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Alberta’s February budget hadn’t even been tabled before rising crude prices overwhelmed its cautious revenue outlook.

On Feb. 24, West Texas Intermediate closed at US$61.39 a barrel, more than a third higher than the budget’s $46 estimate for fiscal 2021-22. Four months on, oil prices have surged even higher – briefly touching a six-year high this week – driven by rebounding demand and the failure of oil-producing countries to agree on production increases.

That big, and persistent, gap points to a massive revenue upside for Alberta (and to a lesser extent, Saskatchewan and Newfoundland and Labrador). If current prices were to stick around for the entire fiscal year, Alberta could see a $6-billion increase in its non-renewable resource revenue, cutting its projected $18-billion deficit by a third.

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With the additional boost of the broader economy recovering more quickly than expected, the province’s deficit could be cut in half, says University of Calgary economist Trevor Tombe. Over the next three years, he estimates, Alberta could take in an additional $11.7-billion in revenues, if high prices persist. (That estimate also takes into account economic growth and exchange rates.) An additional piece of good news for the province’s coffers: The gap between Canadian and U.S. oil prices is holding steady, limiting the discount imposed on oil sands production.

Alberta has already enjoyed an early windfall, with the government disclosing last week that the 2020-21 deficit came in lower than predicted, in part because of higher-than-forecast oil revenues. Non-renewable resource revenue was C$3.1-billion, below the original budget estimate of $5.1-billion, but significantly above the updated forecast of $2-billion. There should be a clearer picture of where Alberta stands in the current fiscal year, when the province releases its first-quarter fiscal update at the end of August.

There is growing optimism about oil revenues in Saskatchewan, too. Saskatchewan Finance Minister Donna Harpauer told reporters this week that “oil prices are much stronger than what we predicted in the budget.”

However, the boost that Saskatchewan will get is smaller. In Alberta. every US$1 increase in the average price of crude over a full fiscal year produces an extra C$230-million in revenue. In Saskatchewan, the same increase in oil prices delivers just a $14-million upside. Newfoundland and Labrador is slightly higher, gaining $19-million for every US$1 increase in the year-long average for oil prices.

Still, that potential extra oil revenue would add up for Saskatchewan; over a full year, it would amount to $250-million, enough to cut the projected deficit of $2.6-billion in fiscal 2022 by a 10th. That relatively muted impact results in part from Saskatchewan’s fiscal prudence, Prof. Tombe says. The province moved to diversify its revenue sources, and to reduce expenditures, during the waning days of the Brad Wall government. That has left the Prairie province less exposed to the vagaries of energy price fluctuations.

In Newfoundland and Labrador, however, the situation is much different. Newfoundland’s budget has a much higher estimate for oil prices, in part reflecting the fact that it was tabled three months later, at the end of May. The Atlantic province forecast a US$64 average price for Brent crude in 2021-22. As a price-tracking graph published by the province shows, Brent has traded above that level for almost all of the current fiscal year. If current prices were sustained for the full year, Newfoundland would gain $179-million in resource revenue – erasing more than a fifth of its projected deficit of $826-million.

In an e-mail, Newfoundland’s Finance Ministry said an appreciating Canadian dollar – a predictable companion to rising oil prices – would offset some of those oil-revenue gains. For every one-cent gain in the loonie, Newfoundland loses $15-million, in part because it receives fewer Canadian dollars for oil exports, which are priced in U.S. dollars. In Saskatchewan, a one-cent rise in the dollar costs the provincial treasury $20-million. And in Alberta, with its much larger oil production, a one-cent increase reduces provincial revenue by $165-million.

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However, all three provinces were much better at forecasting the future of the Canadian dollar than oil prices. If Wednesday’s close of US79.6 cents were to persist, Newfoundland would lose only around C$7-million, and Saskatchewan would see revenue dip by $19-million. Alberta would lose the most, around $443-million, but that would still leave the province with billions in additional oil revenue.

All of those potential gains depend on the rally in oil prices being sustained and not just a speculative blip. A number of factors point to the increase in crude in recent months as being the start of a protracted run, says Michael Tran, an energy market strategist for RBC Capital Markets.

Oil prices could top US$80 a barrel later this year, and $100 oil is not out of the question, he said. “We remain of the view that we are in the early stages of a cycle.”

Both demand and supply factors are at work, Mr. Tran says. On the demand side, consumption of fuel is rebounding from the effects of the coronavirus downturn, accelerated by the arrival of the summer driving season.

Supply issues are also pointing toward a sustained increase in prices. First, the Organization of Petroleum Exporting Countries removed a “historic amount” of production from the market, he said. Talks earlier this week were aimed at restoring some of those production cuts, but fell apart.

U.S. oil-shale producers are keeping their own production curtailed, responding to pressures from investors who value sustainable profitability over simple growth in output. Most important, Mr. Tran said, are the consequences of a protracted period of depressed capital spending, which leaves relatively few major projects coming on stream to add to supply. “We’ve had a decade of underinvestment in the oil space,” he said.

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Tax and Spend examines the intricacies and oddities of taxation and government spending.

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