On maximization

In this post, I raised some questions about the interprovincial implications of Erin's call for an agreement establishing minimum rates for resource royalties. But in the absence of any indication that Alberta is interested in that kind of step (particularly with the Stelmach PCs trying to fend off the Wildrose Alliance as the oil patch's party of choice), let's turn to the question of what Saskatchewan should do on its own.

Here's Erin's take:

I have not (yet) heard much out of the Saskatchewan NDP’s current Policy Review. However, one of its top priorities should be to adopt a royalty policy that aims to maximize provincial revenues rather than simply accelerate the pace of resource extraction.

Now, I definitely agree with the view that the province should take steps to make sure it's actually getting the best possible price for its resources, rather than offering the private sector a break on the privilege of using up Saskatchewan's reserves. But it's worth noting that setting royalty rates alone doesn't seem to me to be the only way of ensuring that the province maximizes its returns.

After all, the province's range of options is dictated by the different means available to tap into its resources. Faced with the choice between the perceived zero value of a lack of development and the ability to earn even the slightest return from setting rates which increase immediate investment, there's at least some logic behind a choice to accept royalty rates which result in the private sector skimming off nearly all of the profit. And that surely isn't lost on the oil industry as it lobbies for rates which will put more money in its pocket.

In other words, as long as it's assumed that the private sector alone will choose what to exploit and when, it's to be expected that the province will end up leaving money on the table - even if it does maximize the possible royalty rate under those circumstances. But that points naturally to another choice the province can make which will strengthen its bargaining position.

If one adds to the picture a provincial Crown which is willing to target underused resources, then the relative strength of the government and industry positions changes dramatically. At that point, big oil would see a need to accept terms closer to the province's preferred position on the understanding that the province actually has an alternative means of deriving value from a particular resource. And the government, applying Erin's principle, could calculate the appropriate royalty rates by comparison to the money it would expect to bring in by accessing a particular resource itself.

In other words, I'd see Erin's suggestion as the second step in what we should be pursuing as our resource development policy - coming after a commitment to public-sector resource development which will allow for one more means of maximizing the price. And hopefully both will figure into the NDP's policy discussions over the next year.