New report, old excuses

The Parkland Institute released its latest report yesterday morning, detailing the huge scale of oilpatch profits – Misplaced Generosity: Extraordinary profits in Alberta’s oil and gas industry.

Many of the responses from government and industry were predictable – that’s why they were addressed in the report.

Let’s run through the standard excuses offered for the string of royalty cuts Albertans have watched their government hand out over the last two years.

1. JOBS – see p. 23 of Misplaced Generosity

The government’s own models tell us that a dollar invested in health care creates seven times as many jobs as a dollar invested in oil and gas extraction. A dollar for education creates five times as many jobs as the oilpatch.

The government breaks down Alberta’s economy into 60 sectors – oil and gas finishes dead last in job creation per dollar invested.

If the Progressive Conservatives were sincere in their desire to keep Albertans working, they would invest in what citizens regularly point to as priorities: health care and education.

2. FLEEING INVESTMENT – see pp. 21-22 of Misplaced Generosity

Albertans have been told a thousand times that the higher royalties announced in 2007 have cost the province billions in lost investment. But talk is cheap and the facts say otherwise.

Despite a major recession taking hold at the end of 2008, oilpatch investment remained at 2007 levels after the announcement of royalty increases.

Land sales, an indication of future investment, actually increased 30% in 2008 after higher royalties were announced.

If industry was pulling billions in investment, why would it increase its purchase of exploration rights for future development?

So investment continued apace after the announcement of higher of royalties in 2007 and showed no sign of decreasing before the recession took hold in 2009.

Much of the rest of what the industry and government have to say about decreased activity in the oilpatch conveniently ignores the ‘Great Recession’.

The serious downturn began in late 2008; oil prices fell by a third and natural gas prices were cut in half in 2009.

The government’s own Competitiveness Review attributed the decline in oilpatch activity to two factors: the Great Recession and the ‘game changing’ nature of shale gas, which had been undermining natural gas prices since before 2007.

Albertans should be very skeptical of anyone trying to pretend higher royalties are to blame for the effect of the ‘Great Recession’ and shale gas.

3. HIGHER COSTS? – see p. 21 of Misplaced Generosity

Another major justification for handing royalty cuts to an already wildly profitable industry has been the claim that Alberta is just too expensive.

Both the Stelmach government’s March 2010 Energizing Investment report and the competitiveness committee’s report claimed Alberta had higher costs than the United States.

However, the technical study on which their claims were based concluded exactly the opposite. Buried nearly a hundred pages deep in the technical appendices is the conclusion: The lower technical complexity of Alberta’s wells makes them 26-per-cent cheaper than those in the United States.

The 2010 competitiveness study further concedes that Alberta enjoys cost advantages when compared with British Columbia and Saskatchewan because of the size of our industry and our more established and extensive infrastructure.

Albertans should ignore self-serving arguments from government and industry and take the time to read the report for themselves and come to their own conclusions.

One comment

  • This is a nice illustration of the problem with broad-based macro arguments about lowering corporate income taxes and royalties, reducing regulations, etc, i.e. lower corporate costs = more investment = stronger economic growth.

    We often critique the links in this chain at the same macro level, but there is some truth to it, and it is also important to point out in which sectors investment flows.

    Oil and gas is problematic for a number of reasons, including both low number of jobs per dollar invested and massive GHG externalities. But the mindset of growth through resource extraction is so dominant in the corridors of power. It’s time to change the model.

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