A discounted, domestic oil price would be bad policy for Alberta

There’s something about oil that makes some of my favorite conservatives start to think like liberals.  Yesterday, I was surprised to read, on John Winslow’s blog, the question of, “whether it stands to reason the people of Alberta and, to a lessor extent, the people of Saskatchewan should be receiving a nice break on the price of fuel since, unlike the rest of the country, WE HAVE OIL?” In other words, should Alberta consider pricing oil as Quebec prices electricity – with one price for domestic consumption and another price for export?  The answer is absolutely not.  The fact that we have oil shouldn’t drive us to use it to subsidize gas prices in our economy any more than a government budget surplus should drive foolish spending or a government surplus in real estate holdings should lead to allocating low-rent office space to some pet industry or another.  We should allow the market to determine the price of oil (and gasoline) and use the benefits of high oil prices efficiently to enhance the Alberta advantage.

Put yourself back in the boom years of 2005-2008 for a minute, and recall the rapid escalation of rents – cost increases which affect many businesses negatively, although landlords and property owners were able to benefit. Now imagine Premier Ed Stelmach stepping to the podium to explain that, since commercial rents were a very important part of doing business, and the Alberta economy needed to remain competitive, that the government would be using general revenues to purchase commercial properties which would then be rented out at well-below market rates to companies wishing to locate in Edmonton or Calgary.  Landlords and property owners would scream that the government policy was de-valuing their assets, preventing them from taking advantage of the boom times.  Conservatives (and the capital letter is due only to the beginning of the sentence) would be up in arms about the government interfering in a perfectly functioning market, and picking winners.  Both of these groups would be absolutely correct.  This would be terrible policy.

It’s not just terrible policy with commercial real estate, it would be terrible policy with oil.  There is no question that, as Albertans, we could offer our citizens cheaper oil than is available to other consumers who must pay the world price. Conservatives would be correct that our best policy would be to let the market prevail, and not follow in the footsteps of Venezuela, China, or Quebec.

The government could make the oil it collects through in-kind royalty payments available for domestic refining (as long as the refined products remained in the province) and given that most of our business and population centers are quite far from international or provincial borders, the cost advantages would be largely realized in the province.  Alberta drivers would pay less for gas.  Alberta truckers would pay less for diesel fuel (as would truckers passing through the province as would some of those shipping our exports out or bringing imports in). But, for every barrel made available for this domestic consumption, we would be effectively subsidizing the cost of that fuel with foregone general revenues, since that barrel of oil could otherwise be sold to export.

This policy would create an artificial comparative advantage in fuel, and so businesses which use more fuel would, in so much as they can, locate in Alberta, increasing the dollars per year foregone from the government purse, and increasing our economic dependence on fossil fuels.

Taking this approach to our oil wealth would follow Quebec’s approach to managing its hydroelectric resources. Electricity is made available to Quebec consumers (by the type of a regulated government monopoly that I expect Wild Rose supporters would love!) at the average cost of production from heritage assets, not at its market value. Quebecers pay 2.79c/kWh for this power, with an export market sitting right next door clamoring for power exports at prices often more than 5 times that high. Some Quebec businesses including the aluminum industry have lower cost deals still, at 1c/kWh on so-called risk-sharing contracts.  So, for each kWh used to produce aluminum in Quebec, the government and by extension taxpayers are forgoing up to 10 cents of revenue from the sale of this power at export.  These decisions have kept the aluminum industry in Quebec, of that there is no question, but the policy is only a small step removed from a direct cash subsidy – it’s a subsidy in foregone potential government revenue.  No matter how you slice it, it’s an incentive that encourages over-consumption of electricity.

I would rather we have an incentive to increase economic activity, not an incentive to increase energy use. So, Albertans have a choice – we should demand of our government that they maximize the value of the oil and gas resource, and that they use those revenues in a way which most improves the quality of life in Alberta, including the business environment in the province.  Whether the oil is still in the ground or not, we must look at it as a financial asset – the fact that it was given to us by geographic luck does not mean we should waste it.

A simple way to look at the choice would be to ask whether the government should use this financial asset to lower taxes or whether they should use it to decrease gas prices.  Decreased taxes make it attractive for companies of all sorts, not just those which are gasoline-intensive, to benefit from the Alberta advantage.  By encouraging a healthy and vibrant business environment, those companies which are more exposed to the gas price in the province will also benefit from the higher demands for their services brought about by increased economic activity, while not being sheltered from broader market forces.

As Stephen Gordon points out, high gas prices are good news on average for Canadians.  They are great news on average for Albertans as they indicate further appreciation in our individual wealth as owners of our province’s oil and gas. While the increase in oil and gasoline prices reflect a large shift in crown wealth, they also affect some Albertans more negatively than others.  That should not be an excuse to move to a policy which would devalue the wealth of all Albertans for the benefit of a few.

11 responses to “A discounted, domestic oil price would be bad policy for Alberta”

  1. Robert McClelland

    You should read this. Pay particular attention to the first 5 or 6 paragraphs.

  2. John Winslow

    You misquote me. I never stated that a vote or the Wildrose would bring lower pricing for Alberta gas in Alberta. My reference to the Wildrose was simply that something needs to be done about ridiculous fuel pricing, in general, and I believe Wildrose is the only party to do it.

  3. Charles

    So as I understand;

    - high gas prices are good to reduce consumption and increase alternative options.
    - Reducing taxes on gas prices would result in lost tax revenue and promote increased consumption, thereby increasing demand, and potentially price..

    In view of a complete leftist ideal – why can’t taxes be increased at the refiner’s stage? Would this be able to cut into margins in the intermediate level, not the end-user level (i.e. can we limit profits from our natural resource)?

  4. Anonymous

    Interesting article. Well written. When you say that we should let the market decide market price, I strongly agree. I disagree however with the idea that the only market is the world market. There are two markets, the domestic market, and the world market. The government of Canada owes a duty to canadians to protect our assets. Canadian oil being owned by foreign investors and sold at world price to anyone is not protecting our assets. I would like to see a price ceiling on domestic oil. I’d be very interested to hear your thoughts on this.

  5. Nathan DJ

    I really disagree with this article in for a few reasons;
    “I would rather we have an incentive to increase economic activity, not an incentive to increase energy use” you cannot increase economic activity without increasing energy usage that is just obvious.

    “That should not be an excuse to move to a policy which would devalue the wealth of all Albertans for the benefit of a few.” it would not be a few if all of canada were paying a flat rate for oil, it would only slow down the ones benefitting from high oil prices, and in turn spread the wealth equally throught canada.

    And the third reason allowing the the market to choose how much we pay for oil one day and a different one the next is rediculous, places like africa, the middle east and china are some of the most instable and unpredictable places in the world, when we have our own oil why should we expose ourselves to the unknown that could make a few very wealthy while the mainstream has to pay the price for something we have no control over.

  6. David Webb

    why is everyone missing the point why is me paying less money for rent wrong. Where is a benfit to a tenant to be forced out and become homeless. Lets not talk about oil or how bad or good one political party is over another,They are all the same. They all refuse to take care of the poor only the greedy rich like landlords

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