Oil money: What do Canadians have to show for it?
DOUG SAUNDERS
Globe and Mail Update
October 11, 2008 at 12:05 AM EDT
LONDON — So where did all the money go?
We know where it came from. It came from just beneath the frozen soil, where it had been sitting for 200 million years, deposited there by rotting vegetation in a dinosaur-tormented land. It sat there until crude oil climbed to a price, of maybe $50 a barrel, that made it worth the expense and human endeavour to sc**** it out of the ground and boil it down into pure money.
This week, the money being paid for that oil on the New York Mercantile Exchange had fallen to around $80 a barrel, down $70 from a few months before. Executives were making plans to postpone or cancel $110-billion in Alberta investments.
Yes, the price is likely to rise again, at some point. But during this pause, let's get back to the fundamental question: What have we done with our decade-long financial prize? What does Canada have to show for it?
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Here in Britain, they have been asking that question for years. They have been on the same trip – a petroleum boom, a Tory prime minister, a sharp fiscal decision, a price crash – but it happened here three decades earlier. We ought to have learned their lesson.
In the 1970s, a British foreign office, in an internal memo, called it “a rainbow spanning the sombre horizon” – a sudden rise in world oil prices (caused by the Organization of Petroleum Exporting Countries) that made it worth spending large sums of money to extract huge supplies of petroleum that had previously been considered uneconomical – in this case, the crude oil buried deep beneath the North Sea. Oil revenues rose from zero in 1975 to £8-billion in 1979, a government income representing 8.5 per cent of tax revenue. For a British economy that had languished for years, it was a welcome rescue package.
But what to do with all this money? As anyone who has come into a few hundred thousand dollars knows, there are two things you can do with a sudden, one-shot burst of money. You can pretend it's going to be permanent and use it to raise your standard of living. Or you can treat it as capital, spend some of it on investments with long-term value and sock the rest of it far, far away for the future.
That was precisely the debate that took place in the backrooms of the British government in 1979, shortly after Margaret Thatcher had been elected to office. Some of her ministers wanted to use it to improve the country, which certainly needed improvements in those days. Others wanted to use it to pay for tax cuts.
“We had a big debate about whether there should be a fund to invest the oil revenues for the future, like they have in Norway now,” says Alex Kemp, a professor at Aberdeen University who is writing the British government's official history of the North Sea oil. “But the Treasury wanted to use it right away for macroeconomic management – to cut taxes and reduce borrowing.”
The tax-cutters won out, and the myth of Thatcherism was born. To many wishful observers, it seemed that she had made it possible to slash taxes without going into debt or cutting spending on important government services, while achieving economic growth.
Fellow conservatives Ronald Reagan and Brian Mulroney both tried to imitate Ms. Thatcher's formula, and both failed badly: In both countries, taxes and government debt rose during those years, despite unpleasant spending cuts. What she never revealed – she is silent on the matter in her memoirs – was the great pool of oil money that made this card trick possible.
“After 1979, the Conservatives were determined to use the oil revenues quickly, to pay debt and cut taxes, rather than to invest it in some long-term plan for industry… [instead] treating oil taxes just like income tax, even though oil revenue was finite, a one-off,” Andrew Marr writes in his excellent new A History of Modern Britain.
At its peak in 1985, the British oil boom was generating 127 million tonnes of oil a year, a 10th of the world's output. And then, just as suddenly, the price collapsed.
During those six years, almost all the revenue was dumped into the British economy. It was not used to pay for investments – schools, hospitals and public services were being left to rot for ideological purposes. It created a boom, but one that damaged the country's foundations.
Economists knew then, and know even better now, what happens when a flood of sudden and non-specific money enters a domestic economy: Exchange rates soar, competitiveness tumbles and the industrial economy collapses. High levels of unemployment almost always result.
That certainly was the case in Britain. Three million people were thrown out of work, the last remaining manufacturers were sold abroad. Jobs would come back, but there would never again be secure work in electronics, automobiles or steel – Germany and Japan held on to those, but not oil-rich Britain. Even when jobs returned, they were often poor service-sector jobs: Britain was left without manufacturing know-how, and without the strong public institutions it needed to become a leader in these fields.
“This can be seen as a one-off waste, funding the squeeze of the early Thatcher years, but leaving little for future generations ...,” Mr. Marr writes. “Too much expertise and chains of supply were lost, putting Britain permanently out of markets she could otherwise have retained.”
Three decades later, Canada faced a similar choice. Alberta could have invested most of its windfall abroad, like the Saudis and the Norwegians do now, to build capital for the future. Instead, it flooded the economy with cash and deposited token amounts into the Heritage Savings Trust Fund.
Stephen Harper, as Prime Minister of a country that should have made the petroleum boom a nation-building project, could have found a way to transfer a major share into federal coffers and into a national fund or lasting infrastructure investments. A carbon tax on oil-extraction emissions, as is now being proposed by other parties, would have accomplished this.
But Mr. Harper, continuing more than a decade of federal neglect, made a decision, as the British did in 1979. He chose to spend $60-billion on a tax cut, a last fleeting sparkle from a rainbow of wealth that has vanished without a trace.
DOUG SAUNDERS
Globe and Mail Update
October 11, 2008 at 12:05 AM EDT
LONDON — So where did all the money go?
We know where it came from. It came from just beneath the frozen soil, where it had been sitting for 200 million years, deposited there by rotting vegetation in a dinosaur-tormented land. It sat there until crude oil climbed to a price, of maybe $50 a barrel, that made it worth the expense and human endeavour to sc**** it out of the ground and boil it down into pure money.
This week, the money being paid for that oil on the New York Mercantile Exchange had fallen to around $80 a barrel, down $70 from a few months before. Executives were making plans to postpone or cancel $110-billion in Alberta investments.
Yes, the price is likely to rise again, at some point. But during this pause, let's get back to the fundamental question: What have we done with our decade-long financial prize? What does Canada have to show for it?
Related Articles
Recent
* Oil plunges below $80 a barrel
The Globe and Mail
Here in Britain, they have been asking that question for years. They have been on the same trip – a petroleum boom, a Tory prime minister, a sharp fiscal decision, a price crash – but it happened here three decades earlier. We ought to have learned their lesson.
In the 1970s, a British foreign office, in an internal memo, called it “a rainbow spanning the sombre horizon” – a sudden rise in world oil prices (caused by the Organization of Petroleum Exporting Countries) that made it worth spending large sums of money to extract huge supplies of petroleum that had previously been considered uneconomical – in this case, the crude oil buried deep beneath the North Sea. Oil revenues rose from zero in 1975 to £8-billion in 1979, a government income representing 8.5 per cent of tax revenue. For a British economy that had languished for years, it was a welcome rescue package.
But what to do with all this money? As anyone who has come into a few hundred thousand dollars knows, there are two things you can do with a sudden, one-shot burst of money. You can pretend it's going to be permanent and use it to raise your standard of living. Or you can treat it as capital, spend some of it on investments with long-term value and sock the rest of it far, far away for the future.
That was precisely the debate that took place in the backrooms of the British government in 1979, shortly after Margaret Thatcher had been elected to office. Some of her ministers wanted to use it to improve the country, which certainly needed improvements in those days. Others wanted to use it to pay for tax cuts.
“We had a big debate about whether there should be a fund to invest the oil revenues for the future, like they have in Norway now,” says Alex Kemp, a professor at Aberdeen University who is writing the British government's official history of the North Sea oil. “But the Treasury wanted to use it right away for macroeconomic management – to cut taxes and reduce borrowing.”
The tax-cutters won out, and the myth of Thatcherism was born. To many wishful observers, it seemed that she had made it possible to slash taxes without going into debt or cutting spending on important government services, while achieving economic growth.
Fellow conservatives Ronald Reagan and Brian Mulroney both tried to imitate Ms. Thatcher's formula, and both failed badly: In both countries, taxes and government debt rose during those years, despite unpleasant spending cuts. What she never revealed – she is silent on the matter in her memoirs – was the great pool of oil money that made this card trick possible.
“After 1979, the Conservatives were determined to use the oil revenues quickly, to pay debt and cut taxes, rather than to invest it in some long-term plan for industry… [instead] treating oil taxes just like income tax, even though oil revenue was finite, a one-off,” Andrew Marr writes in his excellent new A History of Modern Britain.
At its peak in 1985, the British oil boom was generating 127 million tonnes of oil a year, a 10th of the world's output. And then, just as suddenly, the price collapsed.
During those six years, almost all the revenue was dumped into the British economy. It was not used to pay for investments – schools, hospitals and public services were being left to rot for ideological purposes. It created a boom, but one that damaged the country's foundations.
Economists knew then, and know even better now, what happens when a flood of sudden and non-specific money enters a domestic economy: Exchange rates soar, competitiveness tumbles and the industrial economy collapses. High levels of unemployment almost always result.
That certainly was the case in Britain. Three million people were thrown out of work, the last remaining manufacturers were sold abroad. Jobs would come back, but there would never again be secure work in electronics, automobiles or steel – Germany and Japan held on to those, but not oil-rich Britain. Even when jobs returned, they were often poor service-sector jobs: Britain was left without manufacturing know-how, and without the strong public institutions it needed to become a leader in these fields.
“This can be seen as a one-off waste, funding the squeeze of the early Thatcher years, but leaving little for future generations ...,” Mr. Marr writes. “Too much expertise and chains of supply were lost, putting Britain permanently out of markets she could otherwise have retained.”
Three decades later, Canada faced a similar choice. Alberta could have invested most of its windfall abroad, like the Saudis and the Norwegians do now, to build capital for the future. Instead, it flooded the economy with cash and deposited token amounts into the Heritage Savings Trust Fund.
Stephen Harper, as Prime Minister of a country that should have made the petroleum boom a nation-building project, could have found a way to transfer a major share into federal coffers and into a national fund or lasting infrastructure investments. A carbon tax on oil-extraction emissions, as is now being proposed by other parties, would have accomplished this.
But Mr. Harper, continuing more than a decade of federal neglect, made a decision, as the British did in 1979. He chose to spend $60-billion on a tax cut, a last fleeting sparkle from a rainbow of wealth that has vanished without a trace.
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