Time for action

Kim Keating
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After catching up on The Economist over Christmas, I was struck by how common the issues we face locally are shared around the world but on a different scale.

Kim Keating

In 2016, the global economy will continue to spawn winners and losers. Right now, oil-based economies like Newfoundland and Labrador are being hit particularly hard.

Recently, Standard & Poor’s Rating Services downgraded Alberta and Alaska, citing low oil prices, weak budgetary performances and rapidly rising debt burdens. With a population of nearly 740,000, Alaska has 40 per cent more citizens than Newfoundland and Labrador and faces a massive $3.5-billion budget deficit. There is near unanimous consent among Alaskan legislators that a major fiscal structure change is coming, and soon.

However, Alaska has a fiscal buffer — its Permanent Fund, where, since 1977, 25 per cent of all oil and mineral lease rentals and royalties have been invested. The $50-billion fund is a dividend paying machine consisting of a diversified portfolio of asset classes from around the world. With Alaska’s oil production in decline, investment income from this fund has become the largest source of state revenue and a very important fiscal asset that many believe could help the state avoid the largest recession in its history. The fund now contributes more to the Alaskan economy than the oil industry.

How this fund came about is a story worth telling. In 1969, on a single day, Alaska brought in $900 million with oil lease awards in Prudhoe Bay. At that time the amount of revenue was thought endless considering that Alaska’s total annual budget was just $100 million.

Charles Wohlforth wrote recently in the Alaska Dispatch News that, “Politicians on the right wanted to spend oil money on capital projects and loans. Those on the left wanted to spend it on education and health. Both got their way and the budget tripled in two years.”

Soon after, oil project delays and high government spending all but wiped out the windfall. While spending for the most part was appropriate, the perception of waste created the right conditions for a new savings strategy — thus the fund was created.

So what can we learn from the Alaskan experience? Government investments in income generating assets is not only a good diversification strategy but it is a must for a non-renewable resource based economy.

With a provincial net debt expected be at $11 billion, we too are faced with a tough reality and need to resist building budgets on the price of oil. Leadership and political will is required now to enact significant fiscal reform in an all-out effort to control spending, raise awareness in the financial markets of the value of our energy investments and boost investor confidence to foster long-term sustainable growth.

One clear advantage we have over Alaska is that our oil production is projected to increase over 50 per cent by 2020 while Alaska’s declines by 20 per cent. Our recent offshore bids show a renewed industry interest while Alaska has suffered from notable exits.

Finally, no matter the course of action taken by the government of a “petrostate,” the challenge is to implement an effective response within the context of climate change.

There is no doubt that with the signing of the Paris Agreement last December, we are in transition away from hydrocarbons. But at a time when our oil industry seems poised to take off, is it too little, too late for us? Have we missed the oil window? Analysts suggest likely not.

Over 75 per cent of the current consumption of oil, and all of its future growth, is either in transport or in non-energy uses, principally as feedstock for petrochemicals. This non-energy use of oil is predicted to be the fastest growing segment, accounting for 50 per cent of oil demand growth over the next two decades, and will be relatively immune from CO2 costs. Future CO2 growth will come almost exclusively from transportation. The International Energy Agency predicts that oil and gas will be a strategic part of the journey to a more sustainable future.

Bottom line — as long as we produce our oil efficiently, with best in class environmental stewardship for least cost, the world will need our oil for decades to come and our renewable hydropower will become more valuable in a carbon priced market.

The provincial economic agenda for the next year is broad and complex. But procrastination is not a sensible option — 2016 must be the year of doing the right things and doing them now. As John F. Kennedy once said, “There are risks and costs to action. But they are far less than the long range risks of comfortable inaction.”

Kim Keating is the outgoing chair of the St. John’s Board of Trade.

Organizations: Rating Services, Permanent Fund, Alaska Dispatch News International Energy Agency Board of Trade

Geographic location: Alaska, Newfoundland and Labrador, Alberta Prudhoe Bay

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Recent comments

  • Jeff
    January 18, 2016 - 07:18

    Fair enough, but you left out the point that Alaska's State Debt is $30 billion. Double the per capita debt in Newfoundland. There is no sense in creating a Legacy Fund if the Debt is going to increase. We need Zero Deficit legislation.

    • roy206
      January 18, 2016 - 14:28

      It's plenty late for zero deficit but a great idea for all governments.

  • Charles Murphy
    January 18, 2016 - 05:55

    Ms Keating, Liberal promise us in the last election. they had a economic diversification plan how to stimulate our economy, now they are in power where is this plan? Or do we have to listen to another four years of blowing wind. Its time to be building our economy. Ms Keating take the time and energy to do some research on your own, like I keep telling people to prove me wrong, I'll say its once more, with no disrespect to anyone. to date were shipping in "Nearly" billion dollars in products each and every year to our province, if we can ship those items in? why can't we manufacture those products at home putting our people to work?

    • Jeff
      January 18, 2016 - 08:59

      Charles, please start up a company manufacturing 'stuff' and let us know how you make out. CUPE or NAPE will be there within a fortnight to unionize the place and then your up the creek.

  • Errol
    January 17, 2016 - 12:22

    It is interesting to note Ms. Keating's reference to the IEA on the future growth of oil and gas. She is hopeful indeed, but neglects to mention our reality, in comparison to Alaska. Alaska, at least, has a gas plan. NL, shamefully, does not, and we flare or re-inject copious amounts in our offshore. The Energy Information Agency in the US, says that in 2014, the US produced 37% of it's electricity by coal, 29% by natural gas, and 19% by nuclear. Hydro produced 6%. Oil, solar, wind and all other sources produced only 9%. Oil is already quite insignificant in energy production in that country. Many of the coal plants in the largest economy in the world are being converted to NG, to become more environmentally friendly. My point being that there are very few oil fired electricity plants today in the US. The NL position of having ignored the vast potential of NG in our offshore was a very costly mistake. The North Sea is criss-crossed with gas lines. Instead, our energy Company, Nalcor, placed all our eggs in the Muskrat Falls basket, the most egregious disregard of public good ever seen in Canada. This project is a failure of epic proportion today, and has crippled our fiscal capacity for generations. Ms. Keating should note that this project was doomed to economic failure from the start, Nalcor having completely ignored the shale gas revolution in the US in 2008, and the resulting decrease in wholesale electricity prices. I recall the Board of Trade's glowing support for Muskrat. Shame indeed. Where were you when NL failed to negotiate a gas plan for our offshore?

  • Greg
    January 17, 2016 - 09:44

    There are lots of places to cut costs in the province. One obvious one is modernize motor vehicle registration and driver's license renewal. It is ridiculous that every person has to get a photo taken by a government clerk for license renewal and sit for hours waiting in line for their number to be called. Do it like passport renewals - fill out a form that is available on line or at the post office, get your own digital photo and mail all this in with the required fee. MANY THOUSANDS of hours of working peoples' time would be freed up.

  • Marc Greene
    January 16, 2016 - 17:47

    The Board of Trade is the biggest consumer of tax payers money in the province. Entire government departments such as "The Department of Tourism" were set up to prop up Board of Trade members.

  • Oh my
    January 16, 2016 - 11:40

    But you crowd were super gung ho during the Williams-Dunderdale-Marshall-Davis overspending bonanza and you were huge, shameless cheerleaders of Muskrat Falls. Remember?! A tad hypocritical of you now. Just a tad.

  • Crawling to the future
    January 16, 2016 - 10:33

    Ms Keating makes the case that the province should go all in on oil and hydro for its future. The Liberals campaigned on a future based on economic diversification instead. It is a fundamental choice for the province. Sadly, the governing Liberals seem unclear which path to the future to take, and so are choosing to do nothing instead, which may mean no future at all.

  • Paul
    January 16, 2016 - 09:34

    Somewhat encouraging given the otherwise bleak news we hear daily. Also while the case for action in the present day is critical, we should be cautious of any knee jerk reactions given the longer term positives..

  • Skeptical Cynic
    January 16, 2016 - 09:32

    The problem, Ms. Keating, is that when it come to managing provincial finances, Newfie politicians throughout the history of this wretched rock have been generally deficient in three innate qualities crucial to providing proper custodianship of a public treasury: wisdom, foresight, and thriftiness.