Oil and natural gas prices reach unimagined heights, revenues pour into government coffers, speculation grows that income taxes will be eliminated, the rest of the nation develops an acute case of surplus envy.
Sound like something from Alaska’s oil heyday?
Alberta is currently moving headlong into that unexplored territory, without any apparent game plan for handling its riches.
By merely sitting back while commodity prices defy gravity, the province of about 3 million people has enjoyed 10 years of deficit-free budgets and wiped out its remaining debt in the process.
The Canadian Association of Petroleum Producers estimates this year’s oil and gas royalties will jump 84 percent to C$14 billion provided oil stays close to US$66 a barrel and gas remains around C$9.50 per thousand cubic feet.
Leading forecasters FirstEnergy Capital and Peters & Co. take a more moderate view, projecting royalties of C$10.6 billion and C$10.8 billion, respectively, compared with the government 2005-06 budget forecast of C$6.7 billion based on its timid predictions of US$42 for oil and C$5.60 for gas (the average prices to date for 2005 are US$54 and C$7).
Melchin: royalties higher than forecast
In what may rank as the understatement of 2005, Alberta Energy Minister Greg Melchin said in late August that royalties will be higher than government forecasts.
“Clearly, there’s upside for our budget,” he said.
The consensus view is that Alberta is heading for a 2005-06 surplus of C$7 billion, close to a five-fold increase over its budget guess.
Accurate or not, some are now describing the Canadian dollar as a petro-currency.
The loonie, as it is known, is now sitting at a nine-month high against the U.S. dollar and is one of the few currencies to have strengthened against the greenback which has actually gained 11 percent against the euro and 7.3 percent against the yen.
Ontario eyes economic disparity
Apparently caught off-guard, the Alberta government is facing a clamor from within the province to open the spigot to health care, education and infrastructure.
It is also being jolted into action by a sudden interest in its bulging treasury from Ontario, the largest of Canada’s 10 provinces and, for most of the country’s 138 years, its industrial heartland.
Ontario Premier Dalton McGuinty recently ruffled the feathers of Alberta Premier Ralph Klein by suggesting Alberta’s wealth was becoming the “elephant in the room” and that a widening economic disparity within Canada should be addressed.
McGuinty said the people of his province now pay C$23 billion more each year in federal taxes than they get back in programs and services, up from C$2 billion a decade ago.
The Ontario Chamber of Commerce issued a report saying this trend means Ontario’s ability to compete on the world stage is at risk of being severely impaired.
“This report is clear proof that Ontario is in trouble,” said chamber president Len Crispino.
He also offered a soothing message to Klein, saying: “What’s in Alberta belongs in Alberta and stays in Alberta.”
Others could flock to Alberta
Thomas Courchene, a professor at Queen’s University, has released a paper arguing that Alberta’s financial growth would be a magnet to other Canadians, who might start flocking to the province, weakening other regions in the process.
Depending on how Alberta spends its largesse it could have an infrastructure that no other province could afford and risk the destruction of the Canadian federation, he said.
Under a national equalization program introduced in 1957 to deal with disparities between provinces, money is taken from the rich and redistributed among the poor to ensure all regions can provide comparable levels of public services.
Over recent times, Ontario and Alberta have been paying the bill in the eight other provinces and now Ontario is warning that by 2010 it, too, may be asking for federal handouts.
These warnings stir memories in Alberta of the 1980 National Energy Program which included a made-in-Canada oil price and billions of dollars in incentives for Canadian-controlled oil companies to explore frontier regions.
Over the five years that the much-loathed program existed Alberta, apart from watching its oil industry crumble, lost an estimated C$80 billion in resource revenues.
Klein bristles
Bristling at the thought of a second National Energy Program, Klein fired back on Aug. 25 that any federal or provincial politicians coveting a slice of Alberta’s riches should back off.
“If they are the great Canadians that they profess to be, then they’ll leave us alone and respect the Constitution (under which provinces own their natural resources),” he said.
Klein welcomed pledges from Prime Minister Paul Martin and Finance Minister Ralph Goodale that they have no intention of making a revenue grab in the oil and gas producing regions.
“I believe it is a good thing when provinces become wealthy, because then that wealth is spread,” Martin said.
“This country was not built on jealousy … it was built on working together.”
Goodale said Ottawa “ain’t going anywhere near” a reincarnation of the NEP.
Even so, Klein is on edge, showing a reluctance to remove Alberta’s gasoline tax of 9 cents a liter, fearing he could attract more residents and businesses to his province at the expense of economically deprived regions.
He also admonished Martin and the provincial premiers that there will eventually be a turnaround in oil and gas prices — “what goes up, must come down.”
Outside advisers are telling Klein he should move more quickly to develop a strategy for using the resource revenues without creating a national political issue.
Roger Gibbins, president and chief executive officer of the Canada West Foundation, a Calgary-based think-tank, said it is unavoidable that the wealth will become a “significant” matter for all of Canada.
He told the Calgary Herald that by next year Alberta’s budget surplus will rival that of the federal government.
“That’s sort of like painting a great big target on our chest, so I think we have to be ahead of the game,” Gibbins said.
