Oil's Bad Math

If you follow the news, you know that Alberta’s oil is suffering a discount, selling for up to $40 less than the benchmark price for North American oil. As a result of these lower prices, last week, the Alberta government announced it will run a deficit. And yesterday, Finance Minister Jim Flaherty said lower oil prices mean the federal government’s deficit will be $5 billion higher than originally projected, and some belt tightening will be needed in the years ahead.

Alberta Premier Alison Redford has been criticized for relying so heavily on high oil revenues, and it’s been pointed out that the province could have done a number of things to guard against this situation. For example, Alberta is the only province without a sales tax. Introducing one would go a long way toward balancing the books. But, regardless of whether it could have been avoided, the predicament is real. The province’s deficit is, in part, a result of depressed prices for Alberta crude.

However, in the case of the Federal government, the argument doesn’t hold water. Unlike the provinces, the federal government doesn’t collect royalties. Ottawa’s  cut of the action comes in the form of taxes. According to Statistics Canada, as cited in the Globe and Mail, in 2011 the federal government collected $1.2 billion in taxes from the oil and gas industry. Yes, $1.2 billion is a considerable sum. But it’s less than the amount  given in subsidies to the oil and gas sector each year. And it’s far less than the $5 billion budgetary shortfall the finance minister recently announced.

Furthermore, the discounted price of Alberta’s oil means that the  oil sells for roughly 30 per cent less than its U.S. counterpart. But 30 per cent of $1.2 billion is only $400 million. Clearly, this discount is not responsible for a $5 billion shortfall.

Why label oil the culprit? There are a few reasons. One is that there is a large difference between the real economy and the stock market. Oil and gas contributes less than 4 per cent of the GDP, but it makes up close to 30 per cent of the TSX. Put another way, oil means a lot more to Bay Street than Main Street, and the federal government has close ties to Bay Street.

 Blaming oil for the federal government’s economic woes also helps make the argument that these depressed prices hurt all Canadians, and therefore, building more pipelines is  in the interests of all Canadians because, the argument goes, that’s the surest way to alleviate this price pinch.

At the moment, there are proposals to expand, reverse, and construct pipelines in practically all directions from Alberta. Each of these proposals faces opposition. And in some cases, the opposition is winning.

To soften the opposition, there is a concerted effort by the oil industry and their allies to convince Canadians that more pipelines and more oilsands extraction are in the national interest. Thus, lower oil prices are fingered as the cause of the deficit. If you believe that the lack of pipelines could put social programs you value at risk, you’re less likely to oppose them.

But the truth is the vast majority of benefits from the oilsands accrue to Alberta. The federal government collects little in taxes from oil and gas companies. According to analysis by the Canadian Energy Research Institute (CERI), whose figures are often cited in support of oilsands expansion, 94 per cent of the projected GDP benefit of oilsands investment and operation will flow to Alberta. Very little goes to the rest of Canada.

What does the rest of Canada get? An increased risk of spills into our rivers, lakes and coast lines. Oh, and a tarnished reputation globally. We miss out on opportunities presented by the green economy. And we face massive costs down the road, because the longer we wait to deal with climate change, the more costly it will be.

Don’t believe the spin. The rampant development of the oilsands is not in the national interest. And the price discount is not at fault for the deficit. This is a case of bad math.