Norway offers few lessons for Alberta
Yes, we’re oil-rich jurisdictions, but the similarities end there
It’s a seductive fantasy. And since I rarely have one of those when I’m churning out a business column, I’d like a private moment to enjoy it, please.
There, that’s very nice. Thank you. Thank you so much.
The fantasy? Instead of drowning in deficits, Alberta could be rich. Just like Norway. If that’s not alluring to you, I don’t know what is.
At least, that’s what various media pundits in Toronto are insisting, as they watch the country’s former economic powerhouse struggle to avoid falling into recession.
And who are we to argue with the big brains in the Centre of the Universe, whose fondness for advising “oil-addicted” Albertans on how to run their economy is matched only by Ontario’s own addiction to deficits.
Their basic argument goes like this: Norway’s sovereign wealth fund, the world’s biggest, is now worth roughly $1 trillion.
By comparison, the Alberta Heritage Savings Trust Fund is worth just over $17 billion. If you do the math, that makes Norway’s fund about 60 times bigger than Alberta’s rainy-day fund.
The implied lesson: Norway has wisely saved its energy riches for the benefit of current and future generations, while Alberta has stupidly squandered its treasure trove, through mis-management and reckless overspending.
Even if you agree with that last bit (which I do), that still leaves Alberta a long way from enjoying the kind of riches Norway has accumulated.
Norway’s wealth is built on offshore oil from the North Sea. Alberta’s non-renewable resource revenues come from conventional oil and natural gas, and more recently, the oilsands — a low-grade, high-cost resource that was regarded as little more than a science project a few years ago.
With oil prices down sharply over the past year, Norway’s massive fund clearly puts the Scandinavian nation of five million people in an enviable position.
Although its oil output has dropped by half over the past dozen years and thousands of oil workers have lost their jobs of late, Norwegians aren’t losing much sleep over it. Unlike Albertans.
Since Norway’s Government Pension Fund Global, as it’s called, invests in roughly 9,000 companies globally, generating billions of dollars in diversified investment revenues each year, Norway is far less dependent on volatile energy revenues than Alberta.
Ironically, it was Alberta that inspired Norway to establish its sovereign wealth fund in 1990, a full 14 years after the Heritage Saving Trust Fund was founded by then Alberta Premier Peter Lougheed.
Another key point: Norway strictly limits how much can be drawn from its fund each year to cover any budget shortfalls, notes Kristen Halvorsen, Norway’s former finance minister, who attended a conference in Ottawa this week.
“We can only use the estimated real return of the fund, to preserve the real value for future generations. And the real (long-term annual) return is estimated at four per cent,” she explains.
“So in periods of high economic growth, we spend less than the long-term target of four per cent. And if there is a downturn, we exceed the target of four per cent. Transfers from the fund in 2015 will cover around 11 per cent of our total budget expenses.”
Clearly, Norway deserves full marks for its fiscal discipline, and the long-term approach it has taken to managing its resource wealth.
But when it comes to applying those lessons to Alberta, there are some huge differences between jurisdictions that make such comparisons meaningless. And that’s what the media cheerleaders in Toronto usually ignore.
First, Norway is a country, you’ll notice, not a province. So while Alberta’s energy producers pay a 10-per-cent corporate tax to the province, the feds take an even bigger slice, at 15 per cent.
Ergo, billions of tax dollars generated in Alberta’s oilpatch flow to Ottawa, helping to fund a variety of federal programs across the country. Similarly ,well-paid Albertans who work in the oilpatch ship billions of their tax dollars to Ottawa each year — monies that are sprinkled nationwide under the federal equalization program.
Norway, unlike Alberta, doesn’t have to redistribute its oil riches to other jurisdictions, of course.
Perhaps more importantly, Norway’s corporate tax rate is a staggering 78 per cent. Can you imagine Suncor, Canadian Natural Resources or any of Alberta’s big oil producers investing in the oilsands if they had to fork over nearly four-fifths of their profits to the government? I can’t.
At that rate, the oilsands would have never been developed, and Alberta’s economic boom over the past decade wouldn’t have occurred.
The reason such a lofty tax rate is accepted in Norway is that Statoil, the industry’s major player, which accounts for more than three-quarters of the country’s oil production, is controlled by the Norwegian government. So most of Statoil’s profits flow directly into Norway’s sovereign wealth fund.
The structure of Alberta’s energy industry is fundamentally different. It is tightly integrated with the U.S. energy sector. Dozens of domestic and foreign players operate here. Most are widely held, publicly traded companies that trade on the major stock exchanges.
As such, they are expected to generate a decent return for their shareholders. In return, they have invested tens of billions of dollars of private capital to develop Alberta’s resources.
A final point: Until oil prices soared a decade ago, the oilsands were widely viewed as uneconomic, and Alberta’s official oil reserves — as measured by the U.S. Energy Department — were a fraction of what they are today.
But between 2004 and 2014, when capital poured into the oilsands, Alberta posted the highest annual economic growth rate in Canada by a country mile, at 3.3 per cent, and generated a big chunk of the country’s net new jobs.
If managed properly, the oilsands could double output over the next 20 years, generating wealth and jobs for future generations. Meanwhile, Norway’s North Sea production is falling steadily, making it a sunset industry.
The bottom line: comparisons between Alberta and Norway may look very different a decade or two from now. Now that’s a fantasy worth contemplating.