscal crisis compounded by her obsession with separation, a scheme that would cost the province $130 billion ([url]https://troymedia.com/politicslaw/alberta-politics/alberta-separation-could-cost-130-billion-over-the-next-decade/[/url]) in lost economic activity over the next decade.
Smith gambled that strong oil prices would deliver her chaos-making government a safe ride on the roller-coaster. But if Trump’s Venezuela gambit succeeds, Smith’s increasingly unpopular government could find itself flying off the track all together.
?
?
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