A bright-yellow canola field and a pump jack create a classic summer scene in central rural Alberta, near Red Deer, Alta., July 11, 2011.Gregory Sawisky/The Canadian Press
Alberta is once again awash in petro dollars as revenues from rising oil prices and record land sales have handed the province a projected $2-billion windfall.
As the government delivered its first-quarter fiscal update, Finance Minister Lloyd Snelgrove said higher-than-expected revenues will slash the projected deficit to $1.34-billion for the fiscal year ending March, 2012.
The new figures underscore the diverging fiscal fortunes of the provinces, which are now divided into two camps: those that can count on natural resources for significant revenues, and those that can't. While Alberta and potash-rich Saskatchewan are on track to eliminate their deficits quickly, the finances of manufacturing-heavy provinces such as Ontario are proving harder to fix.
If those numbers hold, that would amount to a dramatic drop from the $3.41-billion deficit the government was projecting earlier this year.
The first-quarter projections rest largely on data compiled in late June and early July, before the world was rocked by new concerns over sovereign debt in Europe and the United States. The province has based its budget on benchmark West Texas Intermediate crude trading at $97.85 (U.S.) a barrel. The province's outlook for natural gas is unchanged at $3.45 (Canadian) per gigajoule.
A sharp increase in oil royalties and the sale of land rights for drilling helped boost the province's revenue by $2.7-billion, pushing its total projected revenue to $38.3-billion for the year. At $10.7-billion, non-renewable resource revenues account for nearly 30 per cent of Alberta's total provincial revenue.
However, with crude oil accounting for a large chunk of the province's revenues, a significant drop in oil prices brought on by a global recession would cause oil consumption to plunge, dragging down prices. But if oil prices stay high, the province could find itself deficit-free by year's end, Mr. Snelgrove said.
"There is a very real chance that at the end of this year we will be back in the black," he told reporters in Edmonton. But Alberta "is not immune from a global contraction," he added.
The province's assumptions drew criticism from rival provincial parties, who summarily criticized the Alberta government for basing its books on high forecasts for oil prices in an uncertain global economy. The Alberta government, which was criticized heavily a decade ago for concealing huge budgetary surpluses by basing its forecasts on conservative energy prices, now finds itself under fire for an outlook some consider far too rosy.
Crude oil for September delivery closed at $87.58 a barrel Wednesday on the New York Mercantile Exchange, up 83 cents. Oil futures have risen 16 per cent in the past year. However, prices have fallen 12 per cent since late July when heightened concerns about a debt crisis in Europe and the U.S. began to emerge.
The impact of the global upheaval, which has pushed down oil prices in recent weeks, will be reflected in the next fiscal update in November.
Concerns about an economic slowdown have trimmed global projections for oil consumption. Analysts expect oil prices will moderate in 2012.
"Recent market activity has been very volatile, with significant uncertainties remaining, including the state of the global economy and the possibility for a global economic slowdown," analyst George Toriola of UBS Securities wrote in a research note.
UBS forecasts average oil prices to be in the $95 (U.S.) a barrel range in 2011, and $87 a barrel in 2012. However those scenarios would change significantly were the economic problems in the U.S. and Europe to take a turn for the worse. In a recession, UBS expects benchmark crude to drop to an average of $85 a barrel, due to sagging demand. In a crisis, prices would drop as low as $60 a barrel.
Warren Lovely, an analyst with CIBC World Markets Inc. said the province has also been bolstered by record land sales. It notched a record $824-million sale in June when the drilling rights to more than 270,000 hectares around the province were auctioned off to the energy sector.
"The significant resource revenue improvement relative to [Alberta's]budget reflects strong land sales results, increased oil prices and stronger oil production," Mr. Lovely said in a research note.
"The revenue outlook remains volatile, but even with the more recent pullback in crude, Alberta looks to remain a growth leader within Canada. The province continues to attract very strong interest from bond investors," Mr. Lovely said in a research note.
The stronger Canadian dollar, which is trading above par with the U.S., partially offsets the benefit from higher crude prices and oil production, but does not have a major impact. However, fluctuations in the exchange rate "will add volatility to the outlook,"
With files from Josh Wingrove
Grant Robertson