It was a cold winter day in 1947, on a farm near Edmonton, when an oil well dubbed Leduc No. 1 spit out a gusher and set the course of Alberta’s prosperous future.
By 1954, the provincial treasury was hauling in $1-billion a year, in today’s dollars, from the booming oil and natural gas business. Come the early 1960s, the windfall had been halved, and Alberta’s painful boom-bust whipsaw was in motion.
The 1970s saw a massive boom – followed by a hard crash in the ’80s. A popular bumper sticker during that bust declared, “Lord, please send me another oil boom and I promise I won’t piss it away.”
Spoiler alert: Alberta didn’t keep its promise. It saved little. The province’s Heritage Savings Trust Fund is worth less now than when it was established in 1976-77, accounting for population growth and inflation.
Today, the boom-bust province is again suffering, its finances and oil industry beaten down by the pandemic. In a late-August budget update, the province announced a $24-billion deficit on revenues of $38-billion for 2020-21. Revenue from income taxes and oil have collapsed. Non-renewable resources revenue is at $1.2-billion, the lowest since the early 1960s, adjusted for inflation. Debt is spiking to $100-billion.
There is, however, potential good news. Alberta may in fact have one last shot, one last oil boom. If it comes to pass, how Alberta manages this windfall will help set the course of its future, not unlike Leduc No. 1 did so many years ago.
This might sound counterintuitive. The long era of oil is moving toward its end. Exxon Mobil in August was dropped from the Dow Jones Industrial Average after a 92-year run. Analysts predict global oil demand could peak as soon as 2022. Even some big oil companies see peak demand by the 2030s.
But between then and now, in the mid-2020s, oil companies such as France’s Total forecast higher prices on a combination of steady demand and tighter supply.
This scenario, if it plays out, won’t mean $100 for a barrel of crude. But it would mean a profitable oil industry – and potentially quite profitable. Given that Alberta is among the biggest producers of oil in the world, this outlook could be very good news for the provincial treasury.
Alberta has for decades spent most of its oil and gas money as it came in, on everything from education and health care to new infrastructure. If there is indeed one last boom, prudence will be necessary. To plan for the future, Alberta needs to look to its past.
When Peter Lougheed established the Heritage Fund to invest Alberta’s resource wealth, the original legislation stated: “It would be improvident to spend all such revenues as they are received.” The goal was to save about a third of the oil money, but the plan collapsed during the 1980s bust. In the boom of the early 2010s, Alberta drew up a new savings plan, but it never happened, sideswiped by yet another bust.
Reliance on resource money subsidizes a high-spending, low-tax regime. Alberta has slashed its corporate tax rate to by far the lowest in Canada. Alberta remains the only province without a sales tax. Middle-class families pay less than half in provincial taxes compared with those in British Columbia, Ontario and Quebec.
When Finance Minister Travis Toews issued last week’s dire budget update, he said he would not increase taxes as the province recovers from the pandemic. Prime Minister Justin Trudeau has promised the same.
Longer term, however, Mr. Toews said, “It will be important that Albertans have a discussion on revenue structure and tax structure.”
Alberta is in tough shape, but, as with other jurisdictions, it benefits from near-zero interest rates. Its debt burden, even as it shoots higher this year, is modest compared with the size of its economy. In late March, Alberta followed the recent lead of Austria to sell a “century bond” to investors – $300-million of debt at 3.06 per cent, to be paid back in 100 years. That’s breathing room.
Alberta will make it through this. Its population is young, educated and accustomed to adversity.
The people of the province know highs and lows. They have weathered hard times.
The real challenge will come when times are once again good. What will Albertans do with the next – and last – oil boom?
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