The Meaning of Ralph

Commentary, Energy, Brian Lee Crowley

If Ralph Klein were a tradable commodity, you might notice something peculiar about it. When the price of oil was low, the price of Ralph would be high. But the reverse would also be true; when oil prices soared, the demand for Ralph would fall.

What explains this curious inverted relationship? Nothing should be easier in a resource-rich province than being premier when the good times roll, and nothing more miserable than dealing with the aftermath of a price collapse of your main resource. The price of Ralph and the price of oil should move in lock-step, shouldn’t they?

Not at all. To understand why, consider that many policy thinkers argue that a massive natural resource endowment is a curse, not a blessing.

Look at the countries with vibrant economies. Few have a large natural resource endowment. In fact, many with high per capita incomes—Japan, Denmark, Switzerland, Germany, France, Taiwan, Korea —are resource poor. The same is true within countries. In the United States, resource-rich Texas and Louisiana have low per capita incomes compared with resource-poor Connecticut and Massachusetts.

Even countries that should benefit from huge increases in the value of their natural resources often find their blessings extremely well disguised. Mexico and Nigeria both went bust in the 1980s after oil price rises hugely increased the value of their resources. Jeffrey Sachs, one of the world’s leading economists, notes that it is a generally accepted fact of economic development that “resource abundant economies [tend] to lag behind resource scarce ones.”

There are many reasons why. One of the most powerful is that natural resource revenues feel like free money. The residents of the jurisdiction that has those revenues didn’t do anything to put them in the ground. That was just an act of God. Sure, they have to work to pull them out of the ground, but that actually doesn’t require all that much work relative to the value of the resource itself when prices are high.

And as every lottery winner quickly discovers, spending a windfall wisely is no easy matter. The reality is that when oil prices are high, undisciplined oil-rich jurisdictions spend their time fighting over the spoils. Everybody wants some of that money because since hardly anybody had to work to earn it, nobody has a better claim on it than anybody else. Everybody’s pet scheme suddenly becomes feasible. Things get fractious. Huge oil revenues are the apple of discord.

But what goes up must come down, and the crash follows the oil boom as the wind follows a billowing sail. Ironically, the crash is a politically unifying force. People quickly realize that they have been on an unsustainable credit card binge and their income has fallen. They need to work off the debt and get spending under control. That’s where Ralph Klein came in. He rallied Albertans in the oil price trough (around US$20 in 1992) to the cry of living within their means. And he has been forced out as oil prices reach dizzying heights (US$66 this week) because he’s not providing effective leadership about how to manage the province’s burgeoning wealth.

Getting the politics out of natural resource revenues is the only solution in the long term. Few jurisdictions have done so successfully. Norway is one. Alaska is another. Alberta got off to a good start when Peter Lougheed created the Heritage Fund. Ralph Klein did the right thing eliminating the debt and lowering taxes. But after that he ran out of ideas while the cash kept rolling in. Having been through the cycle before, canny Albertans sense that this lack of discipline is simply storing up trouble for the future.

That’s why, if Albertans are smart, they’ll elect a new premier who forswears gimmicks in favour of a credible plan to treat natural resource revenues like the precious assets they are, rather than a cash windfall to be squandered before the crash. That is the meaning of Ralph.

This appeared originally in the Montreal LaPresse