Royalty to a Royalty Rate Increase?

The debate in increasing the royalty rate on oil in Alberta is not a new issue, however; Albertans are now faced with a $6 billion deficit in the March budget. The deficit that Alberta is now facing is due to several reasons. Alberta’s main source of income is its oil. The major buyer of this resource has always been the USA, but now the Americans have their own source of oil and it is very difficult to export oil to Asian countries such as China. The royalty rate of Alberta is also one of the lowest in the world.

In 2007, Alberta decided to increase the royalty rate on oil but then rolled down the rate again in 2010. If the same royalty rate were kept in place, would we still be facing a $6 billion deficit in the March budget? Does this mean that the Albertan government should revert back to an increase of the royalty rate for 2013?

The royalty rate is a method for the government of Alberta to extract revenue from the wealthy oil sand owners. Every time a company extracts, produces, and sells this natural resource, they have a royalty to pay. The problem? For some companies, this will cause them to extract oil from another location to avoid the raised royalty rate. Others may begin to produce less in order to pay less and this inflates the cost of oil. Royalty rates for oil sand projects continue until the project has reached payout. Therefore, at higher oil prices, the quicker it is for a project to pay out. According to CBC News, “Alberta retreats on energy royalties,” the lowered royalty in 2010 led to an increase in revenue of $167.5 million in one day for exploration rights. This made Alberta to have the “fourth-highest total in the province’s history.”

Even though the evidence I presented above seems to support a lower royalty rate, I believe that Alberta should raise the royalty rate again. Why should another Albertan program suffer due to a deficit caused partially by the revenue loss of oil? Oil is the main supplier of revenue to Albertans and we should take advantage of that even if it may increase gas prices. Everyone should contribute a little to help the province as a whole. I think that with the raised gas prices, it will also help citizens be mindful of the amount of natural gas their car and furnace consumes. Oil sand owners will also be careful in their expeditions and projects with an increase in royalty rate. This will preserve the natural resource and lower carbon emissions. But I hope that the Albertan government doesn’t expect to raise the $6 billion only from our natural resource. They should work on discovering a more sustainable and reliable source of income.