The Sooner Alberta Weans Itself From Its Resource Addiction, the Better

03/30/2015 10:19 pm ET | Updated May 30, 2015

Any Canadians curious about where Prime Minister Stephen Harper's plan to turn the country into an energy superpower is heading need look no further than the provincial budget just tabled by Alberta. The collapse in oil prices has turned a once-enviable budget surplus into a monster $5-billion deficit.

What makes Alberta's current predicament even more troubling is how little of its royalty wealth the province has saved. In the last 25-plus years, Alberta has contributed barely anything to its Heritage Savings Fund, which was established in the mid-1970s by Premier Peter Lougheed. It now stands at $17 billion, which is a mere pittance compared to its potential. And it's not like this is a case of twenty-twenty hindsight. Over the years, Albertans have consistently wondered why its Conservative governments weren't being more prudent with their oil wealth.

When sovereign wealth funds are discussed, the first example out of the box is typically Norway, which has put away nearly $900 billion despite only starting to save its North Sea oil royalties in 1990. A more damning comparison that highlights the ironic fiscal myopia of oil-rich, Tory-dominated Alberta, though, is tiny East Timor. Compared to Alberta, the southeastern Asian island nation has a fraction of the oil and gas production, a third of the population, and considerable social and political unrest. Yet, it also boasts a wealth fund equal in size.

Instead of saving, Alberta governments have put resource royalties towards financing the so-called Alberta Advantage, part of which included a flat 10 percent personal income tax rate and no provincial sales tax. In theory, such choices are designed to attract other industries to the province in much the same way that Texas, which has no state income tax, tries to use its oil revenues to convince companies in footloose industries, like electronics, to set up shop in the state. In practice, the main beneficiary of the province's policy decisions, as ever, is Alberta's oil industry, as the rapid expansion of the oil sands will attest.

Premier Jim Prentice has vowed to wean the province from its fiscal dependence on oil, a promise Albertans have heard before. The last time oil prices crashed in 2008, then Finance Minister Ron Liepert pledged to do the same. Since then, Alberta has only become even more dependent on resource royalties, as production from the oil sands continued to march higher. Should Albertans believe this government anymore than the others? Neither side, as it happens, may have a choice.

The problems of Alberta's oversized and high-cost oil sands industry aren't due to a wild, yet cyclical part of the commodity price roller coaster that will ultimately self-correct. We now have nearly a decade of evidence that shows the high crude prices counted on by the oil sands industry aren't compatible with healthy global economic growth. Not only have those prices produced the deepest recession of the post-war era, but the ensuing recovery also continues to be among the weakest on record.

What's more, Alberta's oil sands also faces new competition for refinery space from the millions of barrels of tight oil that's being fracked from previously inaccessible shale formations. Not long ago, US shale production, which now doubles the output from the oil sands, was off the radar.

Even more troubling for Alberta's oil industry, as well as future provincial budgets, is the global move towards reducing carbon emissions. The world doesn't yet have a binding global agreement on emissions in place, but that hasn't stopped individual countries from taking their own steps. Consider the measures adopted to fight coal-fired emissions in the U.S. and China, the world's two largest coal-burning economies. The new rules have hurt coal prices and the value of coal companies as much as any future global pact likely could.

Alberta's government should be thinking deeply about what happens when countries turn their attention from the coal-fired emissions pouring out of smokestacks to the oil-fired ones spewing out of tailpipes. According to the International Energy Agency, the fight against climate change means world oil demand will need to peak in the next five years and then start falling considerably in order to keep atmospheric carbon from reaching even more dangerous levels.

The new realities of climate change mean Premier Prentice may be right in spite of himself. The imprint of oil revenues on future provincial budgets is bound to become much fainter, as will the oil industry's profile to Alberta's economy. In a world of increasing carbon constraints and low economic growth, the oil sands look more like a stranded asset than the source of any fiscal advantage. The sooner Alberta can wean itself from its resource addiction, the better off the province will be in the long run.