Redford's Alberta collides with reality

Redford’s hope for her Progressive Conservative party to continue to rule Alberta (they’ve had government continuously since 1971) after the 2016 election has to be in consolidating those “just left of us” voters into the PC fold. To do that, she has to deliver improved services, improved infrastructure, a “more caring” government.

Last year’s Alberta election saw a shift in the political alignment of the province. This year’s financial woes will solidify it.

Alison Redford dealt with the rise of the opposition Wildrose Alliance by shifting her Progressive Conservatives a little leftward, to attract voters who might otherwise support the Alberta Liberals, the Alberta Party, or even the New Democrats. This manoeuvre was successful, in that it returned another PC majority last year.

All of the promises made, however, depended on on factor: Alberta getting a good price for its oil.

Alberta’s provincial revenues are disproportionately tied to royalties from resources. There is no provincial sales tax, and the provincial income tax is a flat tax (which penalizes the lower half of the income distribution relative to other provinces, but makes the upper half do better than almost anywhere else in Canada most of the time).

As a result, Alberta’s history is one where spending rises and falls based on royalty streams.

If Alberta had been getting the world price for oil this past year, we wouldn’t be talking about a collision with reality for 2013. Alberta built its 2012 budget on an expected oil price of about $97/barrel. The world price has mostly been above that in the past year — indeed, for much of the year, in the $115-120 range.

But Alberta’s actual royalty streams have come from a price range of $83-88/barrel.

That’s because Alberta has one outlet for its oil. The United States. (There is limited refining capacity in this country, and Canadian refineries mostly process light crudes. To process the output from the oil sands, or most shale oils, the outputs must be sent to refineries on the coast of the Gulf of Mexico.)

Refinery capacity constraints have led to an oil glut waiting for processing. These products are stored at Cushing, Oklahoma, where the US (West Texas Intermediate) price is set. With the glut, new product arriving is being deeply discounted.

As a result, even after avoiding payments and taking monies from the sustainability and heritage funds, Alberta comes out of 2012 with a seven billion dollar deficit (assuming there isn’t a sudden windfall between now and the end of the the fiscal year on March 31).

Given that a balanced budget with a moderate surplus had been forecast, that sets a new record for “fudge-it budgeting”. It also means that, like it or not, promises that were made to spend are being backed away from.

Alberta Health Services and education in Alberta will feel the pinch. Much needed infrastructure, such as twinning Highway 63 up to Fort McMurray (desperately needed given that road transport is the only way most goods and services move to the oil sands), will be delayed or deferred. City transit expansion in Calgary and Edmonton will be slowed.

Meanwhile, Wildrose — which had already attracted most of the fiscal conservatives to its banner — gets to oppose the continued use of deficits, which in Alberta (the only province that had managed to pay off its provincial debt) means piling up a new debt for future generations to pay back. It gets to oppose the government’s slow pace in recognizing that their revenue projections weren’t going to be met. It also gets to oppose whatever number is used in the next budget.

Set that royalty expectation too low, and claims that the budget process is being used to manipulate public opinion will come forth. Set it high, and claims that a new deficit beyond plan will emerge will be brought out. Set it right, and criticism that Alberta isn’t doing enough to ensure its oil gets to world markets (where the Brent price would rule) instead of the American one will fill the airwaves.

Meanwhile, Alberta’s economy (as with the rest of the country’s) is starting to feel the pinch. Calgarians are moving to (wait for it) Saskatchewan — for the job opportunities. (This after years of making jokes about their next door neighbours, from “would the last person leaving Saskatchewan please turn out the lights” to “socialist hordes on the Prairies”.)

Saskatchewan is the only Canadian province with a balanced budget — and services are comparable to or better than Alberta’s these days.

Without money, that’s going to be a challenge — and “without cash” is the order of the day in Alberta.

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Redford's Alberta collides with reality

by Bruce A. Stewart

21 January 2013