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CALGARY — As oil prices continue to teeter, slumping Wednesday to their lowest level since October, provincial governments that have traditionally padded their budgets with resource royalties are facing the unpleasant prospect of ever-more glaring deficits in the coming months.
Saskatchewan is already creating contingency plans in case crude prices fall, as Newfoundland and Labrador premier Kathy Dunderdale warned voters that the province could be facing hard times if the price per barrel continues to dip. Alberta insists it’s too early in the fiscal year to panic, however its budget may be in for a rethink by the end of the first quarter.
Global Brent crude prices closed at US$92.57 per barrel on Wednesday, well below Newfoundland’s forecast of about US$124 per barrel. Both Saskatchewan and Alberta base their forecasts on the cheaper West Texas Intermediate benchmark, which closed at US$81.45 per barrel — again at a steep discount to the values predicted by budgetary bean counters.
Jurisdictions that rely on volatile commodity royalties often overshoot estimates, making it easier to justify more ambitious spending. Projections that look fine on paper during optimistic budget planning meetings, however, can end up in disastrous budgets if prices collapse. In 2008, the Alberta government’s $8.5-billion surplus projection shriveled to a nearly $1-billion deficit when recession hit and energy prices collapsed.
Of Alberta’s approximately $40-billion budget this year, about $11-billion comes from royalty income largely derived from non-renewable resources, said Robyn Cochrane, spokesperson for the provincial finance ministry. Forecasts are based on longer-term averages, not daily ups and downs she said, and the budget benefits from a number of other trade-offs that may mitigate longer-term declines in oil prices.
“Natural gas, the exchange rate, all those things play into the bottom line, not just simply subtracting what oil is at today,” she said. “It’s too early, really. If you look at it, we’re just two months into the fiscal year. It’s really what matters in the long term over the entire year. But of course we’re paying attention.”
With its oil forecast at US$99.25 per barrel, the province is expecting an $886-million deficit for the 2012-2013 fiscal year. Ms. Cochrane said Alberta is looking for a surplus of just under a billion dollars the following year, with oil prices expected to rise again.
Earlier this month, premier Alison Redford said her government wouldn’t play the part of Chicken Little.
“We are not a caucus that is going to run around saying, ‘The sky is falling. The sky is falling,’” she told reporters. “What I am not going to do is spend every day responding to a question about what we are going to do because the price of oil is lower. This is about big picture.”
Katherine Spector, the head of commodity strategies for CIBC world markets said a number of factors are pushing oil prices lower. Europe’s volatile financial situation and uncertainty about China’s growth rate have stamped question marks all over commodity prices. In addition, Saudi Arabia is releasing more oil supply onto world markets in response to declining production in Iran.
Ms. Spector, however, doesn’t expect global crude prices to continue downward indefinitely.
“I think we have more upside than downside at this point,” she said.
For the rest of this article, please go to the National Post website: http://news.nationalpost.com/2012/06/20/rosy-provincial-forecasts-fail-to-materialize-as-falling-oil-prices-put-budgets-in-peril/