In my latest Ottawa Citizen column, I discuss what to do with natural resource revenues. Full column below:
An oil investment fund is a good idea
By Brian Lee Crowley, Ottawa Citizen, June 2, 2012
Brash Texas oil billionaires and Saudi princes have forever fixed in the minds of people the idea that oil and gas wealth is synonymous with the high life.
Canada now has the second or third largest oil reserves in the world? Let’s whoop it up!
Before we fire up the cheque-writing machine, though, there are two things we should ponder.
First of all, natural resource revenues are not like income or sales taxes, which are genuine income; they flow from the endlessly renewed efforts and activities of our people and companies.
But non-renewable natural resource revenues come from the sale of a finite resource. When the oil and gas and copper and iron and diamonds are gone, they are gone.
So when we sell these resources, it is a one-time deal. Nature is not putting new oil and gas under the prairie or minerals under the mountains. Those of us alive today are merely the stewards of those resources on behalf of their owners: all present and future citizens. We therefore have a moral and a prudential obligation not to treat this money like some windfall, to be blown on consumption today, but as assets to be managed wisely for the future.
To use the ugly language of accounting, the sale of natural resource assets doesn’t belong on the income statement. It is a balance sheet transaction. Selling natural resources creates no new value. The government that owns the resource has simply changed it from one kind of asset (the physical resource) into another kind of asset (cash). And everybody knows if you sell your assets, like your house or your RRSP, to pay your bills, soon you have no assets but the bills keep coming. If you invest those assets, however, you can spend the returns they generate each year, or reinvest them to create even more.
It is also perfectly in order to use the money to reduce debt. Suppose that a government is paying eight per cent a year on its debt. Servicing $1-billion worth of debt would cost $80-million a year, year after year. Pay off that $1-billion debt and the money that was going on interest is now reliably available to sustain new spending or reduce taxes, every year. Over 20 years you’d have an extra $1.6 billion to spend.
So when this week the environmental think-tank the Pembina Institute became the latest group to suggest that we should use some share of the revenues from the sale of oil and gas to build up an investment fund, they are on solid ground. Norway, the country that best manages its natural resource revenue, has done so with great success.
Where the Pembina folks are shakier is on whom such a Canadian fund should belong to. The Constitution is crystal clear that natural resources belong to the provinces (although it increasingly looks as though aboriginal people may contest this notion with some success). The stewards of our natural resources are provincial governments. Moreover, it is the provinces who own the asset (the natural resources) and who sell it in return for a royalty.
Ottawa is no party to this transaction, and it would likely cause a political and constitutional crisis were Ottawa to seek to capture a share of the sale of those assets for a federal fund. This is a job for the provinces. Former Alberta Premier Peter Lougheed got this when he created the Alberta Heritage Fund. Ralph Klein used resource revenues to pay off the province’s debt. But subsequent governments have returned to debt and profligacy.
That brings us to the other thing to remember about non-renewable natural resource revenues. They are, as former Alberta Treasurer Jim Dinning once famously observed, non-reliable revenues.
Most government spending goes on salaries for employees who provide public services and on transfers like welfare payments, pensions and the like. The cost of these things only goes in one direction: up.
Natural resource revenues, by contrast, gyrate wildly. The temptation, when prices are high, is to pretend those revenues will always exist, causing a cycle of booms and busts in public finances. Moreover if you acquire recurrent obligations on the basis of one-time asset sales, an inevitable day of reckoning comes. The natural resource is gone and you have a lot of public servants you can’t pay and a lot of people reliant on public services you can no longer afford.
This problem is resolved by using the money to pay off debt and then investing the rest and only spending the fund’s returns.
That still leaves the problem of how to prevent politicians “investing” the fund on their latest cockamamie scheme (putting unsightly wind turbines underground perhaps?), but the Norwegians manage. Surely we can as well.
Brian Lee Crowley is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.
