Alberta's Perfect Storm, Part 2

Last time I looked at some of the ways Alberta's economic pillar, the fossil fuel industry, was recently affected negatively by a combination of technological change, competition and strategic interference. However, to understand the present economic bust more fully, we need consider more than the industrial side of things, but the human side, too. Unfortunately, much of the province's suffering today is result of poor choices made by people in government, and in their private lives, as it is a matter of circumstance. Accordingly, I believe much of what has happened was avoidable, as our predicament was predictable, but our leaders, and our selves, failed us.

To be gentle, we should start by considering the failings of the PC government.

The most common complaint about the past government is that they failed to plan for the future. This is a big charge, made up of two major components. The first is that they failed to save for days like this. Another component is that they failed to diversify the economy.

On the first charge, that they failed to save, rings all too true. The PCs, from Klein to Redford will forever be condemned as both reckless and irresponsible. The Province's Heritage fund was left to stagnate, left undisturbed since the downturn of the 1980s. Since that downturn, Alberta had paid off its debt, and was in the position, I remember, "to pay off the debt of other provinces, so long as they promised never to go into debt again" (this was actually argued in the National Post over a decade ago). Instead, the government cut taxes on the rich, on corporations, and on royalties.

That the tax cuts favoured the rich is undeniable; a flat tax, set at the relatively high rate of 10%, were you poor, or the incredibly low rate of 10%, were you rich, was a massive giveaway of billions of dollars a year in revenue. It needs be remembered, for all time, that tax cuts for the rich were very much in vogue in the English speaking world of the early 2000s, but that just serves to reinforce how shortsighted these governments were globally. Now tax cuts in general are not necessarily bad things; I would argue though that you can't afford them when people are dying in your hospital waiting rooms, and the insane are being put out on the streets. The only thing that made these tax cuts doable were the high revenues the province received from natural gas, gambling, and oil, the complicity of the province's media, and the wishes of the voters, in that order.

Cutting taxes on corporations remains popular today; probably because all of our news media comes from blatantly self-interested media corporations. However, even I feel that this may have been a good idea at the time. Low taxes do attract new businesses; but it can be seen that this did not happen in Alberta for other reasons, which I will explore later. The companies we did have, those incredibly profitable corporations of Alberta, were able to save their profits, and if you look who owns what, remove them from the country altogether.

The cut in the rate of oil royalties was actually more of an accident than a deliberate giveaway. Still, the story that can be told tells the same story of moral cowardice as before. Royalties dropped because Alberta had two different kinds of royalties: one for conventional oil, and one for the oil sands. Like the rest of Earth, Alberta's conventional oil was cheap to access and of good quality. Accordingly, the government in the distant past effected a decent royalty rate. Cheap access and good quality are two characteristics lacking in the oil sands. The Oil Sands are so inaccessible that for many years the best plan for getting at the stuff was by nuking the ground around Fort McMurray, a plan approved by Premier Manning's government (more amazingly, the Soviet Union actually did this on its own soil). As for quality, the oil sands are so bad they require much refining before even becoming as good as conventional oil; hence the much lower price it fetches internationally. So, to encourage development of the oil sands, the government set royalty rates low, and provided further generous incentives to oil sands companies. The drop in oil royalties basically reflects the historical depletion of Alberta's conventional oil sources, and their replacement by the oil sands.

Now the moral cowardice. Premier Stelmach inherited the government around the time the oil sands displaced the conventional sources as Alberta's economic (and revenue) driver. He proposed a royalty review meant to address the discrepancy between the oil royalties. In those days the price of oil was galloping towards $150US a barrel, and if your Calgary based oil company wasn't insanely profitable, there was something terribly wrong with it, or more likely, you. Nonetheless, the royalty review was aborted, with the specious claim the royalties were fine. The only thing to come from the whole situation was that Alberta's oil companies threw their financial weight behind the offshot of the wilting Social Credit Party: the Wildrose Alliance.

During the Stelmach years, investment poured into the Alberta Oil Sands. The Province's economic growth and population growth were simply stunning. Already, though, problems were becoming apparent. Things were simply too good. The low tax regime adopted by the province undoubtedly encouraged the mass migration and investment we received (reducing regulations also helped, no doubt). It also encouraged massive inflation; at one time, the poverty line in Fort McMurray was an income of over $60,000 a year.

The government lacked the resources to keep up with the growth. Whole neighbourhoods were being built with no schools, community centres, parks. Calgary didn't get a new high school for 15 years, while the population increased by the hundreds of thousands. During the last election, one friend ran in a Northwest Calgary riding. I was astonished that it had as many schools - six - as the 60 year old community I reside in. There was a lack of hospitals, schools, teachers, doctors, nurses - there was a shortage of almost everything necessary for society to run.

There is perhaps a development lesson here. I feel the lesson is don't encourage more development than you can pay for or keep up with. The Alberta governments reckless tax cuts blew up a bubble economy, while reducing its ability to keep pace with it. And all the while, they didn't save a dime. Former Premier Lougheed criticized the government for its haphazard economic development. One think tank went so far as deem Alberta the province with the worst fiscal outlook in the country.

Why did economic diversification fail? Deregulating the electricity markets didn't help. Experts say it has cost the province's people and businesses $20 billion since it was implemented. This alone may not have been fatal to Alberta's other industries, but the massive economic growth in the province drove up rents and leases, too. The last nail in the coffin of Alberta's economic diversification was the success of the Oil Sands itself. One could simply make so much money, so fast, regardless of your passions or qualifications, that almost all the province's energies and talents were sucked into the oil sector. This was not a bad thing at the time, but were something to happen to oil, we would definitely be in an uncomfortable position.

And here we are.

I realize I have spent too long bashing the government. The people of Alberta deserve a shake too. Next time.

Again, thanks for reading.