Alberta’s history of poor economic decisions

The success of any enterprise is largely a function of the quality of the decisions made by those charged with the governance and management of the entity. One of the chief challenges facing any management team is balancing long-term and short-term concerns. Over-emphasizing one at the expense of the other can yield results that may be impossible to correct.

Looking at the actions of the Government of Alberta over the past 30 years, it is evident that short-term considerations dominated its economic strategies and the province now finds itself between a rock and a hard place.

The short-term focus was evident in two ways. First, governments (subsequent to that headed by Peter Lougheed in the 1980s) assumed that the economic impact of the oil and gas industry would continue unabated well into the future.

That, in turn, meant the flow of royalties from the exploitation of the nonrenewable resources to the provincial treasury would also continue thereby alleviating the need to raise taxes to fund an expansion of infrastructure. So unlike Norway, which decided to put the royalties in an investment fund for use when its North Sea oil resources were exhausted, Alberta spent most of the money. Norway’s investment fund now exceeds $1 trillion and Alberta’s is less than $18 billion.

Second, the decision to use royalties to cover operating expenses also meant that any effort to diversify the structure of the Alberta economy was not a strategic focus. The reserves of oil and of natural gas were enormous and the world’s largest market for these resources was immediately to the south. Classic shortterm thinking.

The growth in importance of the energy sector to Alberta’s economy also meant that its influence on public policy increased as well. Sadly, what was best for the energy sector was not necessarily best for Alberta as a whole. (This will be discussed in detail in next week’s column.)

Then the world changed. Technological advances, primarily the development of fracking, turned the U.S. from a major importer of oil into a net exporter. The demand for and price of Alberta crude fell.

Further, growing concern about climate change and the identification of greenhouse gasses as a major culprit engendered a growing effort to limit the use of petroleum as an energy source.

There also arose increasing hostility to the building of oil pipelines, especially for diluted bitumen from the oil sands, because it is considered particularly toxic if spilled.

Proposed increased pipeline capacity to the west coast generated substantial objections from various conservationist and aboriginal groups who fear a catastrophic impact on coastal marine ecology from any tanker accident. Northern Gateway was cancelled in 2016 and the Trans Mountain expansion is in legal limbo.

Recent declines in the price of both gas and crude have led producers to increase production in an effort to cover costs.

But, without new pipelines, there is insufficient capacity to get this increased quantity of product to markets. The glut has prompted the industry to call for some form of relief from governments.

Low prices mean the flow of royalties into the provincial treasury is down significantly, so the range of policy alternatives available to Alberta are now extremely limited.

Rising unemployment, occasioned by layoffs in the energy sector, means this is not the time to raise taxes. As it is, the province has to borrow to cover operating expenses — and responsible borrowing to invest in projects for possible economic diversification is precluded.

Were all this not enough, pending future elections, both provincial and federal, complicate matters. The NDP provincial government is hoping for a miracle to survive in the bedrock of conservatism in Canada.

The federal Liberals face strong opposition outside Alberta to building pipelines and/or “bailing out” Alberta.

Painted into a corner, the Alberta government decided to limit crude production, buy a substantial number (7,000) of tank cars to increase the shipment by rail of crude and to pressure the feds to get the pipelines built.