Oil and Gas Incentives Deliver Poor Return

From the Parkland Institute:

Earlier this week, Alberta Energy Minister Mel Knight announced the government would reduce royalty rates and introduce royalty credits for oil companies embarking on new drilling projects over the next year.

The total cost of this move to the provincial treasury, based on current drilling projections, is estimated to be in the neighbourhood of $1.51 billion.

This, of course, is in addition to the royalty breaks announced last November to encourage new drilling. Those breaks, according to the government’s own projections, carry a price tag of $1.8 billion over the next five years.

When you take these two royalty holidays and add them to the $2 billion the provincial government has set aside for the oil industry to invest in carbon capture and storage, you get a total of over $5 billion in incentives and subsidies announced for the industry in just the last six months.

According to the news release accompanying the government’s most recent announcement, this money is intended to “encourage new investment and help keep Albertans at work.”

Obviously, the provincial government has good reason to be concerned. Between November and January alone, the province lost more than 25,000 jobs, and even the government’s own conservative estimates suggest that at least another 15,000 will be shed by the economy over the next year.

Given that our recent boom was fuelled almost entirely by construction in the oil and gas sector, it is not surprising that most of the lost jobs were construction jobs in that sector. The rapidly falling real estate market has only served to further darken job prospects for laid-off construction workers.

The government is right to be looking for ways to revitalize the economy and encourage job creation during the current economic chaos.

The question Albertans should be asking, however, is whether investing $5 billion in the oil and gas sector is the best way to encourage investment and create new jobs in Alberta.

A quick look at government data on the subject reveals that the answer to this question is a resounding no.

The Alberta government has created models and tables for determining what impact $10,000 invested in various sectors of the economy will have on the provincial economy (GDP) and in the number of jobs created.

These numbers clearly show that oil and gas extraction creates fewer jobs for each dollar invested than any of health care, education, arts and recreation, construction and transportation.

Oil and gas extraction actually has one of the lowest ratios for job creation of any sector of the economy. This is not surprising as it is very capital-intensive.

The models are based on the reality that economies (local, regional, provincial, national, etc.) are interconnected and interdependent, and a change in one aspect will have a ripple effect.

In the case of jobs, this ripple can be captured by measuring direct and indirect jobs created across the economy.

For example, building a school would create direct jobs with the construction workers and then ongoing direct jobs with teachers and maintenance when the school opens. Indirect jobs would be created in other industries by the buying of materials for the construction. Further jobs would be created by the spending of salaries by workers in

local communities, creating jobs in retail and services.

According to these models, therefore, every dollar invested in health care will generate almost seven times as many jobs as if that dollar were invested in oil and gas extraction.

Education creates 5.5 times as many jobs per dollar, and investment in transit and mass ground transportation a whopping 49.4 times as many jobs.

Accordingly, for every dollar invested, health care can deliver as much GDP stimulus as drilling while creating more jobs, and education can actually deliver a better GDP effect.

Why then, if the goal is economic stimulus and job creation, would the government invest $5 billion in the oil and gas sector rather than in sectors that can generate more job creation and similar GDP stimulus?

Some might argue that investing in oil and gas protects government revenues because these companies pay royalties, but this is simply not the case.

The $5 billion was obtained by cutting royalties to the point where their relevance to the government treasury will be almost negligible. Besides, the lion’s share of the province’s revenues comes from taxes, not royalties.

Therefore, the way to protect government revenues is to put as many people as possible back to work in good well-paying jobs in sectors like health, social services, education, transportation and arts and recreation.

Also, those jobs are sustainable. Oil and gas drilling in Alberta is a sunset industry.

Alberta’s crude oil production peaked in 1973 and natural gas production peaked in 2001. Thus, directing large subsidies at drilling in Alberta is only staving off the inevitable.

The province should instead be investing in creating jobs for drilling workers in other sectors. All of the sectors above create more jobs per dollar invested and all of them will be around in the long term.

DIANA GIBSON AND RICARDO ACUÑA

The Edmonton Journal
March 9, 2009

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