Alberta and the Curse of the Petro State

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Alberta now suffers from too much of a good thing or what some wags call "the paradox of plenty."

Although blessed with the richest endowment of oil and gas in Canada, the bitumen exporter simply can't pay its bills or manage its oil wealth in a fiscally disciplined manner. Moreover, the government has failed to collect its fair share of oil profits let alone save any of this one-time inheritance for a rainy day. Nor can it table a balanced budget any better than a tin pot banana republic. For the last four years the province has recorded four deficits in a row totalling $10 billion. Wedded to increasingly volatile oil and gas revenues that have dropped by 50 per cent ($7 billion) since 2006, Alberta's government now offers but one innovative solution - that Albertans pray for another oil boom. 1

The whole sorry predicament confirms what many citizens still find impossible to accept – that Alberta is just another troubled petro state. Although the media and academia are loath to recognize the condition, the province has been massively bent out of shape by its crippling love affair with petro dollars.

For decades, economists have thoroughly documented that governments that run on oil revenue don’t behave normally. They not only lose their civil discipline, but eventually stop representing taxpayers altogether. The state, in short, becomes oil fettered, oil stained and oil obsessed. Political scientist Terry Karl defines the unhealthy addiction bluntly: “Oil revenues are the catalyst for a chronic tendency of the state to become over-extended, over-centralized and captured by special interests.”

Karl, who teaches at California’s Stanford University, knows what she’s talking about. Thirty years ago, Juan Pablo Perez Alfonzo, the Venezuela lawyer and father of OPEC, advised the budding political scientist to study “what oil is doing to us” because Alfonzo believed the money “will bring us ruin.”

Stirred by Alfonzo’s prescient advice (Venezuela is poorer today than when Alfonzo issued his warning), Karl has been analyzing the fortunes of petro states ever since. Drawing on the seminal work of Canadian economic historian Harold Innis, Karl specifically looked at how a government dependence on income from a single staple such as bitumen or natural gas, can weaken institutions, dumb down policy, concentrate power, cripple the economy and even hinder democracy.“Petro states are not like other states,” concluded Karl in trailblazing 1998 book The Paradox of Plenty: Oil Booms and Petro States.

She discovered that oil left a tell-tale crude imprint on nations as diverse as Algeria, Qatar, Ecuador, Russia, Alaska and Iraq. Oil booms not only engendered spending manias but poor statecraft, pathetic tax regimes, political extremism and long periods of often authoritarian rule. Oil-exporting nations, she wrote in a 1998 essay, The Perils of the Petro-State, “rely on an unsustainable development trajectory fuelled by an exhaustible resource – and the very rents produced this resource form an implacable barrier to change.” She found but few exceptions: Norway and Britain. And even they have oily problems. 2

Karl’s conclusions have been confirmed and buttressed by a legion of scholars. Researchers as varied as Michael Ross at the University of Southern California and the Nobel prize-winning economist Joseph Stiglitz have commented on the peculiar and often destructive character of petro states. In an essay on Russia’s petro rulers, Peter Rutland, a U.S. scholar, recently noted that resource wealth also poses a hefty moral hazard: “The society (and its leaders) start to think that it is richerthan it really is, and fritters away the energy rents in excessive consumption or infrastructure investment. Social inequality and political instability tends to increase."3

By definition petro states, whether Christian or Muslim, earn more than 20 per cent of their revenue from hydrocarbons. That's makes Alberta a bona fide member of the global petroleum fraternity. Oil and gas account for nearly a quarter of the province's GDP as well as one-third of government revenues and more than 70 per cent of all exports. In contrast Libya, a morbidly dark petro state, depends on oil for 90 per cent of its export sales and a quarter of its GDP, too. (Norway offers a similar profile: Oil and gas account for 25 per cent of the GDP and more than half of all exports. And so on.)4

Perhaps the first major symptom of "petrolization" are low taxes. Oil states, such as Wyoming, Alaska and Saudi Arabia run on hydrocarbon revenue and tax their citizens lightly or not at all, notes Karl.

Even Alberta Finance, which can't balance a provincial budget, still proudly proclaims on its website that the province has the lowest personal taxes in Canada and among the lowest business taxes.5 While neighbouring Saskatchewan and B.C. governments collect an average of $1,000 in sales taxes from their citizens, Alberta demands but $141. As a consequence oil profits, not citizens, pay for roads, schools and hospitals.

This reliance on oil, one of the world's most volatile commodities, leads to bust-and-boom government spending sprees. A 2010 report by the C.D. Howe Institute disclosed that Alberta has the most volatile government revenues, with the most predictable of results: "Volatile revenues can lead to the inefficient provision of government services" and "stop-go" fiscal policies.6

A petro state's dependence on petro dollars, changes both the governed and quality of governance argues Karl. Oil revenue not only detaches the government from duly representing its citizenry but produces a citizenry "less likely to demand accountability from and representation in government."

No representation without taxation might also explain why Alberta records some of the lowest voter turn-outs in the country. In 2008, 60 per cent of eligible Alberta voters stayed away from the polls. In the absence of direct taxation, notes Karl, the residents of petro states, "tend to politically inactive, relatively obedient and surprisingly loyal."

Over time, oil revenue can either strengthen authoritarian regimes or weaken democratic ones. The reasons are simple: oil states can, with petro dollars, buy consensus or marginalize dissidents. With few exceptions (Norway again) most oil-exporting nations tend to be ruled by long-reigning demagogues (even Louisiana had the demagogue Huey Long) or a single governing party for extraordinary lengths of time. Alberta disturbingly supports Karl's analysis. In fact, one highly centralized party has ruled the province for 40 years. No other North American jurisdiction boasts such an unparallelled record of political control except Mexico. The extremely autocratic and corrupt Institutional Revolutionary Party (PRI) governed that country for nearly 70 years with the help of Mexico's formidable oil wealth. Oil dollars also cemented the long reigns of Suharto in Indonesia, Saddam Hussein in Iraq and Hugo Chavez in Venezuela. Oil, too, has kept Col. Moammar Gadhafi in power for 42 years.

To maintain power, petro states invest heavily in public relations and nourish their own brazen propagandists. In Venezuela, American lawyer Eva Golinger has attacked critics of Hugo Chavez's dysfunctional regime as decadent agents of U.S. imperialism. She even helped to write a law intended to limit foreign contributions to political parties and non-profit organizations critical of Venezuela's unwieldy petro state.7

In Alberta, Calgary lawyer and Tory activist Ezra Levant has performed much the same role. The former tobacco lobbyist has attacked environmentalists and non-profits critical of rapid oil-sands development.8 To silence public debate about the pace and scale of the project, he's also declared Alberta's low-grade bitumen as "ethical." Sounding like many Saudi autocrats, he's also called for the jailing of members of Greenpeace. Although the two lawyers represent different ends of the political spectrum, they play the same role in a petro state – deflecting criticism away their inept rulers.

Concentration of power is another hallmark of the petro state. Alberta is a barrel full of centralizing initiatives. In 2008, for example, the Alberta's Tories dissolved nine regional health boards and concentrated all power into one superboard. Although the government assured citizens that the move would bring more standard, accountable and integrated service, the concentration of political power simply produced a crisis in emergency-room care that erupted in widespread public protest. Faced with a basic issue of statecraft, the government elected the daftest of solutions – make it bigger. The government is now contemplating the creation of a super energy board, too.

Alberta's petro rulers have attempted power grabs in other arenas. In the last two years, the ruling party passed three pieces of legislation (Bill 19, Bill 36 and Bill 50) that effectively placed more power in the provincial cabinet; diminished the authority of local municipalities; eroded property rights and prevented the courts from ruling on political decisions. Due to widespread protest, the government has promised to review the wording of the Soviet-like bills.9

Another curse that befalls oil-dependent states is something called "the Dutch Disease." After an offshore natural gas boom rattled the Netherlands in the 1970s, the country experienced a rising currency. The country's "petro guilder," in turn, made it harder for exporting businesses to sell their goods abroad.

As a result, both manufacturers and farmers languished. As Karl notes "persistent Dutch Disease provokes the rapid often distorted growth of services, transportation and other non-tradeables while simultaneously discouraging industrialization and agriculture – a dynamic that most policy makers seem incapable of counteracting."

Alberta (and increasingly Canada) now lives with a sure case of the Dutch Disease, but with total political indifference. 10

A 2009 report on Alberta Industry Sector Performances by PricewaterhouseCoopers deftly described all the symptoms.11 The oil and gas industry now accounts for 33 per cent of the province's gross economic output or its highest share in two decades. As the province ships more and more raw bitumen (nearly 50 per cent of all oil exports) the province's oil industry and transportation have predictably flourished.

But the province's growing dependence on bitumen has paralyzed other sectors. Service employment growth exceeds that of industrial manufacturing, which is almost exclusively bitumen related. Meanwhile primary agriculture has recorded GDP negative growth while the province's agri-food sector "is becoming less competitive" due to rising prices and the petrodollar. Forestry, value-added energy industry (petroleum and chemicals), plastics and farming have all taken a tumble. Makers of wood products hit their lowest production levels since 1996. Spending on research and development has suffered In fact, Alberta ranks last in innovation among four of Canada's largest provinces.

When not hollowing out the economy, petro states also spend great gobs of money. In per-capita terms, the Alberta government, for example, spends 40 per cent more than Ontario or 30 per cent more than British Columbia.12 Much of the money goes to oil-based infrastructure or special interests.

Alberta's spending plans boggle the imagination. According to the Alberta Carbon Capture and Storage Development Council, up to $60 billion of federal and provincial spending will be needed over the next two decades to bury private carbon emissions underground using unproven technology. 13 It has also allotted more than $14 billion to overbuild an electrical transmission system without public-needs assessments.14 Even industry concedes the plan could bankrupt the province. But what often appears as economically inefficient decision making, says Karl, is really "an integral part of the calculation of rulers (in a petro state) to retain their political support by distributing petrodollars to their friends, allies and social support bases." 15

Many petro states are also incapable of saving. They simply spend for today, a philosophy well rooted in Alberta's politicians. In 1976, the visionary Premier Peter Lougheed created the Alberta Heritage Savings Trust Fund and directed 30 per cent of all hydrocarbon revenues to the savings account. But successive governments later capped and then looted the fund to solve their own bad spending habits. Between 1987 and 2006, no new payments graced the fund. Today, the grossly mismanaged account is worth a paltry $14 billion.16 That sum wouldn't even cover the cost of reclamation liabilities ($20 billion) for mining waste in the oil sands.

Based on the political abuse of the Alberta fund, Norway created an ironclad pension fund in 1996. Politicians can't even touch the money. As a consequence it's now worth $500 billion. A 2007 Alberta Finance report titled Preserving Prosperity warned that Alberta could end up looking like a ghost town this century unless it saved $100 billion by 2030. It even pleaded the obvious: "So if we do not save today, it is entirely possible ... that future governments will not have the necessary revenues to pay for core services that Albertans require and expect particularly education and health care."17

In 2008, the Organization for Economic Co-operation and Development (OECD) chastised the Alberta government for having no "framework or long-term" savings plan for oil revenue. It also recommended that Alberta "should save all of its oil revenues in a foreign asset fund, as Norway does, spending only smoothed yearly fund income." Not surprisingly, Alberta's ruling party ignored both reports.

Every oil-exporting state displays some form of "petromania" or the tendency of the government to put "the needs of the oil industry above else." Alberta's petromania is most pronounced in the state's uncritical approach to rapid bitumen development. Since 1996, the government's regulator, which is 63-per-cent funded by industry, has approved nearly 100 projects worth more than $100 billion in the oil sands. It has done so without a risk analysis or cumulative-impact assessment on how the mega-project will unsettle Fort McMurray, the province's water or even Alberta's relationship with the rest of Canada.

Alberta's deference to the oil patch also comes in the form of slipshod environmental monitoring. Even the U.S. Council on Foreign Relations, a non-partisan agency, clearly recognizes that the Alberta government is "skeptical of environmental management." Pollution monitoring on the Athabasca River, which the ruling party has repeatedly defended as "world class," has been found to be negligent and inadequate by five separate national and provincial studies.18

The government's cozy relationship with oil's special interests is best exemplified by the government's disdain for royalties or a fair share of oil profits. Since 1994, Alberta's ruling part has reviewed the state of royalties only twice. A damning 2007 royalty review and a separate royalty study by the U.S. Government Accountability Office both confirmed an ugly truth – that Alberta charged among the lowest royalties on the continent. In fact, it charged less for its hydrocarbons than Wyoming, Louisiana or California.19

In a review of Canada's energy sector, the OECD noted that Norway left companies with 22 per cent of net revenue, while Alberta "generously" allowed companies a haul of 53 per cent.20 One former energy minister, Murray Smith, accurately described the Alberta model in the oil sands as a "give-it-away" formula to a Texas audience in 2006. (Low royalties and low taxes also account for the rapid development of the oil sands says the U.S. Council on Foreign Relations.) 21

In 2010 the Edmonton-based Parkland Institute calculated that Alberta's inept one-party state has failed to capture $37 billion over the last decade due to lacklustre accounting.22 After the auditor general criticized the government for leaving billions on the table by not meeting its own modest collection targets of 50 to 75 per cent, the ruling party commissioned a report attacking the very role of the watchdog. It contained this revealing petro sentence: "To criticize government decisions and even promote alternative policies is contrary to the principles of Alberta's democracy."23

The window for change in a petro state predictably opens when oil prices fall, says Karl. That's when the ineptitude of oil-addled elites becomes most glaring in the form of massive deficits, crazy spending schemes or public prayers for redemption. Almost on cue, two new political movements emerged in Alberta after the oil shock crash of 2008 – the Wildrose Alliance and the Alberta Party. The electoral record also shows that opposition parties such as the New Democrats or Liberals also score significant gains during periods of falling oil prices. Even the province's ruling party notably came to power in 1971 just prior to skyrocketing oil prices.

Oil's volatile economics have also unsettled the Progressive Conservatives. In early 2011, a nasty debate about how to deal with deficits and good governance resulted in the abrupt announcement by Premier Ed Stelmach that he would soon resign. But fickle markets can also help petro states keep their grip on power, says Karl. "Ironically, high prices tend to close this window of reform."

Given these startling realities, reforming a petro state is not for the faint of heart. A government flush with petro dollars simply has the financial wherewithal to fight reform or manipulate voters on an unprecedented scale. Karl maintains that there are only three antidotes to the dysfunction of a petro state: Transparency (clear reporting on royalties and 

savings); participation (direct taxation); and good governance (bureaucracies funded by direct taxes as opposed to oil loot.)24

To date, only former Premier Peter Lougheed has presented a coherent reform package for the province. Yet the elder statesman has been marginalized and vilified for doing so. In response to the rapid and ruinous development of the oil sands, Lougheed carefully laid out his radical plan in a series of interviews beginning in 2006.25 Some day Albertans might well refer to his declarations as Peter's Principles. They are elegant yet practicle: Slow down. Behave like an owner. Collect our fair share. Save for the future. Clean up the mess. The first political party that champions these reforms could well rewrite Alberta's oily geography.

But charging higher royalties alone won't change the character of a petro state until the majority of Alberta's oil revenue ends up in a Norwegian-like pension fund. Norway, the poster boy of transparent petro states, tellingly and responsibly runs on carbon taxes. But until Albertans boldly diagnose and openly talk about the real cause of the province's poor political health, the province will continue to be cursed with dysfunction, volatility and incompetence.

(Andrew Nikiforuk is an award winning Calgary-based journalist and author of Tar Sands: Dirty Oil and the Future of The Continent.)

Footnotes

1 www.energy.alberta.ca/Org/Publications/AR2010.pdf

2 http://politicalscience.stanford.edu/faculty/documents/KarlParadox.pdf

3 www.aspe.spb.ru/Papers/25_1.pdf

4 www.finance.alberta.ca/business/tax_rebates/index.html

5 www.cdhowe.org/pdf/Commentary_313.pdf

6 www.revenuewatch.org/files/RWI_Broken_Boom_Esanov_Heller_FINAL.pdf

7 http://thetyee.ca/Blogs/TheHook/Environment/2010/12/09/Ethical-Oil-tobacco/

8 http://thetyee.ca/News/2011/02/08/AlbertaElectricity/

9 http://ideas.repec.org/p/luc/wpaper/09-06.html#download

10 www.albertacanada.com/documents/ABIndustrySector.pdf

11 http://policyschool.ucalgary.ca/files/publicpolicy/albsp2.pdf

12 www.energy.alberta.ca/Org/pdfs/CCS_Implementation.pdf

13 www.aeso.ca/downloads/Long-term_Plan_bookmarked_Final.pdf

14 http://iis-db.stanford.edu/pubs/21537/No_80_Terry_Karl_-_Effects_of_Oil_Development.pdf

15 www.scotland.gov.uk/Resource/Doc/280368/0084457.pdf

16 www.finance.alberta.ca/fipac/fipac_final_report.pdf

17 www.nature.com/nature/journal/v468/n7323/full/468476a.html

18 www.gao.gov/new.items/d07676r.pdf

19 www.oecd.org/officialdocuments/displaydocumentpdf/?cote=eco/wkp(2008)26&doclanguage=en

20 www.cfr.org/canada/canadian-oil-sands/p19345

21 http://parklandinstitute.ca/research/summary/misplaced_generosity/

22 http://www.business.ualberta.ca/Centres/WCER/~/media/University%20of%20Alberta/Faculties/Business/Faculty%20Site/Centres/WCER/Documents/Publications/InformationBulletins/136_electronic.ashx

23 http://politicalscience.stanford.edu/faculty/documents/KarlERC.pdf

24 http://www.irpp.org/po/archive/sep06/lougheed.pdf

25 http://www.irpp.org/po/archive/sep06/lougheed.pdf