Big oil’s big day

Stelmach takes it away; Flaherty gives it right back, and more
November 5, 2007

These are pretty exciting times for Canada’s oil patch.

Crude oil prices are at record highs, and showing no signs of declining. Most of its current production is either conventional or from the oil sands, both at historic costs that are far below current price levels. The oil industry’s success in limiting Canada’s refining capacity has paid off massively, quietly generating superprofits in the refining and distribution end of the business.

Profits are fattening balance sheets and individual bank accounts at a rate that would make one of the legendary robber barons of the late 19th century blush.

Oil and gas industry profits now threaten the banks for top-of-the-heap bragging rights as the most profitable industrial sector in the country.

The one dark cloud on the industry’s horizon was in Alberta, of all places, where the provincial government finally found that it could no longer resist political pressure to get a fair share for the public of Alberta’s burgeoning oil and gas wealth. First, the government was forced to appoint a panel of experts to study Alberta’s royalties and to compare those royalties with those collected in other jurisdictions.

And while increases rising to $1.4 billion a year in higher royalty payments fell short of the $2 billion a year recommended by the panel, newly selected Premier Ed Stelmach ruined the industry’s day in mid-October with an announcement of significant royalty increases.

But before the industry hot-shots had time to consider the implications of these changes for their plans for a third or fourth home in London and their position on the waiting list for that new Ferrari or Porsche, their old buddy Jim Flaherty came riding to the rescue, and gave it all back, and more.

Just looking at the newly announced corporate tax cuts – i.e. not counting the ones that were announced previously but haven’t yet taken effect – Flaherty is planning to reduce corporate tax rates across the board by 3.5% by time we get to 2012. That doesn’t sound like much, but it will result in a cut in Federal corporate taxes by 22.6% compared with what they would have been without the Update’s new cuts.

And for Canada’s fossil fuel industry, it’s a real bonanza. Oil, gas and coal extraction alone accounts for roughly 20% of the Federal Government’s corporate tax revenue, or more than $8 billion in corporate tax revenue in 2007.

That means that the new 22.5% tax cut announced in the Update will save the industry about $1.8 billion, nicely above the additional $1.4 billion that Alberta is asking them to pay.

So there’s a new memo circulating in the oil patch, ready to be sent off to Ottawa.

Memo to: Jim
From: Your buddies in the energy income trust industry
C.C. Porsche Canada

All is forgiven.

Hugh Mackenzie is an economist and research associate with the Canadian Centre for Policy Alternatives.