Western Canadian oil and gas wealth benefits all of Canada – Part 3
Provincial and federal revenues generated by Canadian resource development
Troy Media by Robert P. Murphy and Brian Lee Crowley
Western Canadian oil and gas wealth benefits all of Canada
In the previous section we discussed three separate models of the petroleum industry’s economic impact across the various provinces. Each of the studies also used its economic model to estimate the flow of government revenues, at both the provincial and federal level, due to the petroleum industry. To the extent that the federal government earns tax revenue from the natural resource extraction based in oil-rich provinces, other Canadians indirectly benefit from enjoying lower tax burdens and/or a higher level of federal services than would otherwise be possible.
Study #1: Alberta Oil Sands (CERI 2011)
Recall that our first model is the 2011 CERI study, which confined its attention to the oil sands projects in Alberta over a 25-year horizon.Based on the economic impacts discussed in the previous section, the CERI study projects the following flow of tax and royalty revenues coming entirely from residents and corporations based in Alberta, as illustrated in table 6.
As table 6 indicates, although the royalties paid to the Alberta government from oil sands projects constitute the single largest revenue source, even so these activities will generate large streams of revenue in other tax categories, at both the regional and federal levels. (See figure 1 below for a graphical presentation of the same information.)
Over the 2010-2035 period, in this conservative scenario that assumes only existing pipeline capacity, the CERI model projects that individual and corporate taxpayers in Alberta will pay some $328 billion to the federal government, all because of economic activity attributable to the oil sands. Even including the large royalty category, the federal government still ends up collecting 37 per cent of the total revenues generated by these projects.
This result is quite significant in discussions of distributional impacts from the Canadian petroleum industry. Because of the precision offered by the CERI 2011 study, we are here focusing on the specific item of oil sands in Alberta, but the result holds generally: Strong economic activity associated with the development of natural energy resources automatically “redistributes” wealth from the resource-rich to the resource-poor provinces, through federal fiscal policy. So long as the federal government spends its funds on activities that generate benefits for all citizens, the large share of resource development going to federal taxation ensures that all Canadians indirectly benefit from this activity. Citizens in resource-poor provinces benefit from the abundance of their neighbours, because (other things equal) higher federal tax payments stemming from their activities allow for more federal services and/or lower federal tax rates.
Study #2: Entire Canadian Oil and Gas Sector (CERI 2009)
Turning now to the 2009 CERI study, which modeled the entire Canadian oil and gas sector, we find the following distribution of government revenues, as summarized in tables 7 and 8.
Recall that in tables 7 and 8 above, each column represents the tax revenues generated across all provinces by petroleum industry activities within that particular column’s province. For example, looking at just the second column “BC” in table 7 and moving down, we see that petroleum activities in British Columbia will generate an estimated $1.375 billion in federal tax receipts in Alberta, $52.924 billion in British Columbia itself, $290 million in Manitoba, and so on. The total federal tax receipts in all provinces, attributable to petroleum activities within British Columbia, amount to an estimated $57.73 billion over the 25-year period. (Note that these figures are simple summations, not discounted present values.) On the other hand, if we look at (say) the fourth row in table 8, we see that of the total $843 million in New Brunswick’s provincial tax receipts due to the petroleum industry, $633 million is due to the petroleum industry in Alberta, $104 million comes from the petroleum industry’s activities in British Columbia, and so on.
Looking just at tax receipts (excluding royalty payments), the CERI 2009 study estimates that, over a 25-year period, the Canadian petroleum industry will generate $408.6 billion in federal tax revenues, and $291.6 in provincial tax revenues, meaning that the federal government reaps 58 per cent of the total tax receipts (modeled in the study). However, the study also estimates that Alberta, British Columbia, Saskatchewan, and Manitoba will collectively earn provincial royalties of $428.9 billion during the same period from petroleum activities. If we include these revenues, then the federal government still reaps 36 per cent of all tax and royalty payments (modeled in the study), which the reader may recall is virtually identical to the value (37 per cent) calculated in the previous subsection, which focused just on the oil sands in Alberta.
Study #3: Enbridge Northern Gateway Pipeline (Wright Mansell Research Ltd.)
Finally we report the government revenue estimates provided in the 2010 Wright Mansell Research study, which focused exclusively on the higher crude prices made available to Canadian exporters from the Enbridge Northern Gateway pipeline.The results are shown in table 9.
Thus we see that in the Wright Mansell study, the federal government reaps $36.3 billion (45 per cent of the total increase in revenues) from the construction of the Northern Gateway pipeline and the higher prices it will bring to Canadian crude exporters.
Conclusion
Despite the claims by certain prominent critics, there is ample evidence that the petroleum industry showers benefits across the provinces, and provides outlets for manufactured goods.
In this paper we have discussed three recent studies, which employed different assumptions and methodologies, which found the petroleum industry generated large contributions to economic output and employment even in provinces lacking resource deposits. Furthermore, the studies estimated large contributions to federal tax receipts from petroleum operations. While the so-called “Dutch Disease” mechanism may operate, in practice it is partially (perhaps more than fully) offset by the gains to the overall Canadian economy documented by these studies.
Robert P. Murphy has a Ph.D. in economics from New York University. Brian Lee Crowley is Managing Director of the Macdonald-Laurier Institute.
Category: Opinion
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