April 2008: Editorial: Alberta and Norway

April 1, 2008

What do a Canadian province and a Scandinavian country have in common? It’s oil, of course. Both have vast deposits of the stuff. Both have tapped its extraction and sale to boost their economies.

But that’s where the comparison stops. Norway’s oil development policy is much more astute and effective—and lucrative—than Alberta’s.

The obvious proof of Norway’s success and Alberta’s failure is the amount of money they have accumulated in their respective oil-generated savings funds. Alberta’s fund, established in 1976, now stands at a relatively meagre $16.1 billion, while Norway’s fund, set up 14 years later in 1990, holds a whopping $368.2 billion. (It is expected to rise to a staggering $500 billion by the end of next year.)

The current levels work out to $4,588 per citizen of Alberta and $76,351 per citizen of Norway. And Norway, with a population of 4,700,000, has a lot more citizens to share its fund with than does Alberta, whose population is over a million less at 3,500,000.

Comparing a country with a province is not normally done, but in this case it’s a question of who “owns” a resource. In Norway, the oil is the property of the entire country, whereas in Canada our constitution gives control of natural resources to the provinces where they happen to be located.

Both the Alberta and Norwegian oil savings are referred to as “heritage funds” because they are intended to assure the continued prosperity of the two economies after the oil runs out—which, as a non-renewable resource, it inevitably will. The huge disparity in the size of the two heritage funds, however, clearly indicates that Norway is doing a much, much better job of planning and providing for its people’s future.

Norway has achieved this, first of all, by ensuring that most of the financial gains from exploiting its North Sea oil go to the people of Norway, not to the private oil companies. In exchange for the right to drill, they have to hand over more than three-quarters of their profit ($78%) to the government, which then deposits all but 4% of it in its heritage fund.

Alberta, in dismal contrast, has given the big oil companies a virtual holiday on royalty payments—charging them a miniscule 1% until all their capital costs are paid off. The companies also enjoy generous federal and provincial tax breaks. Little wonder Alberta’s heritage fund is so much smaller than Norway’s!

The other big problem with having one industry in one region that is booming is the harmful effects it has on other industries in other parts of the country. Unless somehow averted, the flood of money into the domestic economy tends to inflate the currency, drive up the price of exports, devastate the manufacturing sector, and lead to the loss of high-paying jobs and the rise of income inequality. This happened in Britain in the wake of the discovery of its North Sea oil in the 1980s, and it has happened in Canada with the inflation of our dollar, rise in export prices, and loss of hundreds of thousands of industrial jobs.

Norway has escaped this destructive impact from its oil boom. Far from declining, its non-oil private sector economic growth last year was nearly 6%, one of the highest in the world. This has been accomplished primarily by investing all its oil fund billions in foreign stocks and bonds. None of this vast store of money can be invested inside the country until after the oil runs out.

Norwegians haven’t suffered from this frugal, forward-looking approach to handling their country’s oil-derived wealth. On the contrary, although their income tax rates are high and they have to pay $2.30 a litre at their gas stations, they enjoy one of the world’s highest living standards and the fairest distribution of income. Their unemployment rate is less than 2%, poverty is almost unknown, and, on every quality-of-life index, Norway ranks higher than Canada.

This stark disparity in the development of their respective oil reserves will unfortunately continue as long as Albertans keep re-electing a Conservative business-comes-first government and Norwegians keep re-electing a people-come-first social democratic government.