Causes and effects in resource development

I’ll admit that I’m not the sharpest knife in the drawer when it comes to economics, so I had to re-read the quote above a few times. But I gather it means that when a province allows the extraction of a valuable resource to proceed at lightning speed, the incoming wealth not only puts cash in our pockets, but it also forces prices up generally. Just ask anyone who has tried to rent a room or buy a house in Fort McMurray.

“Part of the reason we collect such low royalties is that we’ve allowed development to proceed quickly, and this has led to rapid inflation in wages, housing values and other impacts on wealth in Alberta and elsewhere, while, in turn, reducing the value of the resources as they’re more costly to extract.”

— Andrew Leach, energy policy professor at the University of Alberta

I’ll admit that I’m not the sharpest knife in the drawer when it comes to economics, so I had to re-read the quote above a few times. But I gather it means that when a province allows the extraction of a valuable resource to proceed at lightning speed, the incoming wealth not only puts cash in our pockets, but it also forces prices up generally. Just ask anyone who has tried to rent a room or buy a house in Fort McMurray.

And those high prices also tend to affect the balance sheets of the big oil companies that work up north. That’s because it’s not only the cost of a cup of coffee that tends to rise to a crazy level; the cost of hauling those monster tires and the flatbeds full of drilling equipment north along Hwy 2 rises at a similar rate.

And when the cost of machinery and labour rises, there is less profit available for companies like Suncor and Syncrude. And when there is less profit for them, there is less potential for our provincial government to raise royalty rates.

So, as Leach implies, we may want to consider slowing down the pace of development, in order to get a higher share of royalties. A bigger slice taken off of a smaller pie might be a zero-sum game, but at least we — and the flora and fauna up north — could relax a little. And our grandchildren might thank us for leaving some of the bitumen in storage.

But there’s another angle to this story. And I was reminded of it when I saw a graph showing our changing royalty rates over the years. There was a steady decline from the days of Peter Lougheed up until the days of Alison Redford. Under Lougheed, the taxpayers were getting as much as 33 per cent of the value of the final petroleum product, whereas under Redford, that figure had dropped to a paltry 4.3 per cent.

I suppose that some of that decline could be due to an increasingly chummy relationship between government and industry lobbyists. However, I also have to point out that the intrinsic value of the stuff that we are now pulling out of the ground is a lot less than it used to be.

Remember EROEI? No, that’s not the missing verse from Old MacDonald’s Farm. It stands for energy return on energy invested. And it simply relates to how easy or difficult it is to get fossil fuels out of the ground and refined. If it takes the energy equivalent of one barrel of oil to suck 100 barrels out of the ground (as was the case for Saudi crude a half century ago), then the EROEI is 100:1.

For Alberta conventional crude about 40 years ago, that figure was about 30:1.

Care to guess what the EROEI for Alberta bitumen is? It’s estimated to be anywhere from 3:1 to 6:1, depending on the particular operation. Which means that the potential for squeezing royalties out of producers is a bit more limited than it was in the 1970s.

Lougheed could use an analogy of squeezing juice out of a grape. Rachel Notley might have to use an analogy of squeezing juice out of a raisin. And at some point in the future, we might have to resort to the analogy of squeezing blood out of a stone.

So, while I applaud Notley’s desire to establish a royalty review (and it will be worthwhile even if all it does is pull us away from our latest pixelated distractions, thus boosting our collective IQs a few points), I suspect that we’ll never again be able to get the kind of money from the oil companies that Lougheed managed so long ago.

But then again, maybe such a review will be just the kick in the pants we need to diversify our economy, and perhaps even to consider such dreaded heresy as an HST.

Evan Bedford is a local environmentalist. Direct comments, questions and suggestions to wyddfa23@telus.net. Visit the Energy and Ecology website at www.evanbedford.com.

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