Add the coronavirus to the economic risks faced by Alberta’s oil-focused economy.
In its budget for the 2020-21 fiscal year, the province is optimistically forecasting what it hopes will be slow but steady economic and job growth. At the same time, Jason Kenney’s government acknowledges it could be knocked off its game by an array of factors outside of its control – including the growing risk of a massive oil-demand slump posed by COVID-19.
As the virus spreads and slows international travel, trade and markets, the effect will be felt by governments around the world, including Canada’s. Alberta’s dependence on the global commodity is likely to make it one of the first to feel an economic pinch.
“The volatility is extreme, given the global uncertainty, particularly around coronavirus,” the province’s Finance Minister, Travis Toews, told reporters.
The past five years of economic doldrums in the province mark the slowest, most drawn-out recovery from a recession in recent memory, according to the budget documents released on Thursday.
In its budget for the coming year, Alberta’s United Conservative government forecasts the slow appreciation of oil prices over the next three years, and looks to the completion of three major pipeline projects to add more than 1.5 million barrels a day of export capacity by 2023. The United Conservative government also doubles down on the premise that its significant corporate tax cuts will increase investor confidence.
But uncertainties abound.
The Alberta government forecast that West Texas intermediate prices will average US$58 a barrel in Alberta’s 2020-21 fiscal year. On Thursday, the actual price was US$47, driven down in recent days by declining world demand linked to the emerging virus.
What might have been viewed as a reasonable forecast from the Alberta government just a few weeks ago now feels optimistic. Last year, China accounted for more than three-quarters of global oil demand growth. The International Energy Agency says the widespread shutdown of China’s economy means global oil demand is facing its first quarterly contraction in more than a decade. The agency has also downgraded its consumption forecast for the entire year.
Although Canada doesn’t sell any significant volumes of oil to China, the global demand slump and the corresponding impact on world oil prices could be a direct hit on Alberta government coffers. The government acknowledges, in budget documents, that coronavirus was an “unexpected development” that materialized after the 2020 budget forecast was finalized in mid-January.
“The government will continue to track these and other developments, and provide quarterly updates on the fiscal situation. Should risks persist and materially affect the revenue outlook, the fiscal plan will be revisited in light of the commitment to balance the budget by 2022-23,” it says.
Even without concerns about the virus, this year was set to be a struggle for getting increased oil production to market. The budget documents forecast a drop in bitumen royalties as the light-heavy oil price differential widens because of insufficient pipeline access. (It says the decrease will be partly offset by accelerating growth in income tax revenue).
There wasn’t any further public-sector spending cuts announced in this budget. However, Mr. Toews said if pipeline projects don’t go ahead, including the Trans Mountain pipeline expansion, his government might have to cut more than the 3 per cent over four years that it announced last fall.
Alberta posted 14 consecutive years of surpluses beginning in 1994‑95 because of its oil and natural gas riches. Now, the province is trying to reel back spending levels, and manage the effect of lower oil prices, limited access to global oil markets and federal policies that do not favour massive new oil sands or future pipeline projects. The 2020-21 deficit is estimated at $6.8-billion. Eliminating the deficit by 2023, and keeping the total debt well below $100-billion in the next several years, will still be a balancing act.
There are other parts of the budget released Thursday that economically stressed Albertans might view as overconfident, as well. The government says the province could return to what it calls “full employment” by 2023, forecasting that the unemployment rate will drop down to about 5 per cent in the next five years, from the current 7.3 per cent. But that government projection is more than 2.5 percentage points lower than what is forecast by the Conference Board of Canada.
The budget documents mention clean tech and diversification of the economy, but Mr. Toews makes no bones about the fact that the province’s economy is inextricably linked to oil. On that front, the government points to some hopeful signs, including that Canada Natural Resources Ltd. (CNRL) says the government’s tax cuts and the end to oil curtailment has motivated the oil sands giant to increase its 2020 capital budget by about $250-million over 2019 levels.
Still, the Finance Minister says any major returns on Alberta bitumen are several years out.
“We are not predicting a boom time, in the next few years.”