Reno Rage in Alberta

What has the panel done in the way of economic analysis to estimate how much capital will not be spent in the province, and the impact of capital not being spent?

Clearly, ANY increase in royalties will decrease capital spent. There simply will be fewer profitable projects, and companies will have less capital to spend due to decreased cashflow, less ability to borrow capital, and less ability to raise money in capital markets.

This is what is said in the royalty review document (page 84). It is said without transparent calculations to buttress it's argument:

"Will investment in leave Alberta "on principle" if rates are changed, or will investors continue to monitor the competitive position of Alberta compared to their other investment options?" As shown in an earlier chapter, many of the world's producers have raised royalty rates in recent years with little impact on their investment, the extreme case of Venezuela's 2007 changes being an exception"

That seems to be about it. No transparent analysis we can reference to buttress the assertion that all would be fine with the Alberta economy in the event the royalty proposals were to be accepted.

The assertion is wrong. Economics done by Tristone Capital indicate many investments become uneconomic under the royalty review. The numbers are presented clearly in Tristone's report. Similarly, an internal effort by Encana indicated that approximately 40% of its Alberta capital program would not be eligible for funding.

Note that this isn't stopping spending "on principle". It isn't stopping spending as a "threat". It is stopping spending because under the proposed fiscal regime there simply wouldn't be economic merit in a significant number of currently profitable Alberta oil and gas investments.

Now if the PC's WANT TO PRECIPITATE A DRAMATIC ECONOMIC SLOWDOWN the royalty revision is a perfect maneuver. It really is the only way to look at the proposals sensibly.

Perhaps some measures to grapple the booming Alberta economy are necessary. However, it is far from clear that a "shock therapy" of the proposed new petroleum fiscal regime is a wise way to proceed.

As an example of the Alberta boom, there are a projected $5.4 billion being spent on home renovations in Alberta in 2007. Hard to envision that type of money being spent by Albertans, but there it is. I assume many of them are not in any way connected to the oil industry, but are merely leveraging their "paper" real estate gains into renovations beyond their means.

http://www.kalloteam.com/

Reno rage has truly hit the flush-with-bucks wallets of Albertans. For the second year in a row, the province will record the biggest gains in the country in terms of the cash forked over by Albertans to renovate their home-sweet-homes, says a report by the Canada Mortgage and Housing Commission. Resale records account for a big part of the surge, which will see Albertans spend $5.4 billion for home renovations in 2007; a steep 23.7% increase from the $4.4 billion spent last year. “In terms of persistent resale records, people are very quick to personalize their new homes and bring them up to today’s standards,” said CMHC regional economist Richard Corriveau.

“The other big contributing factor is the very strong gains in home equity, with prices increasing an average of 39% last year,” he said. He said many homeowners have chosen to divert the windfall to refurbishing their properties. Mirroring most sectors of Alberta’s superheated economy, the bigleap in renovation spending has spurred escalating renovation costs, another contributing factor to the overall jump. However, Corriveau said the dominance of this inflation in thespending increase is difficult to quantify, with construction labour accounting for a larger portion of homeowners’ reno tabs than materials costs.

A point I wonder about is how much the home renovations market will decline if the royalty review recommendations are adopted?

How many jobs would be affected?

If house prices drop, how many foreclosures will occur?

If new house starts drop, how many jobs would be affected?

I'm not asking this in a "chicken little" sense. Of course some new houses will continue to be built; and some renos will still occur. Just as some oil and gas investments would still occur. But if there is a dramatic decrease in spending by the oil patch because government demand for an excessive share of the production revenues make approximately half of developments uneconomic, what will be the overall impact on the Alberta economy? How long will it take to equilibrate?

Where are the transparent figures of provincial economic impact from which citizens and policy makers can make decisions on?

Is a dramatic slowdown of the economy desired by the Stelmach government? Is the Stelmach government prepared to stand up and state that there will no impact on the provincial economy, or that Albertans will indeed be better off due to dramatically reduced oil industry capital spending?

I can assure anyone reading this if the proposals go through as recommended the impact will be sharp, and harsh. People will lose jobs and homes. No more $15/hr Tim Horton's jobs.

The people who suffer the most will not be the successful oil executives like Murray Edwards or Randy Eresman. Sure, they might lose 20 or 30% of a very large investment. That hurts. But who will really be hurt are the "not rich" people who've bought houses at the top of the real estate market, and whose jobs will be lost.

I saw it in 1980; and damned but it looks like I'm going to see it again.

Remember, Bill Hunter isn't a moron. He said so himself. All this talk of morons brings to mind a classic quote:

"No, no, he's a friend of mine. He's not a moron at all -- he's a friend."


Canadian Prime Minister Jean Chretien, speaking of another politico who is also purported to not be a moron.