Rising oil price tide could reduce big deficits in energy-producing provinces

Alberta’s February budget hadn’t even been tabled before rising crude prices overwhelmed its cautious earnings outlook.

On February 24, West Texas Intermediate closed at US $ 61.39 per barrel, more than a third above the budget estimate of $ 46 for fiscal year 2021-22. Four months later, oil prices rose again – briefly touching a six-year high this week – as demand rebounded and oil-producing countries failed to agree on production increases.

This large and persistent gap indicates a massive increase in incomes for Alberta (and, to a lesser extent, Saskatchewan and Newfoundland and Labrador). If current prices were to hold throughout the year, Alberta could see a $ 6 billion increase in non-renewable resource revenues, reducing its forecast deficit of $ 18 billion by a third.

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With the additional boost to the economy in general recovering faster than expected, the province’s deficit could be cut in half, according to University of Calgary economist Trevor Tombe. Over the next three years, he estimates, Alberta could earn an additional $ 11.7 billion in revenue if high prices persist. (This estimate also takes into account economic growth and exchange rates.) More good news for the province’s coffers: the gap between Canadian and American oil prices remains, limiting the discount imposed on production from the sands. bituminous.

Alberta has already enjoyed an early windfall, with the government revealing last week that the deficit for 2020-21 was lower than expected, in part due to higher than expected oil revenues. Non-renewable resource revenues were C $ 3.1 billion, below the original budget estimate of $ 5.1 billion, but significantly above the updated forecast of $ 2 billion. There should be a clearer picture of where Alberta is going in the current fiscal year, when the province releases its first quarter financial update at the end of August.

There is also growing optimism about oil revenues in Saskatchewan. Saskatchewan Finance Minister Donna Harpauer told reporters this week that “… oil prices are much higher than we budgeted”.

However, the boost Saskatchewan will get is smaller. In Alberta. every US $ 1 increase in the average crude price over a full fiscal year generates additional revenue of C $ 230 million. In Saskatchewan, the same increase in oil prices only adds up to $ 14 million. Newfoundland and Labrador is slightly higher, earning $ 19 million for every US $ 1 increase in annual average oil prices.

Yet these potential additional oil revenues would add up for Saskatchewan; over a full year, it would amount to $ 250 million, enough to reduce by one tenth the projected deficit of $ 2.6 billion for fiscal year 2022. This relatively moderate impact results in part from the financial prudence of Saskatchewan, notes Professor Tombe. The province decided to diversify its sources of revenue and cut spending during the final days of Brad Wall’s government. This left the Prairie province less exposed to the vagaries of fluctuations in energy prices.

In Newfoundland and Labrador, however, the situation is quite different. Newfoundland’s budget has a much higher estimate of oil prices, in part reflecting the fact that it was tabled three months later, at the end of May. The Atlantic Province forecasts an average price of US $ 64 for Brent crude in 2021-2022. As a price tracking chart released by the province shows, Brent has traded above this level for most of the current fiscal year. If current prices were held throughout the year, Newfoundland would earn $ 179 million in resource revenue, wiping out more than a fifth of its projected deficit of $ 826 million.

In an email, the Newfoundland Department of Finance noted that an appreciation of the Canadian dollar – a predictable companion to rising oil prices – would offset some of these oil revenue gains. For every one cent gain on the loonie, Newfoundland loses $ 15 million, in part because it receives less Canadian dollars for oil exports, which are priced in US dollars. In Saskatchewan, a one cent increase in the dollar costs the provincial treasury $ 20 million. And in Alberta, with its much larger oil production, a one-cent increase cuts provincial revenues by $ 165 million.

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However, all three provinces were much better at predicting the future of the Canadian dollar than oil prices. If Wednesday’s close at 79.6 cents US were to persist, Newfoundland would lose only about C $ 7 million and Saskatchewan would see its revenues fall by $ 19 million. Alberta would lose the most, about $ 443 million, but that would still leave the province with billions in additional oil revenue.

All of these potential gains depend on the continued rise in oil prices and not just on a speculative surge. A number of factors indicate that the rise in crude over the past few months has been the start of a protracted race, said Michael Tran, energy market strategist for RBC Capital Markets.

Oil prices could exceed US $ 80 a barrel later this year, and $ 100 of oil is not out of the question, he said. “We remain of the view that we are in the early stages of a cycle.”

Both demand and supply factors are at work, says Tran. On the demand side, fuel consumption is rebounding under the effects of the coronavirus slowdown, accelerated by the arrival of the summer driving season.

Supply problems also point to a sustained increase in prices. First, the Organization of the Petroleum Exporting Countries has withdrawn from the market a “historic amount” of production, he said. Talks earlier this week were aimed at reinstating some of those production cuts, but collapsed.

US oil shale producers are keeping their own production down, responding to pressure from investors who favor sustainable profitability over simple production growth. Most important, Mr Tran said, are the consequences of a prolonged period of depressed capital spending, which leaves relatively few major projects underway to add to the supply. “We have had a decade of underinvestment in the oil space,” he said.

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