Canadians losing big to Big Oil

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In the last year the price of a barrel of oil has gone up by $45 or 65 per cent. It averaged $70 in 2007, while this year it is looks to average $115.

In Canada, as recently as 2003, the cost of producing a barrel of oil, including royalties, averaged only $5.57. Of course, that year Canadian royalties were again among the lowest in the world, 23 cents a barrel.

For natural resources, the difference between the cost of production, including normal profits and the selling price, represents the resource rent, a one-time benefit to the owners. If we assume the cost of production has nearly doubled since 2003, including small royalties increases in Alberta, the resource rent per barrel this year is $105.

This resource rent money has been treated as a windfall profit and has gone directly into the pockets of the oil producers. As many of them are foreign-owned, the profits go directly out of the country.

Since, under the constitution, the beneficial owners of the resources are the people of the provinces where the resources are located, the rent belongs to the people, and it should have subject to an excess profits tax. Indeed when the price of oil increased in the late 1970s, the Alberta government introduced just such a measure.

The logic is simple. If oil companies are making money at $70 a barrel, and through no action on their part, their price increases to $115 a barrel, why should they get to pocket the difference?

You would think someone would notice this appalling situation, and raise hell about it. An increase in the cost of energy imposes hardships all around, but especially to low-income people. Public institutions such as schools, hospitals, recreational, cultural facilities and universities all see their costs increase. The best way to cope is through increased public spending. In short, taking the excess profits and re-investing them in the community helps to ease the distress caused by the oil price increases.

The situation is similar to what happens in wartime. Some companies get rich producing war materials, while others pay the ultimate price fighting the war. Proceeds from excess profits taxes are used to pay for spousal veterans benefits.

In recent speeches in Toronto and Montreal, Stéphane Dion has talked about a carbon tax. The idea is to tax a "bad," the use of fossil fuels, so as to increase their price, and discourage their consumption. B.C. has introduced such a tax, $10 per ton of carbon. Sweden has such a tax, except its tax rate is $100 per ton.

It is important to debate the best way to stop global warming, and essential to reduce greenhouse gas emission. The 65 per cent increase in the price of oil will have a much greater impact on energy consumption than the B.C. carbon tax or anything the Liberal party is likely to come up with.

The carbon tax is favoured by Big Oil, and Big Business generally, so long as it is revenue-neutral i.e. corporate and personal taxes are reduced correspondingly. Both the B.C. government, and Dion have accepted this principle. In the meantime, we are not supposed to notice that the price of oil has gone up, and that windfall profits are leaving the country. In the name of the environment, we are supposed to welcome the tax cuts being given to the oil companies making windfall profits while happily accepting a regressive tax hike.

How dumb do they think we are?

A small revenue neutral carbon tax imposed on top of the oil price increase will not do much to reduce consumption of energy further, and will most certainly not allow governments to deal with the distress caused by the rising price of oil. An excess profits tax would ensure that the benefits of ownership go to the rightful owners, the people of the oil producing provinces, and allow governments to soften the impact of the 65 per cent oil price increase.

Oil equals money, but neither belongs by right to the oil companies.

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