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A case of Harper’s short-term thinking

Lost in the current debate over pipelines from the Alberta tar sands are the big-picture issues. Yes, the government appears to be taking a decidedly undemocratic position, yes there are economic advantages and downsides, yes there are environmental concerns. But none of these can be looked at in isolation, nor from this overarching consideration: who benefits and at what cost?

Both the Keystone XL and Northern Gateway pipelines come with a hefty price tag, political baggage and a long list of environmental caveats. Proponents point to the economic benefits: investment, jobs and profits from building the pipelines and carrying away Alberta bitumen to foreign markets.
Opponents cite the environmental peril of running a pipeline through pristine B.C. wilderness en route to the coast. Construction alone will be damaging, as will the increased tanker traffic. A spill could wreak havoc. There are also concerns about developing the tar sands in general, both for its impact on the local environment and its contribution to the larger matter of climate change.

There’s money and environmental health at stake. So, who benefits if we roll the dice?
Clearly, those pushing hardest for the project have the most to gain: the oil industry, its lobbyists and government supporters. They’ll reap the profits. Those who work in the industry, provide supplies or benefit from direct spinoffs also have pretty good motivation to back a new pipeline.
At some level, of course, we all benefit. We live in an energy-based world, dependent on oil in particular. Every time we heat or cool our homes, drive our cars or use any form of transit, make use of technology or enjoy something to eat we’re buying into that status quo.

That (not so) little moral piece aside, however, projects such as the Northern Gateway pipeline (the Keystone project being on hold south of the border) provide benefits to some while the risks are more widely dispersed. Pragmatically, will the project pay more than the potential costs to society as a whole? And, will those profits be short-lived, with the downside stretching well into the future?

Those are prime considerations in debating royalties paid for natural resources, not only oil and gas but a host of others, from potash to nickel. If we look at the Norwegian model – the country has been setting aside most of its huge oil revenues into a fund for future generations – then we’re certainly falling down on the job here. Non-renewable resources are by and large a short-term windfall for both the companies involved in extracting them and the provincial governments who collect royalties for taking from the public trust.

“We’re not getting good value for our natural resources,” says Erin Weir, an economist with the United Steel Workers who’s made a study of the royalty issue. “Norway is an outstanding example of managing natural resources.”

Norway collects high royalties. It also puts all but four per cent of its earnings into the Government Pension Fund, the largest pension fund in the world, valued at $525 billion at the end of 2010. None of the money can be touched for decades, until the oil runs out, and the fund invests outside the country in order to avoid making the economy dependent on oil profits and to ease inflationary pressures. (Whether that investment should be in purely speculative form – the troubling financial markets – or in the form of direct investment and asset-buying – see, for instance, China’s bid to buy up technology and resources, including Canada’s – is another discussion.)

It’s a great example of long-term thinking in the public interest, says Weir, noting there’s little of that in this country, as even the heritage funds in Alberta and Saskatchewan, which do set aside money for the future, pale in comparison.

Higher royalties, combined with a Norwegian outlook, would do wonders not only for Alberta, which generates the largest revenues due to oil and gas reserves, but also in every province where resources are extracted.

“We should be charging higher royalty rates and then there might be a bigger public benefit from those projects,” he says of the pipeline debate.
That’s especially true during a time of high commodity prices: profits grow, but the public doesn’t share in the good times. In fact, Alberta has been pushing royalty rates lower, unlike what it did during the boom times of the 1970s when its Heritage Fund was growing in leaps and bounds.

Through the Eighties, there was downward pressure on royalties in Alberta. There have been some spikes, but most recently the trend is down yet again. From collecting total royalties of $12.26 billion in 2006-07, the take fell to $6.1 billion in 2009-10.

“The industry has a very strong interest in keeping royalties low,” says Weir, noting the oil, gas and mining industries have been very successful in playing one jurisdiction off of another, threatening to go elsewhere if royalties are increased.

“There’s a belief that provinces have to give the resources away in order to get them developed.”
While that has been the case with manufacturing – leading to the gutting of Ontario’s economy – it’s a far less compelling argument with natural resources, which have to be extracted where they’re found. Of course, there are other locations in the world, but as supplies dwindle – be it for oil and gas, or a host of other resources – the “we’ll go elsewhere” argument holds less water.

Even today, Weir notes, there are a variety of factors at play in choosing where to develop resources, including the size and quality of the reserves, accessibility, infrastructure, a skilled workforce and political stability.

“Canada stacks up very well in those other factors,” he says in urging governments to resist the divide-and-conquer strategy.
The tactic is at play within the country, as resources fall within the provincial sphere: there’s no national standard.

“I would like to see a bit more inter-provincial cooperation to get higher returns.”
That remains unlikely, however, as lobbyists are relentless and the industry spends large sums of money to influence politicians. There is no corresponding effort on the other side on behalf of the public interest, he notes.

“I’m hopeful that people can learn more about the issue, get engaged and push for better returns on their natural resources. The resources belong to the public.”

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