After a dramatic jump in Alberta’s projected deficit this year, critics are slamming the Reford government’s forecasts for oil and gas prices as far too rosy – arguing it is an unwelcome departure from the practices of past governments, which managed volatile commodity revenues by preparing for the worst.
Premier Alison Redford’s government is scrambling to explain the gaping discrepancy between the energy price projections in its budget 12 months ago and the third-quarter update earlier this week that showed a shortfall this fiscal year of up to $4-billion.
Reliant on oil and gas for about 30 per cent of its revenues, the Alberta government places almost all of the blame on lower-than-expected land sales and prices for natural gas and oil that came in at less than predicted. For instance, in its budget last February, it pegged the price of North American crude, a benchmark for revenue projections, at an average of $99.25 for the fiscal year, but had to revise its expectation in the update to $91.82. A wider-than-expected gap between Alberta’s abundant heavy oil and other North American crude has compounded the problem, it says.
Energy price predictions by Alberta governments have not always been spot-on. However, the Official Opposition says the Progressive Conservatives have lost their way from the Klein-era budget forecasts, which regularly predicted revenue on the low side.
“Year after year after year, they managed to get surpluses. They were obviously doing something different than this current government is doing,” Wildrose Leader Danielle Smith said. “They would go out and get a number of forecasts from the most credible analysts, and then they would choose the lowest amount.”
For instance, in the 2006 budget – the year premier Ralph Klein left office – the government chose an oil price near the low end of an average of energy price forecasts from banks, analysts and national forecasting agencies. Forecasters, on average, pegged West Texas intermediate at $59.92 U.S. per barrel. The Klein government used $50 a barrel as its budget estimate.
This strategy was criticized by groups who wanted the Klein government to spend more on health, education and social programs. A report from the left-of-centre Parkland Institute in 2006 said revenues were underestimated in almost all of Mr. Klein’s 13 years in office.
In contrast, the Redford government’s oil forecast the February, 2012, budget was just a notch lower than the average of all the estimates.
Ms. Smith said the Klein strategy was better because a more conservative forecast meant surpluses instead of deficits when oil or gas prices confounded predictions. “That’s the approach that you have to take when you have such wild variations over the course of a year.”
However, Alberta Finance Minister Doug Horner said no one expected Bakken oil production in the United States, which competes for pipeline capacity with Alberta exports, to ramp up as quickly as it has in the past 12 months. He said there is a different mix of energy revenues compared to the Klein days, when natural gas ruled – and the province is now much more dependent on revenues from the oil sands. He said the government has not changed the way it forecasts the price of oil.
“We took the mid-range, which is what we’ve always done,” Mr. Horner said in an interview on Wednesday.
Ms. Smith said she would like to say the government will make better predictions in its new budget coming up on March 7, but she doesn’t believe that will be the case.
Last year, energy companies were forced to change their projections too. By May, 2012, Suncor Energy Inc. officials said they expected to sell oil for $10 to $15 per barrel less than their earlier WTI forecast of $95 per barrel.
Michael Moore, an energy economics professor at University of Calgary, said that in any resource based economy, the swings of commodity prices are outside government control. He said the Redford government is like any other jurisdiction in North America: “They’re using the most optimistic projection that they can.”
Judith Dwarkin, chief energy economist in Calgary for ITG Investment Research, said forecasts are never realized, but “the onus on [the government] is to be realistic.”
Ms. Dwarkin added “the deficit is a function of both spending as well as revenues … this is just a piece of the picture.”
To Wildrose, the reason the government numbers last February have not matched reality is “an overhyped and overinflated” platform in last April’s election. Facing damning polls and a raft of political controversies, the Progressive Conservatives pulled out all the stops, promising no deficits, no new taxes – but also pledging oil-sands technology research, dozens of new schools and 145 new family health-care clinics.
So far, resource revenues are $2.4-billion under forecast.
“I would have to say that nobody in the industry, nobody in other governments, saw this revenue issue coming as fast and as hard as it has come,” Mr. Horner said.Report Typo/Error