On December 1, 2005, Bill 43 “Alberta Resource Rebate Statutes Amendment Act” received Royal Assent in the Alberta Legislature enabling a one-time rebate to be paid to nearly all Albertans residents in Alberta on September 1, 2005 who had filed a 2004 tax return. The refunds were a product of a larger-than-expected surplus generated mostly by high energy revenues. Rebate cheques were sent out in late January 2006.
The $1.4 billion resource rebate program was controversial, with many people arguing that it would be better if government spent the surplus on other priorities: Health, education, post-secondary, infrastructure, social services, etc. Polls at the time revealed a similar number of people in favour of the prosperity cheques as the number opposed.
This program is sometimes used as an example of wasteful government spending. The assertion is that benefits would have been greater if the government had spent $1.4 billion on the priorities above compared to the benefits generated from the estimated 3.5 million cheque recipients each spending $400 as they each saw fit.
Above is the photocopied cheque I was issued. Emulating Bastiat and Hazlitt, this cheque can serve as a focal point economic analysis.
In Alberta, subterranean oil and gas deposits are not privately owned. The provincial government sets the terms and conditions to choreograph development and it fixes royalty rates. The oil sands royalty rate is equal to the greater of: (a) the gross revenue royalty (1% - 9%) for the period, and (b) the royalty percentage (25% - 40%) of net revenue for the period. The royalty percentage of net revenue is also indexed to the price of West Texas Intermediate (WTI). The royalty percentage is 25% when the WTI price is less than or equal to $55/bbl, rising linearly to a maximum of 40% when the price reaches $120/bbl.
Consider a royalty collector and resource developing firm in Alberta. A young proficient royalty collector, say, takes the prescribed portion of the firm’s earnings. The operators and shareholders of the resource development firm may be furious about this lawful extortion, but it is what it is. Residents of the province ponder with quiet satisfaction at the amount collected. After a while, several are almost certain to remind each other and the owners and employees of the resource developing firm that, after all, the legalized taking has its bright side. The wealth will be transferred to others and create jobs and business and provide Albertans with much needed services. As they begin to think of this they elaborate upon it. How much money are we talking about? A few billion dollars? That is quite a sum. After all, if these resource deposits were not developed, what would happen to schools, hospitals, infrastructure and providers of social services? And the government is doing this for us, on behalf of Albertans, because “we” are the owners of 81% of the mineral rights in the province, which includes oil and gas. Then, of course, the thing is endless. Teachers, doctors, nurses, public servants, social workers and others working on government contracts will have more to spend with other merchants, and these in turn will have more to spend with still other merchants, and so ad infinitum. The taking from the owners of the resource developing firm will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the royalty collector, far from being a public menace, is a public benefactor.
Now take a second look. The residents of the province are at least right in their first conclusion. The collected royalties will in the first instance expanded opportunities for politically connected recipients (like me with my cheque). Teachers, doctors, nurses, public servants, social workers, government contractors, etc. will be no more unhappy to learn of the legalized taking by way of the royalty than an undertaker to learn of a death. But the owners of the resource developing firm will be out billions of dollars which operators could have used to expand their business, produce more output, purchase more inputs, hire more people and increase wages. Because the owner operator has had to come up with a royalty payment, the firms will have to go forego at least some of their plans. This is because of generating and keeping the entire proceeds of their undertaking (including the royalty) the firm just retains a fraction of their earnings. Thus a business plan to increase output, purchase more inputs, hire more people, increase wages and increase dividends has to be shelved. Instead mangers of the resource development must be content with less. Plans have to be scaled down and some parts of it must be eliminated. If we think of the individuals who are the owners, operators and employees of the firm as a part of the community, people have lost the goods and the jobs that might otherwise have come into being, and residents are therefore that much poorer. The gain of $400 prosperity cheque recipients is just a portion of the losses incurred the resource development firm.
More generally the gain of royalty recipients (including the royalty collectors) is the loss of resource development firms. No new “employment” has been added through royalties; but the pattern of employment is different. Often Albertans think only of two parties to the transaction, the consumers of the royalty and the provider of the royalty. We forget (or purposefully overlook) the potential third parties involved, the individuals who would have been hired, the providers of inputs that would have been purchased, etc. These people are not remembered or ignored precisely because they will not now enter the scene. Albertans will see many royalty dependant jobs but we will never see the extra opportunities in resource development, precisely because they will never be made or needed. We see only what is immediately visible to the eye.
And what is plainly visible in 2016 is the disappearance in Alberta of the royalty generators which, in turn, highlights the financial vulnerability and political reliance of the royalty consumers.
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