“You come from capitalist nations. You know what the market does. For any commodity it goes up and down, up and down”—Saudi Oil Minister Ali al-Naimi*
Contrary to the expectations of many analysts, OPEC (read Saudi Arabia) decided it would not reduce its 30 million-barrel-a-day production quota in order to prop up oil prices.
Oil prices dropped by 40%. Oil companies lost $67 billion in market value in two days. And we’re firmly locked in a downward trajectory.
Why did the Saudis do it?
Eighty percent of the Saudi government’s revenue comes from oil production. This decision hurts them more than it hurts us. Why did they do it?
Some say the Saudis are retaliating against Russia for supporting the al-Assad regime in Syria. Others say the Saudis want to teach the US a lesson by crushing US shale production.**
Saudi oil consultant, Mr Al-Husseini, says this is nonsense. It’s just business—a market decision designed to curb high-cost production wherever it lies, Brazil’s offshore fields, the US shale oil plays and Canada’s oil sands.”**
Mr Prentice’s plan
Oil and gas revenue (taxes and royalties) makes up 21% of Alberta’s budget. Oil prices tanked right after Mr Prentice took office creating a $7 billion hole in the budget. His by-election promises of 230 new schools, multi-million dollar flood relief plans, hundreds of long term care beds and a chicken in every pot are in jeopardy.
Never mind says Mr Prentice, here’s why Alberta will survive the 2015 crash.
Moody’s likes us: Mr Prentice boasts that Moody’s gave Alberta its highest rating because it likes Alberta’s low tax regime, strong financial assets and a strong balance sheet.
Moody’s is an investment service. It rates government investment risk like Michelin rates restaurants. A Michelin 5 star rating means the food is good, not that the restaurant can balance its budget.
Similarly a triple A rating from Moody’s means Alberta is a good credit risk and can borrow more money than say, Detroit. It’s not remotely relevant unless Mr Prentice intends to fill the $7 billion budget hole by borrowing until Moody’s downgrades Alberta to junk bond status.
Albertans must tighten their belts: Mr Prentice says “We will be making some tough decisions, and the impacts will be felt in this province. However…we are in it for the long-term (god I hope so!). The job of building this province is not finished, (no kidding!) and the long-run advantage of advancing long-terms solutions is now before us (what?).***
He concludes with a flourish: “…Albertans are resilient, and there is no province better positioned to weather the storm of which I speak”. Actually there is. It’s called Saskatchewan. It too has a triple A rating from Moody’s and oil royalties only account for 11% (not 21%) of its total revenues, making it less vulnerable to plummeting oil prices.****
Stripping away the Churchillesque language, Mr Prentice is saying that government services will be slashed and we’ll have to suck it up. So all you old, sick and frail people, toughen up. And you young people, figure out how to teach yourselves.
Alberta’s bitumen must reach tidewater: Mr Prentice says continued investment in schools, hospitals and roads is contingent on our ability to “seize opportunities in the Asia-Pacific Basin”. He stresses that tidewater access—east, west, north or south—is essential because it gives producers access to world prices (which, you may have noticed, have tanked).
One tiny little problem: Mr Prentice cannot make it happen and Prime Minister Harper just gave notice that he’s washed his hands of the whole thing. So now what?
There will be no change to Alberta’s tax structure: The 10% flat tax on personal and corporate income and the absence of a sales tax is a sacred cow. End of discussion.
Somehow none of this is very comforting.
A new vision
After countless booms and busts (what Saudi Oil Minister al-Naimi quaintly calls “ups and downs”) Albertans are tired of checking with OPEC every time they need a new school or hospital.
Unfortunately 30 years of symbiotic existence with energy companies warped the government’s sense of self. It cannot distinguish itself from industry. It’s become industry’s mindless cheerleader. Its premier says idiotic things like: “Alberta is a price taker.” Alberta is a government. The government is not a player in the energy marketplace.
OPEC’s decision to maintain production gives Mr Prentice an opportunity to remake government. Instead of protecting Big Oil from OPEC, Mr Prentice should protect Albertans from Big Oil by revamping Alberta’s revenue structure and diversifying our economy so that Albertans will never experience another crash like the crash of 2015.
Just because OPEC set up the rollercoaster doesn’t mean we have to ride it.
*Daily Oil Bulletin, Dec 10, 2014
**Globe and Mail, Dec 13, 2014, B8
***Daily Oil Bulletin, Dec 1, 2014