Tuesday, August 24, 2010

Potash belongs to Sask., says prof

Potash belongs to Sask., says prof

With all due respect to the professor, this statement:

"We the people own the potash. The Potash Corporation does not own the potash, it's ours," he said from his campus office. "It is appropriate for us to use the instruments that are available to make sure that those resources are used for what is best for us." It's up to the government of Saskatchewan, he added, to ensure Saskatonians benefit from the mining and processing of the potash that lies beneath our feet.

Isn't entirely correct.

You see, in economic terms, the resources which are still in the ground and untapped, don't really belong to anyone. They aren't the government's. They aren't the possession of anyone by accident of their birthplace or migration patterns.

The resources, in a realistic sense, belongs only to those people who put up the capital, whether human, intellectual or monetary in order to extract the minerals and make them useful. Any unit of resource represents the effort required to extract the resource. If nobody makes the effort to extract the resources, then they are of no benefit to anyone.

That's why I discount the words of anyone who says that the "people" should get their fair share of the resources. So let's illustrate what happens when someone decides they want to extract minerals.

First, they go to the government and give it money for the option to explore an area for minerals. This is done via auction so as to extract the maximum money for "the people". Then the company must pay rent to the actual owners of the property in order to explore on the land. The land is studied and explored to determine whether there are minerals in sufficient quantity to extract to make the extraction feasible. If the company determines that they aren't in sufficient quantity, then this is where it stops, with the company having to outlay money for no gain. If the resources ARE in sufficient quantity, then the company permanently leases the land from the land owner (depending on the resource and the method of extraction, possibly purchasing the land from the owner), and gets to work setting up a mine or extraction site. It, of course, must get the permission of the government to set up the site, and get the proper environmental permissions to ensure that not only does the extraction get done in as environmentally friendly a manner as possible, but that the costs of restoring the site after the extraction is done is covered off.

After this comes the easy part - the extraction begins, and all the company has to do is tell the government how much they took out, and send the government a percentage (before expenses, mind you) of whatever gross revenue the extraction generates. The government then, not content with receiving these royalties, also takes a chunk of the wages paid to maintain the site or extract the minerals, as well as a percentage of the net income of the project as well.

So to make a long story short, the government in the resource game takes money to allow you to look for the minerals. Then it takes money for each dollar of resource that is extracted (without doing anything to earn that money, mind you, merely for the privilege of pulling the resource out of the ground), then it takes money from the business for actually earning a profit.

Add all that up, and resource companies may end up sending close to 50% of the gross revenue from the project to the government.

So the question I have to ask those people who want "the people" to get a fair share is, "Is that enough of a share for you, really?"

After all, a resource is only valuable if it is extracted and used. The oil companies over the past 5 decades (and especially over the last 3 years in Saskatchewan and Alberta) that if "the people" want more than what is fair, they always have the option of leaving it in the ground.

Hopefully this is remembered after the PCS offering is resolved.


  1. Legally, Saskatchewan's potash very much does belong to the people of Saskatchewan.

    Legally, companies must remit royalties to the people of SK in exchange for the privilege of producing and marketing those resources.

    I agree with those who say the people should get their fair share.

    The question is: they should get their fair share of what?

    There has to remain an incentive for people to put up the capital in order to produce it. Royalty rates need to be conducive to that, not discourage it.

    If SK's potash sits in the ground unmined, the "fair share" of the people of SK is nothing.

    It's as simple as that.

  2. Yes, legally they belong to "the people" under the constitution that "the people" wrote for themselves. Morally, the resources belong to those who have the money and the know how to extract them, otherwise they sit underutilized.

    I discount the view of anyone who believes that we're not getting our "fair" share because it's up to each person what is fair. As you say, if "the people" get too greedy (as is what happened in Alberta after Steady Eddie got in) then the resource extractors take their money elsewhere (read: Saskatchewan).

    What it comes down to is that the government is entitled to their "share" of the resources for the same reason that the mafia is entitled to protection money. The only difference is that the constitution has legalized it for "the people".

  3. Very good post. The only thing I would add is that "the people" benefit even further as a plethora of high income jobs are quite routinley created as the result of resources being extracted. Further still, spin off jobs at home and elsewhere are also routinely created. I know you mentioned income tax but so much more valuable than that is some one given the opportunity to not only put food on the table but in some cases, maybe even a child through university.