During my morning reading, I came across an article cited by David Akin in his latest news roundup, in which Cindy Tran reports the following for the Calgary Herald:
Experts estimate the Alberta government has likely accumulated billions in surplus this fiscal year-to-date as crude oil prices remain high.
Trevor Tombe, an economics professor at the University of Calgary, estimates the government has accumulated a surplus of $3.8 billion this fiscal year to date. Every $1 per barrel change in the price of oil is worth about $680 million to the government’s bottom line, according to Tombe.
“It doesn’t take a big move in oil prices to have dramatic impacts on government’s bottom line,” Tombe said.
As Dr. Tombe argues, Alberta’s over-reliance on oil revenues for its prosperity is a very bad thing if we want economic stability, and it is only getting worse:
However, Tombe said while high oil prices would help eliminate the deficit, the province’s main fiscal problem is its exposure to such a volatile source of revenue which it has only become more reliant on.
“Our problem has gotten worse and oil prices being high doesn’t solve that because of course they won’t stay high forever. They’ll fall and then rise again and then fall again… that volatility is worse now for Alberta than ever before,” Tombe said.
Furthermore, even when oil prices are high, that is not necessarily a good thing for the average Albertan:
Tombe said it is never a bad thing for the government when oil prices are high, but emphasized the impact is felt by everyday people. Early after the U.S.-Israel attack on Iran, he did some preliminary math and said if oil prices remained around US $90 a barrel it would equate to an additional $1,000 a year for the average family.
“The affordability challenges that people face are made worse by sustained high oil prices,” Tombe said.
This news reminded me of an article I wrote earlier this year, which just happened to also be inspired by a talk given by Trevor Tombe, where I argued that the secret to Danielle Smith’s success boils down to “dumber-than-dumb luck”. Given everything that has been happening in Alberta politics and the economy lately, I think it is worth reprinting it below.
In short, Danielle Smith deserves zero credit for balancing the budget, since she has done nothing to make it happen other than to hope for the best. Despite her degree in Economics, she demonstrates no understanding of its basic principles; if she did, she would do everything she can in her (majority-government) power to make Alberta’s economy less dependent on volatile oil prices, and thus make our economy more stable over the long term.
Of course, she would also not actively create even more volatility in the economy by pandering to her separatist puppet-masters, but her primary goal is always ensuring her own selfish political success. She enjoys the benefits while we incur the costs.
Anyway, I hope you all enjoy reading the re-post of my earlier article below.
Yesterday, I experienced the pleasure of attending a talk by University of Calgary Economics Professor Dr. Trevor Tombe at the university’s downtown campus. The talk was on the Alberta budget, and as he was near the end of his presentation it hit me: Danielle Smith just might be the luckiest living politician in the world!
Let me explain.
Thanks to the war in Iran, and the resulting spike in oil prices, it looks like Alberta might not have a budget deficit this year after all! And if it was not for that war, the deficit would have been huge because after revealing the expected size of the deficit last month, she admitted she basically had no plan to balance the budget.
Would she raise taxes? Nope.
Would she cut spending in any meaningful way? Nope.
What is left? Do nothing and hope the problem works itself out (other than to blame Ottawa, because that always works).
And wouldn’t you know, it did! To be clear, that is not a good thing, because there is no justification for this illegal war. But it sure worked out for Smith and her UCP government… for now.
At first, I thought she essentially won a fair coin toss, but that is too simple because that will result in “Heads” 50% of the time and “Tails” 50% of the time. It is actually far easier to win a coin toss than it would be for the UCP to balance its budget by doing nothing but wishing on a star.
No, this is more like trying to win the coin toss hundreds of times in a row. That is because the odds of repeatedly winning it decrease the more times the coin is tossed.
Think of it this way: the probability of getting “Heads” once is simply 50%, but the odds of getting “Heads” twice in a row is 25%. That is because the probability of two independent events both occurring is calculated as follows:
P(AB) = P(A) * P(B)
where:
P(AB) is the probability both Event A and Event B will occur
P(A) is the probability Event A itself will occur
P(B) is the probability Event B will occur
Therefore, if Event A represents the first “Head” flip, and Event B represents the second one, then the probability of both of them happening is:
P(AB) = 50% * 50% = 25%
It then follows that the more times the coin is flipped, the more times we have to multiply it all by another 50%, so the end result gets smaller and smaller.
Back when I taught Methodology and Statistics — or as one student delightfully called it, “Meth and Stats” — I liked to involve my students in a couple of quizzes I lifted from Chapter 3 of Dan Gardner’s excellent book, Risk. I will just repeat one here, and encourage you to read his book for the rest.
In one quiz, which was created by psychologists Daniel Kahneman and Amos Tversky many decades ago, I told the students the following: Linda is 31 years old, single, outspoken, and very bright. She majored in Philosophy. As a student, she was very concerned with issues of discrimination and social justice, and also participated in anti-nuclear war demonstrations.
I then asked my students to rank the following options from Most Likely (1) to Least Likely (8), regarding whether Linda:
Is a teacher in an elementary school?
Works in a bookstore and takes yoga classes?
Is active in the feminist movement?
Is a psychiatric social worker?
Is a member of the League of Women Voters?
Is a bank teller?
Is an insurance salesperson?
Is a bank teller and is active in the feminist movement?
As Gardner explains, Kahneman and Tversky gave this quiz to real-life undergraduate students, and they found 89% of the students surveyed thought Option #8 was more likely than Option #6, even though Option #8 had the additional condition of being active in the feminist movement.
So the psychologists gave the surveys again, but this time only those two options were available. Still, 85% of them thought it was more likely Linda is both a bank teller and active in the feminist movement.
Of course, we know from my coin-flip example that Option #6 is more likely than Option #8 because the former option is analogous to flipping a coin once, while the latter option is comparable to flipping the coin twice. It also makes logical sense that if Option #8 is true, then Option #6 is at least equally (if not more) likely because she would be a bank teller either way.
On the contrary, in the minds of the undergraduate students, it was “obvious” Option #6 is the less likely option of the two, because “She has to be an active feminist, too! Read the description!”
As Gardner explained it, these students were allowing their “guts” to overrule their “heads”, also known as The Rule of Typical Things. But we cannot really blame these students for getting it wrong, because when Kahneman and Tversky presented the “Linda Problem” to experts trained in logic and statistics, they were just as wrong as the students on the first go around! Only when the two-option version of the quiz was given to the experts did they — maybe not literally — smack themselves in the heads and say “Of course, Option #8 is less likely!”1
And how did my students rank these options? I cannot remember specific results, but I gave these surveys several years in a row, and most of them also let their guts rule!
Getting back to Danielle Smith, the point of this whole exercise is to demonstrate that the more conditions we add to something happening, the less likely it will happen. And in terms of her strategy of doing nothing and hoping the budget would balance itself, the probability of that happening was exceptionally low!
Just think of all of the conditions that had to be satisfied for this spike in oil prices to happen now:
Someone as reckless and incompetent as Donald Trump, who exclusively thinks with his gut, is the most powerful person on the planet.
Trump wants to do what no previous POTUS ever did: side with Israeli Prime Minister Benjamin Netanyahu in his decades-long quest to go to war with Iran.
The House of Representatives is controlled by Trump via his sycophants, who could almost always be relied upon to support anything and everything he does, regardless of legality and even constitutionality.
Repeat #3 for the Senate.
Repeat #3 for the Supreme Court.
Repeat #3 for his Cabinet.
Repeat #3 for the MAGA segment of the “Fifth Estate” — bloggers, journalists publishing in non-mainstream media outlets, and online social networks — who control the minds of a large proportion of the electorate. I include Fox News in this club.
His “Secretary of War” is Pete Hegseth, a drunken gut-thinking idiot who believes Red Dawn was a documentary and Gunnery Sergeant Hartman from Full Metal Jacket was meant to be emulated.
Trump is in such a hot mess back home — due to the Epstein Files and ICE, for example — that he needed something big to distract attention from that mess.
Despite all of the power and resources available to the POTUS, which should guarantee success in the war in Iran, he still failed miserably by having no plan for what to do on “Day 2”.
Those are just ten conditions necessary for the Alberta budget to be balanced by having oil royalty revenues spike so much and so fast.
In summary, Danielle Smith essentially flipped “Heads” many times despite the coin being rigged to always flip “Tails”!
Unfortunately for Albertans, no one can rationally count on this dumber-than-dumb luck to work again because she still has no plan for what to do on her own “Day 2”, and oil prices will inevitably fall again for one reason or another (they always do). She could hope for another lucky spike in oil prices, but that would be like hoping for yet another consecutive “Head”, and we know the odds of that happening are even lower than ever.
In closing, I want to thank all of my paid subscribers for their subscriptions, and to encourage the rest of you to also consider paid subscriptions. I love to do research, but I also enjoy paying my bills, so a paid subscription would be very helpful in ensuring I can accomplish both.
On a side-note, Daniel Kahneman was awarded the Nobel Prize in Economics in 2002 for his work with Amos Tversky, who was not also awarded the Prize because he sadly passed away before getting the opportunity (it is not awarded posthumously). Their work is a significant influence on the field of Behavioural Economics. I also had the privilege of attending a talk Kahneman gave at the University of Alberta in 2006 when he was awarded an Honourary Doctorate of Science. I remember him telling us his influence on economists and his Nobel Prize award were both ironic because he never took an Economics course in his life!
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