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Providing coverage of Alaska and northern Canada's oil and gas industry
June 2008

Vol. 13, No. 25 Week of June 22, 2008

OECD lectures Alberta to manage revenues

Tells Canada province to restrain spending, pump more oil and gas revenues into heritage fund; recommends Norway’s example

Gary Park

For Petroleum News

The Organization for Economic Cooperation and Development, representing 30 of the world’s richest nations, is urging the Canadian and Alberta governments to establish a fund for windfall oil and gas revenues to combat the negative impact of a rising Canadian dollar and the emerging threat of inflation.

It has accused the two governments of not prudently managing revenues from their natural resources and suggested they should take a leaf out of Norway’s book, which uses its resource wealth to keep its own currency from rising and eroding the international competitiveness of domestic manufacturers.

A Norwegian fund is worth almost US$400 billion and is expected to double in size over the next 10 years, making it a major global investor. Alberta’s Heritage Savings Trust Fund, which was allowed to languish for several years but now collects one-third of the province’s unbudgeted surpluses, is currently valued at about C$17 billion. Canada has no such fund.

In a wide-ranging report on Canada’s economy, the OECD has also warned that oil sands development is endangering environmental goals, with Secretary-General Angel Gurria recommending that Canada pursue a combination of carbon taxes, a cap-and-trade system and technological advances to reduce greenhouse gas emissions.

Spending constraints urged

Finally, the report was critical of the Alberta government’s lack of overall spending restraints and the absence of a firm policy for its heritage fund.

“Alberta should implement allocation and withdrawal rules for its heritage fund; preferably it should save all its oil revenues in a foreign asset fund, as Norway does,” it said.

“The federal government should consider doing likewise for revenues resulting from transitory terms-of-trade gains.”

It said that applying the Norwegian model by investing in foreign currencies would take the upward pressure off a strong Canadian dollar, which is being driven higher by the resource boom, and prevent the weakening international competitiveness of its manufacturing sector.

The OECD said the Alberta government should more systematically increase contributions to its heritage fund.

“Fiscal policy in Alberta should be more prudent,” the 160-page report said, adding that other countries have shown “much more restraint and foresight in managing their resource revenues to mitigate boom and bust cycles.”

Federal fund recommended

On the federal side, the OECD said a fund would provide a cushion against a fall in prices or future depletion of the resources.

“The general justification for such funds is that some share of government revenues derived from the exploitation of non-renewable resources should be put aside for the future,” it said.

Gurria, a former Mexican finance minister, said it is something his country “should have done, but didn’t.”

“Canadians know what to do; all we have to do is remind them what is happening in other places,” he said.

Gurria said Alberta could become a major investor on the world stage at a time when major projects are desperate for money from sovereign wealth funds.

The organization said energy revenues have filtered through the Canadian economy in the past to benefit all regions, but clearer policies are now required.

“With the gathering U.S. recession and depreciating U.S. dollar, the balance has been shifting,” it said. “This is straining the fiscal federal equilibrium (in Canada) and increasing demands for subsidies and transfers.” (There is already a rising demand in

Quebec for a fairer distribution of resource revenues.)

Alberta defends spending

Alberta Finance Minister Iris Evans defended her province’s use of oil and gas revenues to keep taxes low while spending interest from the fund.

She said Alberta has no choice but to improve its infrastructure and get the capital in place to support a population that grew by 103,000 last year.

“Managing the pressures of a robust economy comes with a price tag,” she said.

Andrew Plourde, head of the University of Alberta’s economics department, and Frank Atkins, an economist at the University of Calgary, both suggested the OECD seemed unaware that under Canada’s constitution natural resources are owned by the provinces.

However, Plourde said there is building pressure in Alberta for the government to take a more serious view of the ideas floated by the OECD, adding he would not be surprised to hear the theme echoed by the provincial government.

Federal Finance Minister Jim Flaherty, whose officials reviewed the OECD report before it was released and had a chance to comment, said the OECD recommendations were largely consistent with the “direction our government is taking.”

Specific OECD recommendations

The OECD recommended that:

• Canada’s central bank should consider lowering interest rates in the short term to stimulate the Canadian economy, but be prepared to raise them in 2009 when growth is back on track.

• Government budget surpluses risk turning into deficits if energy prices decline, so governments should rein in their spending.

• Energy production is bumping up against supply constraints, so more labor and resources should be made available by eliminating employment insurance incentives that keep workers in high-unemployment regions and by eliminating inter-provincial trade barriers.

• Governments need to devise and quickly implement a market-based system to control carbon emissions.






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