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The Progressive Economics Forum

What if Potash Tanks?

Regarding the NDP platform’s reliance on additional potash revenue, columnist Murray Mandryk asks, “What if potash tanks as it did in 2009?”

Of course, budgets are necessarily based on assumptions about future commodity prices. Saskatchewan Finance estimates that each dollar of change in the price of oil alters provincial revenues by $20 million (page 35). So, if a barrel of oil is $10 cheaper than projected, the future surpluses needed to fund the Sask Party platform would evaporate.

A government of either political stripe could make up for an unexpected revenue shortfall by drawing upon the Growth and Financial Security Fund, which was $711 million as of the last provincial budget.

A longer-term solution is to contribute a portion of resource royalties to a savings fund. Over time, the proposed Bright Futures Fund would translate volatile resource revenues into a more stable stream of investment income.

It’s also worth remembering what actually happened in 2009. Provincial potash revenues tanked because of the specific royalty regime in place, even though potash mines remained hugely profitable.

Saskatchewan potash sales were worth $3.1 billion in 2009, $900 million more than in 2006 or 2004 (page 31). The industry’s costs were presumably lower in 2009 since it extracted only half the volume of potash it had in those prior years. Due to higher potash prices in 2009, the companies enjoyed a windfall profit of at least $900 million over and above the healthy profits collected previously.

Based on an improved royalty regime, the NDP platform budgets additional potash revenues of up to $700 million annually. No one is predicting a repetition of 2009, but New Democrat projections are so cautious as to be plausible even in that context.

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Comments

Comment from John W. Warnock
Time: October 24, 2011, 9:09 am

Saskatchewan had a Heritage Fund, which was created by the NDP government under Allan Blakeney in 1978. Resource royalties were put into this fund, which were then used to expand public ownership in the resource extraction sector, mainly through the Saskatchewan Mining and Development Act. It was a very successful enterprise. But it was abolished by the NDP government headed by Roy Romanow in 1992. This new NDP government had chosen instead to follow the policy set by the Conservative government of Grant Devine: get the province out of the business of owning resource development enterprises. Dwain Lingenfelter was Deputy Leader of the NDP at this time and a key member of Romanow’s inner cabinet which made this decision.

Comment from Kelsey
Time: October 24, 2011, 10:36 am

I don’t think the Potash prices will tank, the trend has been to inflate food prices and it will continue for foreseeable future. Think of it there would not have been this push by the Australian company last year to purchase Potash Sask, the purchase was only thwarted because of a rare intervention by politicians at federal level.

Excellent opportunity for Saskatchewan to resurrect their Heritage Fund for this very reason.

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