Time for action

Published on January 16, 2016
Kim Keating

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.

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.