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.