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Trevor Tombe: Alberta’s oil bonanza could last another generation, at least

Commentary

For better or worse, Alberta’s government relies heavily on oil and gas royalty revenues. Over one-third of the province’s revenues came from this source last year. And this year, despite lower prices, the government anticipates its resource revenue share will still exceed one-quarter.

It’s little wonder why anything that poses risks to this sector, however small, is met with stiff resistance. 

“Let me be perfectly clear: We are not going to be shutting down our oil and natural gas industry,” Premier Smith recently said. And that was in response to an almost meaningless piece of federal legislation to create advisory councils to promote “sustainable jobs” (whatever that means). 

The province is not against reducing emissions. Alberta was the first in Canada to enact carbon pricing over a decade and a half ago. Even Premier Smith supports moving to net-zero emissions by 2050, as do major oil and gas companies

But Alberta’s government naturally fears policies that may incur unnecessary costs, so it wants a hand in crafting them.

Can net zero be achieved without shutting down oil and gas? And what does such a goal mean for Alberta’s finances?

It turns out that net zero does not have to shut down oil and gas or ruin Alberta’s finances. 

There will be costs, but manageable ones. The big risks come not from Canadian actions but from global ones.

Canada’s Energy Future to 2050

Every few years, the Canadian energy regulator issues a detailed analysis of supply and demand conditions for major energy markets. This provides vital insight. Last week, the regulator published its 2023 estimates. These included a scenario based on current policies and others with net zero by 2050, either globally or in Canada.

I illustrate the key results below for oil prices and production.

Assuming no new policies that affect oil production are enacted, the regulator projects Canadian production (most of which is in Alberta) rises to approximately 6.5 million barrels per day before levelling off. 

For Canada to achieve net-zero emissions, more action is needed, which lowers producer revenues, investment, and production. Oil production is expected to peak at 6 million barrels per day around 2030 and decline to 4 million by 2050, roughly the same as in 2015.This probably overstates the consequences since the regulator includes in their analysis inefficient and inadvisable federal policies like the emissions cap.

But international policies matter most for our energy future. The regulator projects that if the world achieves net zero by 2050, then prices would collapse, reaching nearly $20 per barrel by 2050, resulting in significant and rapid reductions in Canadian oil production after 2030.

Obviously, this would have severe financial implications for Alberta’s provincial government. This is not a likely scenario, though. Even if the world achieves net zero by then, prices need not fall. If supply-side constraints are enacted elsewhere, for example, then global oil production and emissions could decline while prices increase. Canadian oil production need not fall as much if we’re among the last barrels produced

In any case, let’s narrow our focus to domestic policies within Canada since that’s what we can control. What does achieving net zero imply for Alberta’s finances?

The Future of Alberta’s Resource Revenues

If you had asked me last month what my baseline scenario was, I would have projected resource revenues, adjusted for inflation, to average $14 billion from now until the middle of the next decade, rising slowly and stabilizing around $15 billion thereafter.All estimates for Alberta’s budget come from updated versions of my own detailed projection model. You can read details here or here.

This all changed following the release of the Canada Energy Future report for 2023, and two key points stood out. 

First, the energy regulator assumed higher prices than the Alberta government forecast for the next few years. Second, production declines faster than previously thought. If a net-zero goal is met, Alberta may produce 3.5 million barrels per day in 2050 instead of 5.5 million if no new policies are enacted. 

The government’s resource revenues will decrease, but a surprising amount remains. I estimate that resource revenues, adjusted for inflation, could remain above $10 billion for the entire transition. That’s massive. In per person terms, that is roughly $2,700 per person in resource revenues flowing to the government—equivalent to roughly $14 billion today, continuing for at least a quarter century.

Simply put: Alberta’s oil and gas bonanza could last at least another generation. 

This doesn’t mean achieving net-zero emissions is costless. Far from it. 

I estimate cumulative royalties will be $140 billion lower (in today’s dollars) between now and 2050 compared to the regulator’s “current measures” scenario, which assumes no future policy changes. To be clear, there are significant uncertainties and simplifying assumptions here, so take these estimates with a grain of salt. (But they demonstrate plausible magnitudes.)

That’s a lot, of course, but for context, it’s equivalent to approximately $800 per person per year. This is much smaller than Alberta’s tax advantage. Currently, Albertans pay $4,200 less per capita than they would if the province matched the next lowest tax province, Ontario.

So while achieving net zero comes with a cost, it is entirely manageable. If Alberta saved just a little more of its resource revenues today—say, by raising revenues or restraining spending growth and saving its larger surpluses in the province’s Heritage Fund—higher investment returns would more than cover the coming drop in resource revenues. 

While the oil revenue bonanza could last for at least another generation, the path ahead is not without risks. The regulator’s projections show a potential trend, not the large swings around it. The province remains firmly on its familiar revenue rollercoaster, and the financial risks to the province from stronger global climate action have never been clearer. Saving more would both dampen volatility and help secure the province’s fiscal future, whatever scenario unfolds.

Alberta finds itself at an interesting crossroad. How bumpy the coming fiscal ride is—and how long the bonanza lasts—depends entirely on the province’s own choices. 

Bad news for Toronto’s housing crisis: The Hub reacts to the Toronto mayoral byelection

Commentary

Olivia Chow, the former NDP member of Parliament, is Toronto’s newest mayor after a byelection on Monday that was sparked by the surprise resignation of John Tory in February.

Chow took 37 percent of the vote, closely followed by former city councillor Ana Bailão with 32 percent and former police chief Mark Saunders with 8 percent of the vote.

What does it all mean? We’ve assembled some of The Hub‘s smartest contributors to explain why Chow won and what it means for Toronto.

Bad news for Toronto’s housing crisis

By Chris Spoke

I was excited about John Tory’s third term as mayor of Toronto. For the first time in his tenure, he had 1) strong mayor powers, 2) no re-election ambition, so was relatively unconstrained politically, and 3) finally accepted and acknowledged that housing in Toronto is expensive because there’s not enough of it. Specifically, he publicly committed to helping achieve the provincially-set target of 285,000 homes built over the next ten years—approximately 90 percent more than had been built over the last ten years.

That’s what you need to get more housing built in this city: an understanding that it needs to be built and the political cover and power to get it done.

As we all know, he then swiftly resigned. Bummer.

Olivia Chow is now the mayor of Toronto. She 1) promised to not make use of the new strong mayor powers, 2) as a first-term mayor, presumably does have re-election ambition, and 3) has said very little to signal that she understands that housing in Toronto is expensive because there’s not enough of it. Instead, she’s promised to strengthen renter protectionstax speculatorstax luxury homesprevent renovictions, and build 25,000 rent-controlled homes over the next eight years. Only the last of those promises touches on the problem of scarcity and that in a very marginal way.

So: no understanding and very little political cover. I’m not nearly as excited or optimistic as I was just a few short months ago.

Chow ran like a frontrunner

By Dan Robertson

For the first two months, Mark Saunders ran like a front-runner, played it safe—especially on crime and affordability—took no risks, and was otherwise unmemorable.

When he realized with a month to go that he needed to shake things up, it was too late. At the same time, Chow positioned herself as the vessel for change, and—as the actual front-runner—ran a disciplined, low-risk campaign. She benefited from a lack of media scrutiny and the inability of her rivals to effectively attack her because of ridiculously low spending limits.

Progressives have mastered strategic voting

By Stuart Thomson

Any conservative strategist worth their salt knows that the last week of a federal election campaign will show a chunk of NDP-leaning voters surging toward the Liberals.

Dan Robertson, who has his own take on the mayoral election above, said it is the “CPC’s biggest obstacle to winning the next election.”

As Geoff Russ reported for The Hub, while Olivia Chow locked up the progressive vote, a half dozen centrist candidates battled for supremacy and split the vote in the process.

There’s something of a trend here. A recent byelection in Ontario saw the NDP vote cratering to the benefit of the Liberals, who made it a closer race than expected.

It was a remarkable sight in 2016 when the splintered Republican Party couldn’t get behind a single candidate to stop Donald Trump from becoming the candidate, while four years later the Democrats essentially made an institutional decision to back Joe Biden and freeze out Bernie Sanders.

Although nothing rises to Trumpian levels of impact, there is no shortage of stories in Canada about the Right being unable to sort out its difference, to the detriment of its political parties.

The stereotypes might suggest that left-leaning voters decide with their heart, while right-of-centre voters look at their options with clear-eyed rationality. The results suggest otherwise.

Toronto’s election reflects growing progressive takeover of Canada’s major cities

By Sean Speer

So much of Canada’s political conversation presumes that the country’s most pronounced fault line is regionalism. That our political identities and preferences are rooted in our home provinces. That a Calgarian necessarily has more in common with someone from Morinville than with a Torontonian or a Montrealer or a Vancouverite.

This common perspective is how we end up with the perception that our country’s politics are a sum of solitudes. That Alberta and Quebec are fundamentally different. Just as Ontario is different from Saskatchewan or British Columbia or whatever.

Recent big city elections—including this week’s mayoral byelection in Toronto—challenge this old narrative. They demonstrate that provinces aren’t monoliths. That to describe a homogenous Albertan political culture or an Ontario political culture for that matter fails to capture the differences within provinces and the similarities across them.

Olivia Chow’s impressive election win follows a consistent pattern of progressive primacy in Canada’s major cities. It’s reflected in the recent elections of Jyoti Gondek in Calgary, Amarjeet Sohi in Edmonton and Valérie Plante in Montreal who themselves build on the political successes of progressive big city mayors like Naheed Nensi, Don Iveson, Stewart Kennedy, and so forth.  

(John Tory complicates this line of thinking a bit. Progressives believe he was a conservative because he previously led Ontario Progressive Conservative Party and opposed property tax increases. Conservatives generally reject him as having been predisposed to left-wing presumptions about identity politics and all the rest. Perhaps the mistake is to assume that he subscribed to a coherent worldview at all.)

The key point here is that these elections ought to put an end to the tendency to think and talk about our national politics mainly along regional lines. Chow has far more in common in terms of her worldview and policy priorities with Gondek than she does with more conservative mayors in smaller, peripheral, and rural communities in Ontario. The real fault line is less about regionalism and more about the country’s urban-rural divide.

Growing progressive dominance in Canada’s big cities is significant for a few reasons. First, if one accepts that housing and public safety are the biggest urban issues, it’s far from obvious, as David Frum and I recently discussed, that progressive ideas are likely to improve the situation. There’s a stronger likelihood in fact that they exacerbate these problems. Chow in particular seems poorly placed to make progress on boosting much-needed supply in the market-based share of Toronto’s housing market or addressing public concern’s about disorder and violence through greater law enforcement. The conventional progressive toolkit may be unresponsive to the issues of the moment.

Second, conservatives’ ongoing failure to make electoral in-roads in Canada’s major cities is a serious problem. The distribution of the country’s population (particularly the high concentration of immigration settlement in major cities) means that a conservative politics that fails to win in Toronto, Montréal and Vancouver basically cannot win national elections. We know this to be a truism: The Conservative Party has won the popular vote in the past two federal elections but ultimately lost because of its inability to win seats in and around a small number of big cities.

A big-city conservatism is therefore a major imperative for big “C” Conservative parties and small “c” conservative groups, thinkers, and activists. They must make conservative ideas relevant to the lives of big-city residents. Conservative MP Dane Lloyd is rightly starting to ask these questions. There’s a strong case for not overthinking too much. Housing supply and public safety ought to be so-called “sword issues” for conservatives.

Third, these outcomes ought to be a reminder to policymakers, political commentators, and the public as a whole that Canada is less divided along regional lines than is often assumed. The Alberta NDP just swept Edmonton and won 14 of 26 seats in Calgary in the provincial election. That ought to challenge the view that Alberta is a conservative bastion. Just as Doug Ford’s political salience in the Greater Toronto Area should be a corrective to the notion that Toronto is a left-wing monopoly from its downtown core to its sprawling suburbs. It’s time to break free from the old regionalist conception of national politics.

Canada’s major cities are increasingly defined by a progressive politics that trumps regional or provincial identities. Olivia Chow’s election is part of this national trend. The unknown question for her and her conservative opponents is whether her mayoral term reinforces these political developments or causes the city’s voters to ultimately look to conservatives for solutions to the problems it has wrought.