There's no excuse for lazy policies milking the mining cash cow dry

Bookmark and Share Economics & Deregulation | Mikayla Novak
The Australian 2nd January, 2013

Australia's resources boom of recent years is mirrored by similar developments in the US mid-western states and Canadian prairie provinces.

Longstanding North American production of coal, copper, nickel and uranium has been supplemented by substantial increases in shale oil production centred on the small American state of North Dakota, home to a population of less than 700,000 people but which fortuitously sits atop the expansive, oil-rich Bakken reserve.

Until recently, much of the Bakken reserve was not commercially exploitable. However, private sector innovations in hydraulic rock fracturing (or "fracking") and horizontal well-boring have unleashed an American energy goliath.

Latest statistics show the state is producing almost 750,000 barrels of oil each day, up from less than 100,000 barrels a decade ago, with almost 7800 active oil wells primarily in the more sparsely populated western districts.

North Dakota has recently surpassed California and Alaska in terms of oil production and there are some expectations that, if current conditions persist, the state could exceed Texas as the leading US oil-producing region.

The shale oil boom has played a major role in delivering North Dakota unprecedented economic good news, setting it apart from the stumbling American economy more generally.

The state-wide unemployment rate is about 3 per cent, with jobless rates in Bakken counties below 2 per cent, and with record levels of employment there are cries of skills shortages similar to those heard throughout regional Queensland or Western Australia.

But it is also evident that clear tensions exist between the desire to ensure frackers remain free to explore and extract oil, including receiving adequate financial reward for effort, and a deeply entrenched "prairie socialism" favouring heavy redistribution of shale oil boom proceeds.

There is presently a major discussion about how to redistribute the state government's $US1.6 billion ($1.54bn) budget surplus among groups deemed to be politically deserving of a share of growing royalty and tax revenue collections.

So far, the North Dakota government has already expended substantial funds on a variety of boondoggles of questionable economic value.

These include university-based "centres of excellence" promoting renewable energies, separate public subsidies for biofuels, and funds set aside for affordable housing projects in the state's east.

With the active involvement of business groups and NGOs, the Republican governor recently established an Outdoor Heritage Fund whereby some of the state's oil revenues are channelled to environmentalists applying for wildlife conservation project grant funding.

On top of this, North Dakota retains a government-owned bank routinely providing loans to drilling companies that were unable to secure finances from private sector financial institutions.

Major oil and gas companies seeking to invest in North Dakota are also expected to donate their own funds to educational and other projects demonstrating their "corporate social responsibility" bona fides.

Such conduct is not confined to a quirky American prairie state with its own government-run flour mill, as politicians in most resource-intensive regions and countries seem to construe the mining, oil and gas industries as cash cows allowing them to dispense favours without economic consequence.

Australian resources states have jacked up royalty rates usually with the intent to expend the proceeds quickly, and in Western Australia the likes of the Barnett government's Royalties for Regions program is effectively captured by political interests.

The federal Gillard government's minerals resource rent tax may not be quite the revenue raiser as initially anticipated but the policy intention of the MRRT to raid mining company profits, and spend the taxes collected, remains intact.

As international mining consultancies have noted, the MRRT has inspired other governments overseas to raise their mining taxes, distorting the risk-return profile of global mining projects and rendering mining activity less attractive in numerous locations.

Apart from the short-sighted cash-cow mentality attached to mining, resources booms may engender lazy political attitudes concerning the need to implement economy-wide reforms so that economies remain prosperous as commodity prices level off.

What is extraordinary about the Rudd-Gillard economic record is that the government not only responded to the resources boom by imposing a new mining tax, but drove the budget into deficit on wasteful spending, increasing resource scarcities and fuelling the dollar's appreciation, and, for good measure, reregulated the labour market, raising the costs of employing labour.

These actions have not only compromised the robustness of Australia's resources boom but hurt trade-exposed agricultural, manufacturing and services sectors, which the government's punitive approach to mining was somehow designed to assist.

As impressive as the resources boom here and abroad may presently appear, tax-and-waste fiscal responses and reform complacency both fail to position economies for broad-based improvements in international competitiveness and economic prosperity in the long run.