The Optimal Savings Question: An Alberta Perspective

Abstract

This paper examines one question of fundamental economic significance to the Alberta Heritage Savings Trust Fund debate, namely: how much should a province whose income depends upon the extraction and sale of a non-renewable resource in finite supply save for the benefit of future generations of provincial residents when the number of these residents is dependent upon the volume of induced migration? To explore this optimal savings question requires one to consider both the constraints under which the provincial economy operates as well as the objectives it seems desirable to pursue. The revenues placed in the Fund are derived from the development and extraction of petroleum resources, and more particularly conventional oil and natural gas, which are limited in supply. Although exploration and development activity can expand the volume of proven resources of conventional oil and natural gas, it is clear that existing rates of extraction will, if continued, eventually exhaust the supply of these resources that can profitably be extracted at any given technological and cost-price configuration. Assuming that alternative sources of energy continue to be available to the world economy, and therefore that the real price of energy does not escalate faster than the rate of extraction within Alberta declines, the timestream of Alberta's non-renewable resource revenues must eventually decline in real terms as her conventional oil and natural gas reserves are depleted. The existence of substantial heavy oil and tar sands deposits within the province does not alter this picture, since the resource rents per unit of output that the development and extraction of these deposits will generate are most unlikely to be as large as those for proven reserves of conventional oil and natural gas, given any reasonable forecast of the evolution of technological knowledge and associated cost-price relationships. As a result of the existence of substantial non-renewable resource revenues, Albertans have come to expect their provincial government to provide them, on a per capita basis, with a high level of public goods and services in relationship to the direct and indirect taxes which they pay. Without these non-renewable resource revenues, the provincial government would have to impose a substantial increase in taxation in order to provide these goods and services to Alberta residents. This tax increase would lead inevitably to a reduction in the ability of Alberta residents to purchase private goods and services in the market place. From this point