Refining Alberta’s job gusher
Refineries shouldn’t be subsidized on employment grounds – doing so can only destroy value
On May 5, Albertans went to the polls and elected their first new government in nearly 44 years — an NDP government. With the heat of the campaign behind us, a cool headed review of their proposals are in order. One in particular stood out: “Rachel Notley and the NDP will deliver better value from Alberta’s resources by promoting upgrading and refining.”
The NDP is in good company. The desire to “add value” to resources and promote “valueadded jobs” is broadly held by politicians on all sides. The public at large is also behind them. Despite their popularity, the economic case to subsidize upgraders and refineries in Alberta is weak.
First, what is value added? In a nutshell, the value added of a sector is roughly the amount of income that it creates. If a furniture manufacturer buys wood for $200 to make a chair that sells for $300, then it has added $100 in value. It has also created $100 in income for the workers, capital owners, governments, and whoever else gets a take. Ultimately, this income comes from buyers willing to pay more for the sector’s output than the cost of the intermediate inputs involved (wood for the table). Importantly, adding value has nothing to do with physical processing. After all, resources are worth more above the ground than below, so raw extraction indeed adds value.
Luckily, value added can be measured, and it turns out that every sector “adds value,” though some much more than others. Refining jobs also do not add more value than extraction jobs. In 2011, the latest data where we can compare extraction to refining, value added per job in oil and gas extraction was $1.4 million compared to $660,000 in refining. To be sure, both sectors add a lot of value relative to other sectors. Auto manufacturing, for example, is also held up as a highly “valueadded” sector, although the same data reveals it only generates $144,500 per job in value added per year.
This is not just an academic exercise. The confusion around what does and does not add value, and whether we should subsidize some sectors and not others, is the source of much bad policy.
Consider the former PC government’s support for the Sturgeon Refinery (also known as the North West Upgrader). Much of the support is from $26 billion in fees over 30 years for the refinery to process oil that the government receives as royalties. (Yes, the government often collects physical oil rather than dollars; this makes little sense, but that’s a topic for another day.) There is likely a large implicit subsidy hidden within these arrangements.
The NDP plan is no better. They plan to appoint a commission to “recommend a royalty structure that rewards the upgrading and refining of our resources right here in Alberta.” Changing the royalty structure to encourage upgrading and refining will cloud the true magnitude of the subsidy.
To justify support for upgrading and refining, proponents frequently point to “economic impact analysis” of various projects or sectors. For example, in their platform backgrounder, the NDP point to four recently cancelled upgraders, claiming they would help create 16,000 jobs and generate $400 million in provincial corporate taxes. What these estimates (and others like them) neglect are the negative displacement effects on other sectors of Alberta’s economy.
Subsidizing one sector will cause it to expand, hire more workers, use more capital, and so on. Without a reserve army of unemployed refinery workers standing ready, those workers must come from other sectors. Alberta’s unemployment rate is well below the national average, currently at 5.5 per cent, and is forecast to remain below average for the foreseeable future, despite the low price of oil. In an economy like ours, subsidies that expand one sector end up shrinking others, leaving the total number of jobs unchanged. It’s not job creation, it’s job shifting.
These shifts are also inefficient. Competitive markets tend to allocate resources optimally. Subsidies distort that allocation, displacing labour and capital from sectors where they are more valuably employed. Economists call this a “misallocation” — and the costs on the overall economy can often be very large. This is true whether we subsidize sectors with high or low value added. We shouldn’t subsidize extraction any more than we should refining. Of course, it is perfectly sensible to provide subsidies when markets fail — funding for basic scientific research, for example — but appeals to a sector’s “value added” is never proper justification, despite how good it sounds.
Refineries should be treated like any other business, left to succeed or fail in the face of market competition. If there are regulatory barriers to building upgraders or refineries, then those should be relaxed. If not, subsidies would only displace workers and capital from other sectors, destroying as much (and likely more) value than the refineries add to the oil. Albertans will be the poorer for it. Economists are fond of pointing out that there is no such thing as a free lunch — on this issue, we are wise to keep that in mind.