Both Delia Warren and Dwight Ball
believe that we need to diversify the provincial economy and reduce our
dependence on oil.
They both believe that our future should lie with more renewable
energy. Delia thinks there is room for
things like wind farms. Dwight, an
original and enthusiastic Muskrateer, thinks we need to develop Gull Island as
quickly as possible.
Both Delia and Dwight are wrong.
The Newfoundland and Labrador economy is more diverse than at any time
in its history. There are more sources of economic activity – particularly
activity that brings new money from outside the province – than there were
before the 1880s, for example, when the fishery was it. By the early 20th century, you
could add mining and forestry to that mix and by the end of the century there
was manufacturing, professional services, electricity, and information
technology. Then came oil.
Oil brings a lot of money into the economy, so it is not surprising that
it gets a lot of attention. But oil is not the only economic game in town today
as the fishery was before.
Balancing the Economy
If there is a problem in the economy, it is one of balance between oil
and the non-oil parts of it. That’s a
different problem than diversification.
TO balance the economy, you would need to strengthen the non-oil bits of
it. Put another way, you’d have to put
more value in it.
You can get a good sense of the provincial economy by reading a budget
paper called - not surprisingly - The Economy. You can see the size of
different sectors by both the value of goods or services themselves and by the
amount of the labour force taken up with each activity. You can’t get a clear picture because oil has
spin-off impacts on things like finance, which is a service sector that is
almost as big as oil itself.
Imagine a balance
with oil and related economic activity on one side and everything else on the
other. The goal in re-balancing the
economy would be to increase the value of the non-oil stuff such that it took
fewer segments of the economy to offset oil.
Increasing the non-oil value not only increases the potential government
revenue from taxes it also means that a downturn in oil is less likely to send
the whole economy into a tailspin.
With that
image in your head, you can see why The Way Forward plan to double the size of the province’s oil
industry doesn’t make things better. It
makes things worse. Well, it does if
your goal, as Dwight Ball supposedly wanted. Was to reduce the impact of oil
and gas on the provincial economy. If
the economy is out of balance now, then doubling the oil part of the economy
means you have to increase the value of the other parts all the more than you
did before.
Government’s Oil Addiction
There is an oil-related problem in the provincial economy but it isn’t
what either Dwight or Delia are talking about. You can see the problem with the
massive deficits the provincial government has been running for most of the
past decade.
Starting in 2006, the provincial
government boosted its own spending based on volatile, unpredictable oil
revenue. The first sign of a problem came within three years when oil prices
plummeted. The government didn’t reduce
its own spending. The second sign of the
problem was in 2013, when oil prices tanked again. And again, the government didn’t reduce
spending.
It took a third major drop in oil prices to force the government to
reduce spending but the reduction has been modest in comparison to the size of
the problem. Annually, the government
spends about $2.0 billion more on a cash basis than it takes in.
Alberta economist Trevor Tombe has developed a simple way of showing
this vulnerability. His measures shows
none-renewable resource revenues (oil and minerals) and deficit as a share of
total government spending.
The chart shows that measurement from 2006 to 2018. In every year, non-renewables plus deficit ( which is
basically the drop in oil prices) has been more than 30% of spending. The average is about 40% and two of the five
times the annual “Dependence Index” was above 40% was the past two years in a
row.
RBP has been writing about this problem for most of the time SRBP has
been around. In 2013, SRBP ran a
simulation to show another way government could have handled spending and the
huge oil revenues that poured in for a few years.
At the end of the simulation period, the government had about $7.5
billion in the bank and had boosted spending, including capital works every
year up to the end of the simulation. A
second simulation three
years later showed that by following the same policies, the government
would have started to run deficits in 2016 and that one would have been far
lower than the one that actually showed up.
If you go back to your picture of the economic balance, you’d have to
add a chunk of government spending to the oil side of the economy. That’s where the economic problem in the
province really is. Not oil itself but
the impact of government’s chronic overspending based on oil revenue.
The Williams Tories boosted spending to unsustainable levels and never
stopped. They increased the size of the
public service in absolute terms and as a share of the labour force. It’s around a third of the work force, which
makes it one of the highest in the OECD.
That expansion increased the government’s long-term debt due to unfunded
pension liabilities, which, together with Muskrat Falls and the chronic
overspending has led to a series of credit downgrades in the past three years.
Since 2005, the provincial government has been using its own spending to
substitute for sustainable - that is private sector - economic development. Muskrat
Falls is nothing more than the biggest example of make-work in the province’s
history.
Why Renewable Energy Isn’t the Answer
In Newfoundland and Labrador politics, bullshit is the go-to solution
for most problems. We’ll call it nonsense just to be polite.
Here’s why the renewables solution is just nonsense: they cannot pay for themselves.
If they cannot pay for themselves, then they cannot replace oil.
And if they cannot pay for themselves AND replace oil, they certainly cannot pay for themselves, replace oil, AND pay the costs of Muskrat
Falls.
In order for renewable energy to be the answer to the government’s
spending addiction and the public debt problem, it has to make a profit. It can’t. It cannot even pay for itself.
What energy sources we have or are likely to have are too expensive for
the current market and the one likely to come. New wind farms far closer to
market in North America – and hence less costly – are coming online at the
current wholesale market price for electricity in North Eastern North America. You cannot build Gull Island cheaply enough
to make money at those rates and you cannot build wind farms here – very far
from likely markets – any cheaper either.
Both Dwight and Delia want to use non-renewable resources to help fix the
province’s problem. Danny used to brag
that Muskrat Falls would use oil royalties to build a revenue-generator from
renewables.
They all came up with the wrong answer because they all went chasing
after the wrong problem. In Danny’s
case, his problem was how to build Muskrat Falls not how to deliver cheap
electricity reliably to meet the local need.
Delia and Dwight are chasing after their own fantasies.
Newfoundlanders and Labradorians need to balance the economy - not diversify it - yet all they get are solutions to some other problems.
-srbp-