The Alberta government slashed its oil price forecast for the fiscal year by eight per cent as crude prices tumble around the world, and indicated that it may be forced to cut spending to keep its budget in the black.
The provincial Progressive Conservative party now expects a barrel of oil to trade for an average of $75 (U.S.) for the rest of the fiscal year ending next March, according to the fiscal update that was released Wednesday.
The lower oil price assumption reflects a sharp drop in oil markets in recent months, as fast-rising production in the United States adds to a global surplus that shows few signs of relenting any time soon.
The suddenly weakened oil market presents a major challenge for Alberta’s new Premier, Jim Prentice, who vowed to keep Alberta out of deficit and start shifting the province away from its long-held reliance on healthy oil prices in order to keep government revenue flowing.
“We will keep the budget balanced this year through discipline and careful financial management,” Mr. Prentice said in a statement Wednesday.
“With lower oil prices forecast for the second half of the year, we will make the fiscally responsible decisions to keep government operating in the black while addressing infrastructure needs as Alberta continues to grow.”The fiscal update marked Mr. Prentice’s first chance to put this stamp on the government’s budget and spending plans. Robin Campbell, Alberta’s Minister of Finance, said Mr. Prentice laid out another priority: “We have to get off the oil train.”
“We have to get to a position where we’re not listening to OPEC to decide on how many schools we’re going to build,” Mr. Campbell told reporters after the fiscal update was released. “We need to get to the point where we have a budget that is not based on the price of oil.”
Leaders did not elaborate on how they hope to diversify the province’s revenue to reduce the reliance on oil.
Revenue from Alberta’s energy sector, derived from production royalties, corporate tax, leased land and other means, generally accounts for about 25 per cent of the province’s total revenue. Mr. Campbell said the Tories want to write budgets that allow the government to pay down debt, save money or consider additional infrastructure when the price of oil is strong, but not be forced to cut spending and programs when crude drops.
Alberta now calculates oil will average $88.88 a barrel for all of fiscal 2014-16. In its first-quarter updated delivered in August, the province assumed oil would average $96.69 a barrel for the fiscal year. The original budget called for an average of $95.22 a barrel.
Private-sector forecasts call for oil to remain under pressure next year. The 2016 outlook for oil is $76 a barrel, according to data collected by ARC Financial Corp. Crude closed Wednesday at $73.69.
Alberta expects this year’s surplus to drop to $933-million (Canadian), down from $1.1-billion in its original budget.
Robert Kavcic, senior economist at the Bank of Montreal, noted Alberta will struggle to a way to diversify its revenue.
“They’ve been talking about it as long as I can remember. It’s just the nature of the game. It’s an oil-driven economy,” he said. “You can diversify into other areas like retail and housing and different areas of manufacturing, but at the end of the day it’s all tied directly, or very closely, to the energy sector.”
The price of oil has dropped about 30 per cent since June, creating challenges for the province’s longer-term finances. “While we remain financially on track for this year, the recent and significant drop in oil prices reinforces the need to be fiscally prudent and responsible,” Mr. Campbell said in a statement. “We will protect our financial position and ensure we are delivering government services efficiently and effectively.”
Mr. Campbell did not provide a specific example of what action the government is considering to make up for reducing oil price expectations in its new budgeting strategy. “We need to talk about that,” he told reporters. “I haven’t even really sat down and talked to ministers or departments about the budget next year. Right now, we’re looking at everything we can do to become more efficient, reduce costs and be more productive within the civil service.”
He ruled out creating a provincial sales tax.
With files from reporter Jeff Lewis in Calgary.