Low oil prices could cut Alberta revenue by $7-billion, Prentice says

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Two weeks ago, Finance Minister Robin Campbell unveiled a fiscal update that had Alberta returning to a surplus of $933-million in 2014 based on a forecast of $75-a-barrel oil.

At the time, crude was $73.69 (U.S) a barrel. On Tuesday, it closed at $63.82.

Now Premier Jim Prentice has a new message for the province: Expect spending cuts soon, since plummeting oil prices could cut provincial revenue by $7-billion over the next year. The province is heading toward deficit territory again.

"A few weeks ago I thought it was a terrible circumstance to talk about $75-a-barrel oil; today that doesn't look so bad," Mr. Prentice said in his state-of-the-province address in Edmonton on Tuesday.

"The changes have been so deep and so dramatic," he said. "All Albertans will feel the consequences."

Mr. Prentice now says oil prices are expected to remain low until the end of the current fiscal year in March and perhaps beyond. He said Tuesday he "could not wait for better prices to return" before acting on the province's finances.

The Premier has left himself few options to fix a shortfall that could be in the billions next year. He has ruled out cuts to the education and health-care portfolios that make up most of the provincial budget, and refused to introduce a sales tax or any major tax increases. He also said his government would keep a balanced budget.

"He doesn't have much room to manoeuvre and the government's suitability fund has been mostly depleted; we don't have much of a cushion," said Todd Hirsch, the chief economist for ATB Financial.

The economic challenge comes as the province grapples with North America's fastest growth. Expecting hefty surpluses, the Progressive Conservatives had promised to build as many as 100 schools across the province, while investing billions more in a dilapidated health-care system that has been the subject of intense debate.

The province projects a 25-per-cent growth in student population over the next decade, with a 60-per-cent increase in the retiree population. Mr. Prentice has so far ruled out changes to the ambitious building program.

The decline in oil prices has come as a shock to Canada's wider economy, but Albertans have become used to a boom-and-bust cycle. Alberta premiers have pledged for decades to diversify the province's economy and avoid having years' worth of infrastructure planning endangered by sharp drops in oil markets.

Prices have been falling for five months as major oil producers increased production to secure market share. The current slide picked up speed when the Organization of the Petroleum Exporting Countries refused to cut its output last month. Mr. Hirsch called the current tailspin the product of a "game of chicken" as OPEC seeks to drive Russian and American oil producers out of business.

With his ministers now scrambling to find cuts, Mr. Prentice took aim at OPEC's decision and followed in the well-worn path of his predecessors by calling for a move away from a reliance on oil.

"We cannot be in a situation where we watch OPEC on television to decide how many schools we can build or how many nurses we are going to have in our hospitals," he said.

The current situation follows a similar fall in oil prices after the 2007 financial crisis – and the series of coming layoffs will not be pleasant, warned Mr. Hirsch.

More than 10,000 contractor positions were lost in November as Alberta's energy sector began shedding part-time positions. With expansion plans now being shelved and some oil sands ventures operating at the edge of profitability, large-scale layoffs are expected to start in January.

Last year the Alberta government earned more than $9-billion in energy royalties, accounting for almost 21 per cent of the budget. For every $1 drop in the price of a barrel of oil, the Alberta government loses $215-million in revenue – over the past year the price of oil has dropped by $32.