Back in 2014, every citizen in oil-rich Norway became a theoretical millionaire after the country's oil fund - the world's largest sovereign wealth fund - crossed the $1 trillion mark. Six years down the line and deep in the throes of the worst energy crisis in modern history, Norway has a much bigger cushion than most oil-producing nations as its recent US$41 billion drawdown from the fund (~4.2 percent of the fund's value) proves. In sharp contrast, Alberta's oil sands are facing a deep crisis after failing to save adequately during the oil boom even as the ravages of Covid-19 continue to be keenly felt and foreign oil firms keep bailing on Canada's energy sector.
In 1976, Alberta established a special oil fund to save part of its oil and gas revenue for leaner times. Unfortunately, successive governments have failed to save enough, leading to a fund that could potentially have had $575 billion (US$433 billion) tucked away with just $16.3 billion.
Saving for a Rainy Day
Trevor Tombe, an economics professor at the University of Calgary, told BNN Bloomberg that the Alberta Heritage Savings Trust Fund would have had approximately $575 billion (US$433 billion) to help cushion the ravages of Covid-19 had the province stuck to the same practices as its European peer.
The Heritage Fund, as Alberta's oil fund is officially known, initially received 30 percent of the province's non-renewable resource revenue meant to benefit future generations. Unfortunately, trouble showed up before long in 1987 when the provincial government started adding resources to the fund only sporadically during better times leading to perennial deficits.
In contrast, Norway's pot of gold has swollen to $1.12 trillion, even as the Norwegian government continued drawing down ~3 percent of the fund's resources every year.
The irony of it all is that Alberta struck oil about half a century earlier than Norway, managing to pump about 3.8 million barrels a day at the height of the oil boom, or about as much as the United Arab Emirates' production clip. Unfortunately, the demand destruction wrought by Covid-19 has forced Alberta's producers to idle between 1 million and 1.5 million barrels thus throwing the local economy into total disarray.
Related: The 400% Tesla Rally Was Only The Beginning Of The EV Boom Alberta politicians have tried to justify this myopia by arguing that the federal government would have targeted a giant Heritage Fund, which seems partly justified given the continuing intergovernmental clashes over control of Alberta's vast oil resources. Tombe agrees with that line of thinking, saying that it's likely that Canada's federal government would have responded to a swelling Heritage Fund by raising other taxes affecting the province or lowering its transfers to the province.
Fortunately for Norway, the nation is a unitary state that has not had to deal with such internal wrangles.
Alberta's oversight looks particularly grievous now that an exodus of foreign oil and gas companies leaving the oil sands has kicked off en masse. Canada has recorded more than $40B in foreign oil and gas company divestitures over the past three years with Total S.A.'s (NYSE: TOT) recent $9.3 billion asset writeoff in Alberta as stranded assets being the biggest so-far. Other than the French energy giant, ConocoPhillips (NYSE: COP), Statoil, ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A) have either pulled out or retreated from the oil sands due to high operating costs coupled with low profits.
American Social Wealth Fund
The United States' oil and gas producing regions are not much better off than Alberta.
Outside of Alaska, the United States badly lags the rest of the world as far as embracing sovereign wealth funds goes.
Alaska has former Republican governor Jay Hammond to thank for its endowment.
The story goes that when Hammond served as mayor in a small borough of Bristol Bay back in 1974, he watched with a growing sense of apprehension as nearly all of the town's rich salmon resources were extracted with the locals getting next to nothing in the way of profits or job opportunities. Hammond fashioned the idea of imposing a 3 percent tax on salmon revenues and using the proceeds to set up an investment fund that would pay annual dividends from its returns to Bristol Bay residents. Interestingly, Bristol Bay residents voted down the proposal.
Hammond would later get his wish when he became governor of Alaska in 1976. He pushed for a constitutional amendment that taxed 25 percent of all oil royalties and lease sale payments and directed them to a fund whose sole purpose was for use in income-generating investments. The amendment passed by a 2-to-1 margin, and Hammond pushed for the citizens' dividend idea once again. His persistence finally paid off in 1982, and Alaskans have ever since received annual dividends from the so-called Alaska Permanent Fund every year without fail.
Last year, 631,000 Alaska residents received $1,606 each from the Permanent Fund from a pool of $1.013 billion that the state Legislature budgeted for dividends. Alaskans appear set to continue doing so for many more years to come considering Alaska's waters are home to more than 30 percent of the nation's known recoverable offshore resources. The fund is massively popular, with Americans across the political divide all saying they would rather pay higher income taxes to lower the deficit than see their annual dividend cut.
The left has lately been making concerted moves to bring social wealth funds to the rest of America, with Matt Bruenig, founder of the crowd-funded socialist think tank the People's Policy Project, advocating for expanding Alaska's model to create a national social wealth fund for the nation.
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More