The Alberta oil & gas industry is down, the province’s unique tax advantage obliterated, and the detractors point to Norway and say “this could have been us!” Both Norway and Alberta are oil producers with sovereign wealth funds. Norway’s sovereign wealth fund is $1.1 trillion; Alberta’s is $17.3 billion at 2014 year end. The assumption is that Norway has responsibly invested its windfall, whereas Alberta has not. This comparison is wholly unfair.
As Professor Stephen Gordon argues, the Alberta Heritage Fund was set up in 1976 at a time when reserve life was numbered in decades. It was quite literally intended as a transfer of wealth from the present to the post-oil, near-future. Since then, shifts in technology and economics have rendered previously nonviable resources recoverable. Thus, between 2002 and 2003, Alberta’s proved reserves rose from 4.9 to 180 billion barrels, when the oil sands were factored in. Norway’s reserves are a modest 5.5 billion barrels. They have a few years left; Alberta’s have at least a century. Moreover, Norway is depleting its reserves at a fast rate. Production peaked at 3.4 million bbl/d in 2001, and has declined since to 1.9 million bbl/d, with further declines expected. Canadian liquids production is around 4 million bbl/d and projected to grow.
Norway has a demonstrable need for a sovereign wealth fund. It also faces fewer constraints to creating one.
Norway’s dwindling reserves are nevertheless easier to explore and develop, being located in shallow offshore waters. It faced no technological hurdles of the like that had to be overcome to make the oil sands viable. Compared to Alberta, its crude is light and sweet and coupled with plentiful export routes, it commands an additional premium in the form of Brent pricing. Alberta, being landlocked, has to rely on railroads because all proposed pipeline projects have been held up by jockeying politicians and posturing activists.
Norway has also accepted a socioeconomic model based on levels of taxation that would simply not be acceptable in individualistic, pro-business Alberta. Operator taxes, including royalties, can be as high as 78% in Norway, compared to 40% in Alberta. Norwegian consumption taxes are at a whopping 25%; Alberta has no consumption taxes. Maximum income tax rates in Norway are ~47%, in Alberta they are in the area around 40%. That the latter figure includes federal taxation also underlies another key difference between Norway and Alberta: Norway is a unitary state. All revenues are collected by a single level of government that in turn is responsible for all services. Alberta is a sub-national entity that has substantial responsibility over roads, education, and healthcare but that is constrained in how much it can tax from a citizenry that is already heavily burdened by federal taxation. It is relatively easy to maintain services while building a sovereign wealth fund from oil revenues when the general taxing authority is highly centralized and when the public is willing to stomach Scandinavian taxes.
The key points are that Norway 1) needs a sovereign wealth fund and that 2) it faces fewer operational, political, financial, and cultural constraints to building one.
Crucially, the stubborn insistence on comparing Alberta to Norway obscures the central assumption underlying the creation of all sovereign wealth funds: that money saved for tomorrow cannot be better spent today. This is a shaky foundation at best. Indeed, much of the prevailing discourse equates Alberta’s failure to capture a larger share for the Heritage Fund with waste. But there is nothing inherently wasteful about spending on the province’s present health, education, and infrastructure needs. Arguably, it is more wasteful to create a glorified trust fund founded on a hazy approximation of the requirements of an indeterminate future. Nor is it true that wealth captured by the public sector is somehow more efficiently spent than wealth captured by the private sphere. A sovereign wealth fund is a policy choice, but it is not necessarily the best or most responsible one.
Of course, with prices being where they are, some observers may fear – or hope – that Alberta’s post-oil future is close at hand. Again, the timing and the nature of that hypothetical remains unclear. Certainly there is no currently viable alternative to fossil fuels, apart from nuclear. Renewables are at best a supplementary energy source, and will likely remain so for the foreseeable future. Nor is it out of the realm of possibility that further technological innovations can make exploration and development even cheaper and cleaner. There are simply too many variables, so predicting the future is practically impossible. Thus, the argument that Alberta needs its Heritage Fund to hedge against diminished future oil & gas revenues is based not so much on reason but rather on fear. Even assuming the most dire predictions of the oil & gas industry’s fate, it is not necessarily the case that Alberta would suffer unduly for want of a sovereign wealth fund; it survived the shift from coal extraction without one.
The Alberta Heritage Fund was created for a different time, under conditions where proponents could rationally point to a foreseeable end to the province’s resource wealth. Today, it is an anachronism. But it remains political ammunition to those who would attack Alberta’s socioeconomic model, and the oil & gas industry indirectly. The perceived failure to maintain the Heritage Fund was a contributing factor in the downfall of the Alberta PCs, even though they had good reasons for declining to maintain it. A sovereign wealth fund, however needless, still creates the impression that it must be maintained. It is also what drives the unfair comparisons between Alberta and Norway, and the quixotic desire among an element of Alberta’s population to emulate the latter. For these reasons, Alberta’s post-NDP government would do well to take a page from Saskatchewan’s book and put a well-deserved end to this increasingly obsolete and needlessly damaging artifact.