Enough of Alberta's roller-coaster. Let's save every cent of resource revenue

This column is an opinion by Geoff Salomons, a PhD candidate at the University of Alberta researching provincial resource wealth. For more information about CBC's Opinion section, please see the FAQ.

Alberta's revenue roller-coaster continues.

During the pandemic in 2020, history was made when oil prices went into negative territory. Then they rose and peaked above $122 US per barrel in June 2022 — only to be nearly cut in half shortly thereafter, before a surprise overseas production cut brought prices back to the $80 range.

Within two years, the province's books swung from a $17-billion deficit to a $10.4-billion surplus, and now more modest surpluses are forecast. A ride this wild will push even Alberta's comfort levels. 

This recent volatility perhaps offers a moment to reconsider how Alberta manages its resource revenue. 

Outgoing Finance Minister Travis Toews recently said he'd like to see a more in-depth review of Alberta's "volatile revenue structure." Meanwhile, the Alberta NDP have released a plan, authored by former ATB Financial economist Todd Hirsch, that recommends capping the amount of resource revenue used for government operations.

How we pay for the groceries

While this conversation is overdue and welcome, there is a fundamental issue that must be part of it. The Hirsch report rightly notes that "income from natural resource royalties are not, in fact, income. They are the conversion of an asset in one form (physical molecules) into another (dollars)."

Or to put it another way, it is the conversion from natural capital to financial capital. As such, this revenue should be viewed differently than just another income stream the government relies on.

In the mid-1970s, when then-premier Peter Lougheed first made the case for why the Heritage Savings Trust Fund was needed, he compared the spending of resource revenue to selling the house to pay for the groceries. 

Alberta should maximize resource revenue's value over time because, as a form of capital, it is finite. Alberta has a century's worth of oil and gas reserves. But technological obsolescence as we move toward a net-zero world is a concern for our high-cost and high-carbon resources. 

What the value of those resources will be in 30 years is anyone's guess. 

If Alberta is going to truly manage this capital for the long term, the province must get to a point where it can save 100 per cent of the resource revenue it receives. All of it.

This is needed for a few reasons. First, because Alberta did not historically do a lot of saving — even in the Lougheed era savings were capped at 30 per cent of resource revenue, and then shrank to zero — it has some catching up to do. This approach would allow Alberta to save what it can, while it still can. 

Second, saving 100 per cent would dramatically reduce the volatility in the budget. Alberta could still rely on the interest from the Heritage Fund for spending — because in this case, it would be an actual income stream. 

In fact, until recently Alberta has consistently used the interest from what little it has in the Heritage Fund as general revenue, with a bit retained to inflation-proof the fund. With a principal of just over $17 billion in 2021-22, Alberta got approximately $1 billion in investment income.

Rather than the dramatic swings Alberta has experienced of late, this revenue stream would be much more consistent. 

Given that Alberta's budget forecasts at least $15 billion per year in resource revenue for the next three years, and given those figures should remain healthy because of higher royalty rates that will be paid by most oilsands projects, within a decade Alberta could save $150 billion more.

By my estimates, the fund would generate $10 billion per year in interest income from a much more reliable source of revenue for the Alberta government, in perpetuity. 

Drilling a hole

This is a radical new vision of where Alberta could go. 

The inevitable question is how to get there. Creating a $15-billion hole in the budget is no small thing.

Unfortunately, two things are true about Alberta and Albertans. The province has a history of ramping up spending during the good times, and that locks in expenditures for the inevitable bad times. 

No need to quote it; I simply need to reference that bumper sticker to get this point across.

As pollster Janet Brown has noted, Albertans are more tax averse than fiscally conservative. The reliance on resource revenue has entrenched the expectation of big spending and low taxes into Alberta's political culture. 

Alberta celebrates it — selling the house to pay for the groceries — as the Alberta advantage. Taxes are so politically anathema that even to whisper the phrase "sales tax" is political suicide. 

While this is a bold vision of how Alberta could get off the revenue roller-coaster, what happens if Alberta decides it wants to keep riding?

In the medium term, the ups and downs will get bigger. Alberta's Budget 2023 notes that a $1 change in oil prices swings Alberta revenue up or down by $630 million. That is set to increase as more oilsands projects begin paying post-payout royalty rates. 

Economist Trevor Tombe estimates that could likely increase to $850 million for each dollar by 2025.

This will continue the volatility as governments increase spending during years of plenty and cut during years of poverty. 

In the longer term, there is the energy transition to consider. 

While estimates of peak oil demand vary, momentum is building. Oil won't be as in demand in 2050 as it is today. 

And while efforts are underway to make our resources competitive in such a future, the odds are against Alberta's being the last barrel of oil.

But by saving what we can when we can, we ensure that in the future we can keep the house, even if it means we need to trim the grocery budget now to do it. 

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