And there were ballot boxes - Power of Royalties

Alberta experienced a power struggle between the petroleum industry producing Alberta petroleum and the Government of Alberta otherwise known as the People of Alberta.

Royalties were raised and then royalties were lowered. The adversarial approach at play included threats and actions of economic punishment of Albertans and petroleum companies.

Albertans were punished by falling production mixed with falling gas prices and therefore falling net royalty revenues to their government and and a lowering of the overall return to the resource owners.

Petroleum companies were punished by threats of reduced net return per unit of production – barrels of oil or cubic feet of gas - as more of the final price received was supposed to go to Albertans.

Some argue that the final result of all this was reduced employment, fewer Alberta taxpayers, lower royalty income, lower producer profits, lower producer investment, increased production from competing petroleum producing jurisdictions, in other words, not one positive outcome.

I must say that none of these perceptions is as clear cut as the adversaries expressed them or as I have presented them.

However, aside from those arguments, do near-zero or even negative royalties, should they ever come to pass, be good for the petroleum industry?

As it stands, the petroleum industry clearly demonstrated dominating economic power turned into dominating political power.

At the same time, Albertans have committed their Government to providing some minimum level of service to serve the common good. Reduced royalties rolled into general government revenue threaten to reduce the resources available to provide those services. Yet all these services provide infrastructural support to Albertans as they strive to achieve their quality of life expectations and are the single most important purpose of government, with the need remaining pretty much constant over time on a per person basis.

Assuming Albertans want any government at all, Albertans then have four choices.

They can reduce their expectations of what a minimum level of service should be and what that service mix should be – hospital beds per person, lane kilometres of road per person, police and fire officers per thousands of citizens and so on. Should there be hospital beds or schools, police or highways?

Albertans can sell off other assets to earn revenue to make up what's needed – highways sold and leased back, parks sold to residential and vacation property developers and so on.

Albertans can borrow money and hope to grow out of the deficit and debt financing required to pay for current expenses.

Albertans can raise personal and corporate income taxes.

Albertans have already lived through the first option. Albertans are toying with aspects of the second option.

Albertans have lived through the third option and are again using that option via provincial bonds after swearing off of deficit and debt financing as a viable or sustainable alternative to government financing.

The fourth option is a game changer. What if Albertans got used to paying for the minimum level of government services through personal and corporate income taxes?

The budget could be balanced with taxes. Funding for schools, roads, hospitals, emergency services, police and so on would be stabilized. Services and infrastructure would experience greatly reduced feast or famine financing which usually means human services going through famine (low service levels) when the economy is down and the need is greatest and feast (high service levels) when the economy is heated up and the costs are highest.

The government and people of Alberta would then not be as dependent on the petroleum industry for maintaining level of service and would not be captive of that industry's need for short-term quarterly profits.

As it stands now, about one in seven Albertans is directly employed in energy production while seven in seven Albertans have their level of government services expanded or reduced by that industry's commercial success alone.

It is high time the People of Alberta studied their options and stood up for themselves as independent and self-sufficient citizens. Paradoxically, near-zero royalties must accelerate that process, thereby reducing the economic and political power of the petroleum industry in Alberta. As Albertans become less dependent on the petroleum industry for their well-being, the industry will have ever-less ability to bring government to heel to do its bidding.

What might happen to royalties and costs of services to that industry then?

As the title to this series suggests, all this was done in what must be a democratic society because it happened in the presence of ballot boxes.

Future blog postings in this series will deal with some of these options and other issues of democracy in action.

Mike