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economy lab

Oil rig.Kevin Van Paassen/The Globe and Mail

The recent exchange between the premiers of Ontario and Alberta on the question of oil prices and the exchange rate raises an interesting question: if the government of Alberta chose to manage its natural resources in the best interests of Canadians outside Alberta, what would it do differently?

Alberta's petroleum reserves constitute a huge store of wealth for its residents, akin to a winning lottery ticket. As everyone knows – or should know – the smart thing to do with a winning lottery ticket is to put the proceeds in the bank and to base spending on the investment income it generates, and not on the windfall itself. This is roughly the approach taken by Norway: much of its oil revenues are invested in a sovereign wealth fund whose purpose is to provide a flow of income to future generations of Norwegians after its oil reserves run out.

Alberta has chosen not to pursue a policy of maximizing and saving resource rents. If it had, the pace of development would have been much slower: higher royalty rates would have added to the costs of producing oil. And if an Alberta wealth fund invested a significant portion of its holdings outside Canada, this outflow of capital would at least partly offset the upward pressures on the Canadian dollar.

It's not hard to build a strong case that this is what the Alberta government should do. Probably the most powerful argument against is that pointed out by Maclean's columnist Colby Cosh: "[I]'s not at all clear to me that it is smart for a non-sovereign jurisdiction that doesn't control its borders to 'save' for a totally different future populace." Norwegians can be fairly certain that their grandchildren will benefit from the revenue generated by their oil fund. Albertans cannot be so sure; the Alberta of the future will be largely populated by the grandchildren of people who don't currently live there.

Alberta has essentially decided to dissipate its resource rents in the form of cost inflation, and one of the ways this shows up is in higher wages. (A slower pace of development would have kept wage growth in check.) But this effect is not only limited to Alberta, for the same reason Albertans can't be sure that their grandchildren will benefit from an oil wealth fund: the free flow of workers across provinces. This mobility means that wages will be set at the national level, not by province or sector. As I noted here, the last resource boom increased wages across Canada – including in Ontario.

Non-Albertans who wish that the economic benefits of Alberta oil production were spread across Canada can stop wishing: it's already happening.