Betting on WTI is a Short-term Strings Attached Solution

Commentary, Economy, Gerard A. Lucyshyn

The Alberta government stopped collecting the fuel tax at the beginning of April in an effort to provide “real relief” to Albertans impacted by rising fuel and inflationary costs. The tax cut saves motorists up to $0.13/L on gasoline and diesel but reduces the provincial revenues by approximately $1.3B (nearly 3% of provincial revenues). 

For many motorists, this “relief” was very welcome as fuel prices have been rising rapidly since Christmas. Albertans experienced an increase of 42.5% in pump prices rising from $1.20/L (Dec’21) to a high of $1.71/L (Mar’22). 

The spike in fuel costs has been largely attributed to imbalances between global demand and supply of oil. More demand, less supply. The Russian invasion (or “special operation”) in Ukraine has cut global supplies while demand for oil is on the rise as economies return to pre-pandemic levels. In addition, adding fuel to the fire (no pun intended), the driving season is kicking off. So thinking that the current spike in high fuel prices is short-term might be classified as wishful thinking

Touting the government’s move to cut the fuel tax as a “bold decision”, the Alberta Premier stated it will provide Albertans with “real relief”.  

“Bold”…perhaps, “real relief”…not really. This relief may provide a temporary bandaid at the pump, but in the long-term will simply add to the ever-growing provincial debt.

Slashing the provincial gas tax is not a new idea. In fact, this was a centerpiece campaign promise made by the Saskatchewan Progressive Conservatives back in 1982.

At the time, WTI (Western Texas Intermediate) had spiked to $37/bbl. The price increase was largely attributed to the Iranian Revolution (known as the second oil crisis of the 1970s) which caused widespread worldwide panic as global production fell by 4%. The pump prices in Saskatchewan dramatically increased by 90% in just 14 months, from $0.22/L (Jan’79) to $0.42/L (Apr’82). In addition, Saskatchewan residents were facing 9% inflation and interest rates of 18% (yes, 18%).

The Progressive Conservatives would win a historical victory capturing 55 out of 64 seats in the Saskatchewan legislature in 1982. The campaign promise was instituted immediately after the election and the new government eliminated the $0.06/L gas tax. Eliminating the gas tax shaved off approximately $105M (3% of provincial revenues). This lost revenue largely contributed to the new government’s large deficit in its first year and increased the province’s debt.

However, adverse conditions throughout the 1980s (drought, global recessions, market crashes, and international wars) would continue to plague the Saskatchewan Progressive Conservative government forcing them to make lost revenues by reintroducing the gas tax and increasing it to $0.09/L eight years later. 

Needless to say, Saskatchewan voters were not understanding nor did they appreciate the reintroduction.

Most Albertans are grateful to the Alberta government for taking such a “bold decision” and are more than happy to accept the fuel tax respite. However, unlike the 1982 gas cut in Saskatchewan, the Alberta gas tax cut comes with some strings attached. 

The amount of the tax savings is linked to the price of WTI. As long as WTI is higher than $90/bbl USD, Albertans enjoy the full $0.13/L relief, however, if WTI goes below $80/bbl USD then ’no relief’.   

One can certainly appreciate and understand linking the savings to the price of oil, especially since the price of oil is entrenched in Alberta’s provincial revenues (between 6% to 20% of provincial revenues). The higher the price of oil the more tax savings passed back to Albertans.The lower the price of oil the lower the tax savings. To call it “real relief” may be a bit of a reach, especially when the government’s economic estimates for 2022-2023 have WTI forecasted for $70/bbl. 

Credit to the Alberta Premier as he did warn Albertans “This is a fiscally responsible measure that will only provide this relief if, in fact, the province is generating significantly [sic] additional revenues.” In other words, if the province makes significantly more revenues on its commodity price speculation, only then will Albertans get the gas tax “relief”! 

Alberta’s finances continue to reel from the impacts of COVID-19. The last couple of government budgets appear more on the optimistic side rather than the realistic side as actual deficits outpace forecasted deficits. These forecasting errors have substantially contributed to the ongoing growth of the province’s liabilities. 

Perhaps the provincial government may wish to heed lessons from history and focus on sustainable solutions rather than short-term-strings-attached ones. Otherwise, Albertans may be as understanding and appreciative as Saskatchewan voters were back in 1991.  

Gerard Lucyshyn is an economist and an economics lecturer in the Department of Economics, Justice and Policy Studies at Mount Royal University in Calgary, Alberta. He has also served as a business and economic consultant to a variety of industries. Gerard has authored a number of articles and research papers on municipal, provincial, federal and international economic and policy issues.