The National Interest Part 3: Norway, Alberta, Saskatchewan and the Oil Price Crash of 2014
For decades, Western Politicians have stoked grievances about missing out. The reality: the fallout from the Oil Crash of 2014 has been an unrecognized economic catastrophe for Canada.
Norway is the only country in the world to escape the “oil curse” because of a deliberate plan to have controlled access to the resources, high taxes, and building a giant sovereign wealth fund, which has been invested around the world in order to keep their economy from being thrown out of whack.
Understanding how Norway did it is really important - because it’s the opposite of what Alberta (and other provinces) decided to do.
This is really important to understand, especially when “analysts” like Bill Bewick, of “Fairness Alberta” make blatantly false claims complaining about the Federal Government. Provinces are in charge of natural resources, and set their own taxes. The Federal Government has the same taxes in Alberta as everywhere else.
The government of Alberta chooses to have low royalties and low taxes as a matter of ideology. The province has authority over natural resource revenues, and “owns 81% of the mineral rights (approximately 53.7 million hectares of land).” Alberta’s lack of a “heritage fund” is because they are unwilling to put money into it. The money is going to industry and high-income earners, not the federal government.
Norwegian Oil
This article in The Narwhal contrasts Norway (population 5.5-million) and Alberta (4.4-million) on their sovereign wealth funds - Norway’s sovereign wealth fund, which has reached US $1.6-trillion ($17.4-trillion Norwegian Krone).
According to the fund’s website:
That is over $300,000 per person in Norway, an amount that has more than doubled in the last decade.
Just 12 years ago - March 21, 2012, the fund was valued at US $613 billion for a country of 4.9 million people — $125,000 for every man, woman and child, and by January 2013 that had grown by nearly 50% and surpassed 1-million Norwegian krone per citizen, about $175,000 each.
Let’s also put this in some context
Norwegians nevertheless still have high household debt levels - nearly 91% of GDP.
Canada also has major public pension funds with a major presence in international markets - but nowhere near Norway’s.
Norway produces about 2 million barrels a day. In 2020, Alberta produced 3.79 million barrels per day (MMb/d) of crude oil.
This puts some of these numbers in context
There are claims that if Alberta had just taxed the way Norway does, it would have a much larger sovereign wealth fund:
In 2015, the Calgary Chamber of Commerce calculated that Alberta’s sovereign wealth fund would be worth $40.9 billion if it followed Alaska’s model of taxation and $163.7 billion in the case of Norway.
That same year, Mitchell Anderson of The Tyee calculated much of that difference has to do with a difference in collected royalties.
“Norway realized revenues of $87.69 per barrel in 2013. Alaska managed $38.54. And Alberta? Just $4.38 — one-twentieth what our Norwegian cousins managed to rake in,” Anderson wrote.
However, it’s not just taxation: Norway’s entire approach to oil development, and how it avoided the “oil curse” was told in a 2011 interview with NPR’s Planet Money.
It was “a feat due in large part to the work of an Iraqi geologist named Farouk Al-Kasim.” Al-Kasim moved to Norway in the 1960s with his Norwegian wife, to seek medical treatment for their child, who had cerebral palsy.
At the time, Norway had discovered oil - but hadn’t announced it yet. Al Karim and a colleague wrote a proposal for how to do it right:
One radical solution aimed at preventing the oil money from destroying Norway's existing industries: Limit the amount of money the country made from oil in the short term. Don't drill everything at once.
"It was received with skepticism by the industry, who wanted Norway to go full-speed ahead," Al-Kasim said.
Despite the industry pushback, Norway handed out just a couple drilling permits a year.
In an even more stunning act of self-restraint, the Norwegians decided not to spend most of the oil money. Instead, they put it in an oil trust fund that's now worth hundreds of billions of dollars. The government only spends the interest that the fund generates.
So, the answer was not massive expansion, which is routine elsewhere - but what you might call “a controlled burn.”
In addition, to prevent local inflation and distortion in the Norwegian market, the fund invests outside of Norway.
There are other aspects to the economic and geographic reality facing Norway: it is a sovereign country with its own currency, and close access to ports and to its customers in Europe. Norway refused to join the EU or the Euro and has thus preserved its monetary sovereignty.
This is not just “government intervention” - governments create and shape markets by the way they create legislation.
Sympathy for Albertans
In contrast with Norway, Alberta took exactly the opposite approach.
Alberta’s political culture has always been different, in part because - for decades - one of the major sources of immigration has been from the United States. With the oil crisis of 1973, there were strong connections with the U.S. as well, and Calgary had one of the largest concentrations of Americans living abroad.
These factors - including the political evolution of the province meant that Alberta was the “Texas of Canada” both in oil and in attitudes. The “Alberta Advantage” aimed at ultra-low taxes and lean government. This was possible - because of oil revenues.
However - and this is an absolutely critical part of understanding the impact of oil price busts: despite the perception of Alberta’s great wealth and economic activity, it often didn’t make it down to the average Albertan.
Alberta was approving projects, and at the Federal Level, the Conservative government was, quite literally, wiping out environmental legislation all the way back to 1867.
Plenty of oil companies are foreign owned, so profits went straight out of the province as well as the country, but Alberta was not very good at spreading the wealth, in either the private or public sector.
The province has a flat tax of 15%, instead of a progressive income tax, which means that the people with the highest incomes keep much, much more of their income.
That means that in one of the wealthiest province in Canada, with the biggest boom, lots of people are no better off than they were 30 years before. That’s with taxes being cut - and income and corporate and federal sales taxes were all cut at the same time.
Part of the reason for why this happens, is that the oil business, by its structure, is capital intensive, not labour intensive. It can takes a lot of financial capital to get it up and running, because it takes a lot of physical capital - machinery - to get oil out of the ground and to the refinery or port - which have even more capital requirements.
Since it’s not “labour intensive” - it takes fewer people, but they will make a lot of money, both in extraction and higher up the executive chain. As I mentioned with the recent spike in oil prices due to the invasion of Ukraine, oil prices around the world surged though the price of production did not. It’s pure profit.
And the fact that oil revenues are not labour intensive is part of the reason for the “oil curse” or the “resource curse”. Most resource extraction industries are like this.
It doesn’t take that many people to run the whole business
The thing that matters is access to the resource - which is only available in the one location. Either oil or gold is there or it isn’t.
It takes skill and money to extract the resource, but whether it was there or not in the first place is an accident of geology.
So, for resource extraction companies and for provinces or countries, what matters is whether you get access to the property where the resource is. Because this is something that governments can control, there tends to be a lot of corruption involved. Governments can act as a gatekeeper to access the land.
But the other problem - which is a bigger problem than you might expect - is that it the capital intensive structure of the oil business means that while workers may be well paid, there aren’t that many of them, and as a result the structure of the business itself does not distribute its benefits throughout the further economy - it is concentrated in the hands of a few. In fact, even if all the revenue were shared equally among all the employees, it would still be a large amount of money concentrated in a few hands.
Different types of industry have different ratios of capital and labour. Meat packing is labour intensive, manufacturing can be labour intensive, running server farms are capital intensive.
This creates problems, including for the rest of the private sector, who can’t afford to compete with the salaries in the oil sector, but also because when only a few people have a lot of money, it doesn’t make its way into the pockets of other businesses, or workers.
In Alberta, 139,000 people, or 7.1% of the population work directly in the oil industry. In turn, they produce 25% of that province’s GDP, 33% of the provincial government’s annual revenues, and 50% of the province’s exports. Alberta’s economy has grown quickly since 2000 because the price of oil has increased, but between between 2000 and 2009 (though this includes a sharp recession after 2008) Canada as a whole lost 500,000 manufacturing jobs.
Generally speaking, you need more people to manufacture something, and make all the parts you using to make your final product, unless the process is highly automated. Even then, complex manufacturing will require multiple suppliers. You only need so many people to extract oil.
The Twitter account of a Canadian Member of Parliament who represented the tar sands in Alberta when fuel prices were high reads “180,000 people in a riding of 180,000 sq. km. 8% GDP of Canada.” That means that a 0.5% of the population of 34-million people is generating 8% of the country’s GDP.
In principle, there is nothing wrong with this. But it creates several challenges for the tar sands and the wider economy. Fort McMurray, the town closest to the oilsands, has all the benefits and problems of any resource boom town: labour and housing are expensive and in short supply, the workforce is young and transient and there are various social problems - lots of drugs and addiction.
The other thing is that that automation is making this worse: drivers who used to make six figures have been replaced with self-driving trucks.
I have nothing but sympathy for people who do hard work for a living, and to me - these are incredibly important numbers, because it shows just how many people a “boom” can leave behind.
Canada’s Broken Debate About “Haves” and “Have-Nots”
There’s two kinds of “haves and have-nots” here. One is within resource-producing provinces in Canada, and another between provinces.
At the level of both the provincial government policies and the provincial private sector economy, money is being redistributed upward.
For people outside of Alberta, the perception is that they are doing really well. The fact that they talk about the billions in taxes they pay tends to underline this.
For people in Alberta who aren’t seeing the benefits, you can understand why they might vote conservative - not just because of values, when their government talks about taxes, and blames everything on the federal government, it seems to make sense in one important way: conservatives are the only ones acknowledging the real financial stress and pain that incredible numbers of people are experiencing, which is otherwise being completely ignored, or outright dismissed, or even scorned.
What’s missing from the conservative explanation, however, is the role the industry and provincial governments both play in accelerating inequality in a boom.
This has impacts on our national debates, which are based in equally false and mistaken ideas - about who is benefiting and who is paying taxes.
For decades, Western provinces - especially Alberta and Saskatchewan - have complained their “have” “provinces” are paying more in, while other provinces het more.
This is why understanding the concentration of income and wealth is so important.
We are living in an era of record inequality, in Canada and the U.S.
Since the 1970s, when we talk about inequality and “booms” - it is a surprisingly small, concentrated group of people who are making the money - and they keep making more money, faster than anyone else.
Imagine one of those glass elevators in a mall, where you can see everyone inside going up, while a crowd gathers at the bottom. That is what inequality has been like.
Each province in Canada has a few such individuals. Those few individuals are the ones who make the difference between whether you are a so-called “have” province or a “have not” province in Canada’s federal equalization program.
Politicians and pundits in Western Canada have been stoking a grievance for decades that ordinary folk in Alberta and Saskatchewan are losing out - because their collective money is being sent to another province - except it is not “their”taxes - it is the taxes being paid by a fairly small proportion of high-income earners.
For example, you will sometimes see articles about how the top 10% of earners paid 50% of the taxes.
For at least 90% of the population, of those provinces - even “have provinces” that is not money that is going to them.
It’s also a widespread lack of understanding of how and why Canada’s federal transfers work, and why Canada cannot function without them. We know that, because in the economic collapse and Depression of the 1930s, the provincial governments of Manitoba, Saskatchewan and Alberta were all effectively insolvent. They required continual bailouts by the federal government to prevent them from default. Bringing in transfer payments were an automatic stabilizer for the whole national economy. They are used to somewhat level the national playing field and ensure fiscal year-to-year stability.
They are essential, because many jurisdictions share the same currency, when there is an intense change in one jurisdiction, it can warp the economy. It has impacts across the country for good and for bad.
Transfer payments - from high income individuals is a way of automatically smoothing out the economy, because it’s actually better for the whole system - it helps keep a hot economy from overheating. And the functional reality of transfer payments in Canada (and other comparable federations like Australia and USA, is that transfers from “have” states pay for health care and education of people who live in have-not states. Those people may then either increase the local economic capacity, or move to a “have” state, and return the investment.
These programs are effective and efficient because over the long term they prevent crises by reducing volatility. The fact that provinces can rely on transfer payments makes it easier for the them to borrow at lower cost. That lowers the cost of government.
These are all lessons that came out of the catastrophic failures of the financial crisis of 1929. They were incorporated into policy and law in Canada and other states as part of the New Deal.
Ever since the New Deal was brought in, there were continual efforts to push back, overturn it and dismantle it, and those efforts have been successful over the last 40 years, arguing that they need to return to the “free market.” While conservatives today argue that this is not the “free market” they are making a mistake, in (at least) three ways.
First - transfer payments are a market stabilizing measure, because it provides a better assurance of long-term, ongoing return on investment. That is one of the most important things government does, and it is much of what government does, in creating a legal and regulatory structure for the entire economy.
Second, these are payments that going to the provision of public services, not for creating new businesses. The public services are essential for the economy, but they are the not the same thing as capital investment that will create new businesses or new economic development. That is separate.
Third, when the 19th century liberals and other political economists were all clamouring for a “free market” it wasn’t to be free from government taxes or regulation. It certainly wasn’t to be free from taxes for a democratically elected government that built roads, bridges, and runs hospitals, schools and universities.
The system of government people wanted the market to be free from was feudalism, where you paid rent to a local hereditary lord, who in the words of John Stuart Mill, made money in their sleep.
That rent on everything, was to support the luxury lifestyles of people who did not have to work - and it made life more expensive. The high rents add to the overhead, and raise the cost of living and doing business. Those are private rents - not taxes. If you were a serf you would always pay more than you got back.
With our current governments, when you consider the entire amount of public infrastructure and facilities, most people get back more than they pay. And, in when provinces that receive equalization top-ups and when governments run deficits, governments are putting more money into the economy than they are taking out.
The people writing about free markets wanted a market free from the extra cost of rent-seekers, who gave nothing back.
From Libertarian-leaning, to liberals, to social democrats and communists, they wanted an alternative to aristocracy.
Saskatchewan
The Romanow NDP came to power in 1990, four years after the price of oil had collapsed. The province was a “have not” province and was struggling under a serious burden of debt. The Federal Government of the day was the PC government of Brian Mulroney which was also engaged in austerity.
The Saskatchewan economic miracle of becoming a “have” province is a factor entirely beyond the government’s control: the international price of oil tripled and the price of potash went up ninefold, while interest rates dropped.
Writing in Canadian Dimension in 2012, John W. Warnock writes that the Romanow-Calvert NDP in Saskatchewan:
Refused to enhance the rights of labour, ignoring calls to introduce pay equity legislation and legislating SaskPower employees and nurses back to work
Closed hospitals all over the province
Froze welfare rates for 15 years, from 1991 to 2006.
Passed a statement in 1997 denouncing the Kyoto Accord and rejecting any emission controls
The Saskatchewan NDP’s finance Ministers were profoundly economically conservative. In 2015, Andrew Thomson, who a “star candidate” for NDP MP in Eglinton-Lawrence, was in the Saskatchewan NDP cabinet. His record included:
Proposing to lowering oil royalties to spur investment
Outsourcing government IT, and
As Minister of Finance during a period of rising resource revenues, Thomson had introduced the largest tax cuts in the province’s history by lowering sales taxes, capital taxes, and corporate income taxes in 2006.
There was concern that Thomson’s tax cuts would be too deep, but there was still a substantial surplus. There is a reason for that, which is that the price of potash skyrocketed, from a stable price of around $100/ton to a peak of $900/ton before settling down at about $300/ton.
The NDP were defeated in 2006 by the Saskatchewan Party, who, despite being comprised of some far-right conservatives, including lifting the freeze on welfare.
Now, there are some strange quirks to Saskatchewan’s politics, one of which is that it has some of the loosest campaign finance regulations in Canada - termed “the Wild West.”
While there are strict limits at the Federal level around donations (corporate and union donations are banned) the rules vary wildly between provinces, and both Alberta and Saskatchewan allow large donations of money and time from both corporations and unions.
A report showed that between 2006 and 2016, Alberta companies donated $2-million to the governing Saskatchewan Party. In fact, Saskatchewan Premier Brad Wall travelled to the Calgary Petroleum Club to raise funds.
This means - in a very real sense - that the oil industry has a claim, not just on the Saskatchewan’s economy, but its politics.
When faced with the challenge from the New Green Alliance and the few environmental organizations in the province, Lorne Calvert’s government finally came up with a set of goals for reductions, but there was no attempt to actually implement any serious program. Scott Bell and Jamesy Patrick outline a general path that could be taken. But they do not confront the reality of the situation in the province, where neither of the two major parties has ever had any commitment to doing anything which would reduce the consumption of fossil fuels.
As this happened, Saskatchewan still had one of the highest child poverty rates in the country - comparable to B.C. and Manitoba - all provinces that had NDP governments in the 1990s and 2000s, all of whom completely abandoned any pretense of progressive economics, by embracing and endorsing the right-wing economics of neoliberalism and fiscal conservatism.
The basic idea behind Keynesian economics is to ensure stability to avoid collapse That means you have taxes so that the state can act as an insurance company in the event of a major crisis, when the private sector collapses. You moderate the highs and the lows.
The basic idea behind neoliberal or fiscal conservatism, is to amplify the highs and lows, and pretend that crises either can’t happen, or that when they do, they’re “fixing” things, because it’s a correction.
Saskatchewan’s economic turnaround in the 1990s was treated as a miracle, and praised by libertarian think-tanks like the Fraser Institute. After all, under the Romanow NDP in Saskatchewan “per-person program spending dropped from a peak of $9,098 to $6,963 in less than five years.”
That money was going into supporting oil and gas projects instead, as this Government of Canada update from 2005 reports:
This quite amazing chart directly shows how conflict causes gas price increases, and the direct connection between specific historical events and the price of oil and gas.
In the 1990s, the federal government also went through austerity, after there was a risk the government of Canada could default. There was a huge amount of fear over Canada’s deficit, and various predictions it would never be paid off. In fact, Canada did go into surplus, in surprisingly short time - in fact, all governments started balancing their budgets - including Bill Clinton in the U.S. and Tony Blair’s Labour in the UK. This marked a significant rightward shift for all three parties, to adopting “neoliberal” economic and social policies - balanced budgets, tax cuts, freer markets, and NDP parties and Liberals were all operating as fiscal conservatives.
But it wasn’t just the cuts and freezes, reducing government spending. Revenues were up, because interest rates were down. In the 1980s, interest rates were often between 10% and 20%. In the 90s, they dropped to between 10% and 5%. This resulted in an explosion in the amount of credit banks were extending. The economy was being pumped up with a debt bubble - but while the bubble’s being inflated, of course it doesn’t just increase private revenues, it increases government revenues too.
So, sorry all you fiscal conservatives who thought that all that “tough love” austerity and cuts balanced the budgets while boosting the economy. That’s what happens when the central bank drops interest rates by 5%.
As the price of oil kept going up - especially after the invasion of Iraq and the war in Syria - it stayed around $100 a barrel or more for several years, until 2014. Several factors played a role - China bought less, the fracking revolution in the U.S., restored oil production in the Middle East, overproduction, and the deliberate choice by Saudi Arabia to flood the market. As this paper points out, “The decline in oil prices in 2014-16 was one of the sharpest in history”
“while oil and gas extraction accounts for only 6 per cent of Canadian gross domestic product (GDP), it made up roughly 30 per cent of total business investment in 2014. Initial Bank estimates found that in the absence of any monetary policy response, the oil price decline would have reduced the level of Canadian GDP after 2014 by roughly 2 per cent (Bank of Canada 2015). The Bank therefore decreased interest rates twice in 2015 to help the economy adjust to lower oil prices.”
This is what started to accelerate the use of consumer debt to try to compensate for a historic collapse in the price of oil, which went to inflating real estate and other existing assets - when Canadians were already under a heavy burden of private debt.
The collapse in oil prices has a devastating effect: it can be thought of as a financial blast zone - with different levels of damage depending on exposure. Changing interest rates ignores all of that - it does nothing to really help the people in need, who are facing massive drops in revenue.
The oil boom had created a new market for welders, truckers, and manufacturers. In 2015, this report from Saskatchewan reported drops in business of 50%.
“Small businesses that service oil companies in the area are reporting a 30 to 50 per cent drop in business. Among those feeling the pinch are workers at one Estevan welding shop, who are finishing up their last orders from oil companies and wondering what's next. Like most businesses in Estevan, Brent Gedak Welding is just trying to stay afloat. He used to receive 90 per cent of his business from the oil patch.
Trucking companies are also hurting in Estevan.
Darryl Shirley, who's part owner of Bert Baxter Transport, says the trucking business has cut 40 jobs since Christmas.
"Last year, the year before, at this period of time, they'd be putting in 80 or 100 hours a week. The trucks were always gone. Right now, I got more trucks in the barn than I got on the road."
Another company, Dayman Trucking, has closed its doors and put 12 trucks up for auction.
It had been in business in Estevan for nearly 60 years.
There were many more stories of shutdowns and business dropping by 30% - 50% in a month. “the average number of people receiving regular EI benefits in Saskatchewan increased by 24.6% in 2015, much higher than the national increase of 4.9% during the same period. The majority of the province’s EI claims came in occupations related to trades, transport and equipment operators and related occupations.”
There are a number of problems with the way we measure the impact of employment and unemployment that conceal the damage - simply, that we treat all jobs as the same, when they are not. If someone was making $75,000 and they stay employed while taking a $40,000 pay cut - while carrying the same debt, that is going to make their life much harder. Manufacturing employment in Saskatchewan dropped by 9.3%, “Residential housing starts in Saskatoon declined more than 25%”
To put a final point on it: Consumer insolvencies in Saskatchewan “jumped by 42.5% from 2015 to 2016” “It was the country's second-highest increase, behind only Newfoundland and Labrador,” (which I have not mentioned, but which has had the same impacts.
“It kind of correlates directly with the oil and gas service right now, unfortunately, and we've seen this increase coming since about 2015 when the prices of oil did decrease so significantly," said Meger [of MNP]. “And we saw it come in waves.”
This economic agony - which is real, and damaging - is generally ignored, because, incredibly, while we always talk about deficits, debt, and the two sides of the ledger for government, as a matter of orthodox economic practice, we do not do so for households.
And for hard-core fiscal conservatives - who dominate governments in Alberta and Saskatchewan - there is an ideological prohibition on public policies like taxation, investing in heritage funds, saving for a bust, or providing personal debt relief.
This means the costs of the economic downturn are being borne by private citizens, while financial and energy industries are often shielded: after all, they can write off their losses.
Economists thought that the price of oil would spur an economic recovery by making things cheaper to produce. What they failed to consider was that the oil price boom, and the crash of 2014 resulted in a drastic reshaping of Canada’s economy, because everyone thought the boom would last forever. Capital investment that might have gone elsewhere, went to oil, where it was trapped in stranded assets.
Canada’s Capital investment, productivity, personal and government debt - even the acceleration of the housing and affordability crisis today - are due, in part, to an economic catastrophe for many people in oil-producing provinces that has not been recognized.
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DFL
NEXT IN THE SERIES: The National Interest Part 4: Petro-Politics & Petro-Propaganda in Canada. Understanding Oil and Finance as Warfare.
Very well thought out paper, Dougald!
On the "sovereign wealth funds" --- I will need to read your whole article more closely, but in case you do not mention it, this idea of a sovereign wealth fund is ridiculous. Norway has "saved" scorepoints (accounting records) from oil revenue. They have no need for saving scorepoints. There is no need for a superannuation fund or any such like for CND, AUS, NZ, USA, UK, JP,... for any nation outside the EMU. These savings mentality policies are holdovers from fixed exchange rate times/Bretton Woods, which are no longer applicable frameworks. Such savings does nothing to cool off inflation, and does not improve the amount of stuff for sale for today retirees, nor does it increase what could be for sale for tomorrow's retirees, in fact such policy reduces what pensioners can buy tomorrow. So much lost real output that will never be recovered. it is an epic crime of negligence.
All those revenues not immediately handed back to the workers who drilled up the oil, or to anyone else in poverty for that matter, is a massive potential loss of real output, so a drain on the *real* economy. There is simply no need for a monopoly fiat currency issuer to save it's own scorepoints. It is in fact an inapplicable concept (saving your own IOU). Even more wildly to normies: there is no reason for a government to save foreign reserves either. Not if they could cash them in to get imports for employing in domestic public purpose.