The Resource Curse: The Alberta Context
The discovery of Leduc 1 in 1947 set off a period of rapid oil & gas development in Alberta, attracting workers, investment and creating massive wealth in the province.
Production of conventional light oil increased steadily until the early 1970s, when production peaked. After conventional light oil peaked, conventional heavy oil was exploited and peaked in turn in the early 21st century. Heavy oil requires more investment in recovery, transportation and refining. During roughly the same period, massive investments were made in northern Alberta to extract bitumen from sand. Bitumen requires a diluent for transporting by pipeline and requires much more processing to be made into a usable product.
[Source: Canada Energy Regulator, http://www.cer-rec.gc.ca/nrg/sttstc/crdlndptrlmprdct/rprt/tghtdvlpmntwcsb2011/tghtdvlpmntwcsb2011-eng.html]
In the past 10 or 15 years, advances in technologies like hydraulic fracturing (‘fracking’) have allowed for the extraction of oil & gas from tight sands and shales. These formations require more well stimulation and the wells typically have shorter useful lives than conventional oil and gas. This is because the oil or gas liberated by fracking flows quickly to the well and then it is done, requiring additional fracking or a new well.
[Source: https://www.cer-rec.gc.ca/nrg/ntgrtd/ftr/2017cnvntnll/index-eng.html]
Each stage of the development of oil in Alberta has required more technology, more investment, and more energy for each barrel produced. It has also resulted in more changes in land-use, more use of fresh water, more abandoned or orphaned wells as a public liability, more air pollution, and more greenhouse gas emissions.
These are indicators of the ‘resource curse’.
The Paradox of Plenty:
The ‘paradox of plenty’[1] (or the ‘resource curse’) has been observed in regions that have an abundance of a non-renewable resource. The argument is that resource-rich regions are more likely to experience low economic growth in the long-term. The International Monetary Fund considers a region ‘resource-rich’ when 20% of the fiscal revenue is derived from non-renewable resources.[2]
The cycle goes like this: A resource is discovered and the demand for this resource is established. This draws private investment from early entrants into the industry. As the industry expands and the return on investments remains lucrative, available financial capital is directed to increase the extraction, refining and transportation of the non-renewable resource. Governments invest in infrastructure that benefits the dynamic industry. Both public and private investments are made at the expense of other potentially profitable industries seeking capital.
In plain words, the eggs are placed in a single basket.
Overlooking alternative investments is called an ‘opportunity cost’[3] in economics, and represents the difference between the forgone investment and the chosen investment in the long term. When there is an extremely active and profitable economic sector in the short-term, opportunity costs can be high. Money flows to one industry for short-term rewards, which will cost the economy in the long term.
This is where the curse comes in. At some point in the resource cycle the return on investment begins to decline. This may be because the easily-extracted resources are diminished, and the resources that are more difficult to access or refine are needed to fill the gap. The government that relies on a single resource industry for revenue and for employing the productive capacity of its workers responds by supporting the struggling and influential industry in the form of increasing direct investment in industry-focused infrastructure, tax incentives, support for research & development, and reductions in royalty expectations. This is usually an honest attempt to sustain the industry (already vulnerable to boom/bust cycles in commodity markets), hoping that it will recover in the short term or within the next election cycle.
The ‘resource curse’ suggests that there will be a time when this recovery is weak, or simply non-existent. Nonetheless, out of desperation, even more money will be invested to prop up the industry – money that will never be recovered in revenues.
It becomes what Herman Daly, former senior economist for the World Bank, calls ‘uneconomic’[4]. Uneconomic growth considers the costs to society from externalities – those expenses that are not borne by the industry, but have real costs to society. Externalities might include liabilities like orphaned oil & gas wells, mining tailing ponds, contaminated soil and water from industrial effluents, biodiversity loss, and the accumulation of greenhouse gases in the atmosphere.
Since most of the available money has flowed to a single industry at the expense of other industries, the resource-rich region has not adequately diversified and it is unprepared for the loss in revenues and employment opportunities. It is not uncommon that the failing industries leave behind a legacy of obsolete infrastructure and environmental damage that become public liabilities. In many countries where this cycle has been observed, the results have included instability in democratic institutions and the rise of populism and demagoguery, a drastic reduction in public services, an increase in human desperation and a dissatisfaction in political leadership as manifested in corruption, violence, crime, scapegoating, and human rights violations.
The Paradox of Plenty is a cautionary tale. Indicators might include rising liabilities (like orphan wells and mining tailing ponds), increased public investments in infrastructure for the once-lucrative industry (often accompanied by declining private investment), lower transparency in government finances, and less civil and open public discussion. Good government leadership can mitigate many of the worst effects – by encouraging economic diversification, by adopting a long-term view in decision-making, by not relying on royalty revenues for core public services, or by saving revenues from this non-renewable inheritance for future needs.
It takes courage and foresight to recognize a faltering or uneconomic industry, and it takes wise leadership that seeks thoughtful input to avoid the worst consequences of the ‘paradox of plenty’.
[1] An interesting in-depth analysis of oil may be found in Terry Karl Lynn’s 1997 book titled “A Paradox of Plenty: Oil Booms and Petro-States.
[2] https://www.imf.org/external/np/pp/eng/2012/082412.pdf
[3] https://www.investopedia.com/terms/o/opportunitycost.asp
[4] http://www.steadystate.org/wp-content/uploads/Daly_SciAmerican_FullWorldEconomics(1).pdf