(It was … interesting to be at CHPC twice last week discussing my long-standing interest in the Court Challenges Program. Thanks to Kevin Waugh for riding herd on the proceedings as acting chair and to Rachael Thomas for her questions.)
I met Gerry Butts back when he was working for Mr. McGuinty and I was with Mr. Harper. We negotiated the end of the Ontario-Canada Agreement. That policy triumph went unrecognized at the time and even fewer people remember it today. Life in government is full of unknown triumphs. Gerry went on to work for Mr. Trudeau and then, like me, Gerry left PMO for a jet setting lifestyle with a US-based organization. He went to a high-priced consulting firm and I went to a multilateral anti-poverty bank. He had excellent timing. He moved just as Canadian standards of living started to stagnate and US ones powered ahead. I moved in the opposite direction. Gerry is either smart or lucky.
I don’t usually keep track of Gerry’s travels, but a few weeks ago he posted to LinkedIn that his jet setting had taken him to Norway. He attached a graph of how much Norways’s sovereign wealth fund has grown over the years and wondered why Alberta hadn’t accumulated a similarly rich SWF. He didn’t need to post a graph of the Alberta’s Heritage Fund’s growth. We all know it hasn’t grown as quickly. His post provoked a spate of counter-posts about equalization and so on.
At about the same time Gerry was jet setting to Norway, I was chatting with an overseas researcher who was visiting to study how Alberta’s bitumen resources have shaped our political culture. That conversation also turned to the question of savings funds. And then, Alberta’s provincial budget set some targets for adding to the Heritage Fund.
All this talk got me thinking. Why does Alberta have the Heritage Fund in the first place? Why don’t we save more money in it? And what does the state of the Heritage Fund say about Alberta? Why does the Heritage Fund capture so much political attention?
The public finance textbooks tell us to save the money we earn from selling some kinds of natural resources. The argument goes like this: Certain natural resources renew themselves. Think of lumber, grain, dairy or electricity generated from the wind. Cut down a tree today and sell it – another tree grows in its place. Use today’s wind to generate electrical power and there’s more wind tomorrow. Bottomless resources generate endless money. But other resources – the awkward textbook name is “non-renewable resources”– come in a fixed amount. Think of iron ore, or oil and gas. Every ton of iron ore that you dig up today leaves less iron ore for future generations to use. So, the argument goes, you should save the revenue from non-renewable resources and live off the return on those savings.
Peter Lougheed was lucky enough to become Alberta’s premier just before the 1973 oil embargo. Faced with a gusher of new provincial royalties from higher oil prices, he created the Heritage Fund to hold that revenue as an asset. He gave the Heritage Fund three mandates: save for the future, diversify the economy, and improve the quality of life of Albertans. The “save for the future” mandate reflects the textbook argument about non-renewable resources. And it was made more urgent because, at the time, Lougheed thought Alberta might run out of exploitable oil in fifteen or twenty years.
But his assessment about running out of oil was mistaken. Albertans used their genius and the money we made selling oil to figure out new ways to find petroleum, new ways to extract it, and new models to finance the business. Even as Albertans pumped oil to market, the province’s oil reserves increased. The biggest win came as Albertans solved the ancient problem of alchemy. We invented ways to turn worthless tar (lead) into valuable oil (gold), the biggest innovation in our history since Europeans figured out how to make hats out of beaver pelts. Alberta’s energy regulators still try to estimate how long our oil reserves will last, but in practice those reserves will never run dry. If the day ever comes that humans don’t need oil and any longer, Alberta will be left with tons of the stuff.
Once oil became a renewable resource, the old argument for saving the proceeds fell away. Or, to put it more precisely, once we escaped our pessimism about Albertans and our economic future, we figured out we don’t need to save. Yes, oil prices fluctuate, and we should be careful not to assume $80 a barrel prices will last forever. But that risk doesn’t mean we should save billions of dollars of today’s revenues for our children.
But what about the risk that oil will be worthless at some point? After all, energy transitions happen. Whale oil was once an important energy commodity, but no one follows whale oil prices these days. The same thing could happen to petroleum oil. Human genius is unpredictable. Maybe we are only a few years away from finding a new source of safe, plentiful energy that’s cheaper than oil . Shouldn’t we save for that day?
Again, the case for savings turns on whether we are optimistic or pessimistic about Albertans.
What do I mean by that?
This year, Alberta’s non-renewable resource revenue is estimated to be $17 billion (https://www.alberta.ca/revenue). That estimate is based on WTI oil prices averaging $74 this year, and so far WTI looks likely to exceed that level (https://economicdashboard.alberta.ca/dashboard/wcs-oil-price/). By the end of the year, Alberta could have surprise revenue of $5 to $10 billion. What should we do with that unexpected cash?