29 August 2005

The Seven Billion Dollar Question

Thanks to sky high prices for oil and natural gas, the province of Alberta is looking at a surplus of $2.8 to $7 billion dollars this year. The province with the next largest surplus is British Columbia at $220 million. The federal government itself is running an even bigger surplus, but that is another story. The Klein government is concerned that the other provinces are eying Alberta's surplus and looking for a cut. Since Alberta has no public debt anymore, there's not a lot to do with the money aside from spend it on public entitlements or slash income taxes to 0 %.

In the Calgary Herald, former premier Peter Lougheed urges the Klein government to take an active leadership roll in the country to forestall any pilfering. This would certainly mark a welcome change in the rather obstructionist approach that the Klein government usually takes. Lougheed tangled with Trudeau during the last oil shock, so his suggestion to take the initiative should be heeded. Lougheed may be a throwback to the conservative intellectuals of yesterday but he still commands tremendous respect in the province.

What Alberta should do is take this opportunity to diversify its energy holdings and economy. While gas and tar sands development may be roaring now, there is no guarantee that this will hold indefinitely. Most of Alberta's gas reserves were flared off in the first half of the 20th century. As a result, conventional gas will be nearly gone in four years. Given the effort around the globe to get away from oil as a carbon fuel, are the tar sands enough? This question is especially pertinent given that natural gas is burned for steam refining of bitumen. It's also worth pointing out that electricity prices in Alberta are some of the highest in the country, due to a lack of cheap hydro. Right now British Columbia gouges Alberta by selling it electricity during peak daylight hours, and then buys power back from Alberta coal plants over the night in order to preserve the water in its reservoirs.

Alberta should take this windfall as an opportunity to invest in the future, rather than act as Saudi Arabia Mk. 2. Another historical analogy would be how the Spanish Empire squandered the bullion it captured from the Americas. They burned brightly for awhile, only to be fall back and be eclipsed by the English and Dutch. Eventually Alberta is going to want other, robust sectors in its economy, and access to wind, hydro, and ocean power from its neighbours, since its neighbors certainly won't be sharing.

I think that Alberta should push for something like a national energy board, largely controlled by the provinces but with a seat for the federal government as well. A proportion of all energy revenues would be managed by the board. For example, not only would Alberta's oil and gas revenues go into the pot, but so would uranium exports from Saskatchewan and the NWT, hydro-electricity from BC, Manitoba and Quebec, and the offshore oil and gas of the Maritimes. This board would be the type of federalist, decentralized power structure that Albertan's crave, and no doubt headquartered in Calgary.
  1. Create research entitlements. Currently any research into energy systems is funded on the basis of its scientific merit by NSERC or CFI. This is not a particularly good metric for an industry where manufacturing and management techniques can have a bigger impact than R&D. Given the critical importance of energy to the Canadian economy, it's long past time to create an agency specifically to fund energy research projects. An example would be Canadian Institute for Health Research role in medicine.
  2. Fund energy infrastructure projects. While production capacity can pay for itself, there is often little money to be made in delivery. For example, the dilapidated state of our electricity grid is in dire need of a cash infusion. Construction of new direct current transmission lines could improve the ability of the nation to switch power from one end to the other. In the case of Alberta, they could certainly look to benefit from British Columbia and Manitoba's hydroelectric power. The most economic solution to the gas shortfall may be a LNG terminal built in Prince Rupert and a pipeline built to Edmonton.
  3. Fund public services infrastructure. Highways, hospitals, and the like all carry a high capital cost but once built, can provide effective service for a lifetime.
The real question is if the current Alberta provincial government can overcome the inertia current 'No' policy to take a leadership roll in the country. The current cabinet is, frankly, stolid. It would probably take the election of Kevin Taft's Liberals, or a new more dynamic and ambitious Conservative leader following Klein's retirement to push through anything like I've detailed.

No comments: