During our interview, John Warnock defined the concept of economic rent.
Key to this concept is that fact that, "
Natural resources are a free gift from nature." As such, resources like oil and gas are considered public property, with governments entitled to exact payments, royalties and taxes on behalf of the public to compensate for the extraction and depletion of the resource by private corporations.
In the context of the oil and gas industry, economic rent is the difference between the cost of exploration, field development and extraction, and the final market price. According to Mr. Warnock, "
These costs include a normal rate of return on investment." In other words, oil and gas companies have already made their profits even before the calculation of rents. The remaining economic rent is extremely valuable. It's up for grabs, and who gets it and in what proportions becomes a political contest between between public authorities and private interests.
In many parts of the world, governments insist on claiming a very high portion of this rent. In Saudi Arabia, the organization of the oil industry allows the Saud government to collect nearly 100% of rent. The Russian government in 2005 claimed 90% of oil rent.
What is interesting in all this, is that if international oil companies don't like giving up this lucrative rent to national governments, they are free to find a Saudi or Russian oil field elsewhere. Oil companies, making a normal rate of return, and with really no where else to go, stay.
Every once in a while, private oil companies do get aggressive. For example, in Venuzuela, where government demands a 50-50 sharing of oil between their national oil company and private oil corporations, there was a coup in 2002 against nationalist president Hugo Chavez. The subsequent installation of a "business friendly" president resulted in wide spread rioting, leading to the re-installation of Chavez as president.
In Saskatchewan, it appears that recent provincial governments surrendered this rent without much of a fight. According to Mr. Warnock's report, "
...the average actual [oil] royalty rate would thus be less than six percent." For natural gas, "...
corporations do not pay any royalties until the incentive [25 million cubic metres] has been extracted." As a result, ".
..the royalties received by the people of Saskatchewan for the extraction of natural gas are lower than those collected in Alberta and British Columbia."
Questions: Should Saskatchewan bring itself in line with other jurisdictions and insist on claiming a higher portion of this economic rent? Should we be using this rent to help cushion our transition into an energy depleted world?
Again, John Warnock's report can be downloaded at
http://www.ualberta.ca/~parkland/research/studies/OilSaskWeb.pdf