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The Syncrude Canada Ltd. upgrader plant of the company's mine stands at dusk in the Athabasca Oil Sands near Fort McMurray, Alberta, Canada, on Tuesday, June 2, 2015.Ben Nelms/Bloomberg

Faced with a collapse in energy prices, widespread drought, forest fires and the uncertainty of an untested government, the engine that drove much of Canada's growth over the past decade has seized. Alberta's economy is expected to contract this year.

"I think it's inevitable that Alberta will be in a contraction this year," said Todd Hirsch, the chief economist for ATB Financial. "In 2016, I'm still optimistic we can squeeze out a very modest recovery. But this province won't feel like it normally does until 2017 at the earliest."

Apart from a devastated energy sector, the provincial government has declared a provincewide agricultural disaster. After weeks of near-record drought, fields of parched grain can be found across much of Alberta. The Agriculture Financial Services Corp. now expects to pay out as much as $1-billion to struggling farmers. Although most of Alberta's farmers have crop insurance, the provincial agency will use the money to ensure the speedy compensation of farmers for lost crops and revenue.

At the same time, dry weather gave rise to an early fire season in Alberta that has burnt 493,000 hectares across central and northern areas of the province – a burn area nearly twice the five-year average. A final price tag for the 1,646 fires seen across Alberta so far has yet to be determined.

The struggling economy will have a huge effect on the government's finances.

The provincial budget deficit could be the largest in nearly two decades, topping $8-billion if oil prices remain low, according to John Rose, the City of Edmonton's chief economist. That would complicate Premier Rachel Notley's campaign promise to increase spending on health and education while balancing the books by 2018.

"It's turning out worse than I expected," said Mr. Rose, who warned of a significant slowdown in the provincial economy last December. "My forecast for 2015 was predicated on oil holding around $60 a barrel through the year. Things have gone awry."

Mr. Rose expects that the Alberta economy will contract by 1.5 per cent this year.

Businesses across the province have been nervously eyeing the price of oil. A barrel of U.S. crude oil closed at $39.31 (U.S.) on Tuesday and most oil exported from Alberta faces a steep discount from that price. The province's Wildrose opposition has noted that a barrel of Alberta's oil is now cheaper than a case of beer.

Former premier Jim Prentice introduced a budget in late March that forecast the province would run a $4.9-billion deficit in 2015. The Progressive Conservatives had assumed a barrel of U.S. crude oil would average $54.84 (U.S.) in 2015 and that Alberta's Western Canadian Select heavy crude would fetch $46.33 (Canadian).

Alberta Finance Minister Joe Ceci has asked ministers to find duplication and inefficiencies in their ministries as he works toward a budget due in late October.

"Everyone knows our economy is energy-driven, and lower oil prices are putting a strain on families' pocketbooks. Our focus is on jobs for Albertans and protecting the public services that they need," Mr. Ceci's spokeswoman, Marion Nader, told The Globe and Mail.

While Mr. Ceci said in early August that he anticipated a deficit of about $5.4-billion, Ms. Nader could not release a more recent estimate for the expected size of the province's shortfall. She said that the fiscal situation would start to be clearer after the province released its first-quarter numbers on Aug. 31.

According to Mr. Hirsch, oil will need to climb above $60 a barrel for the provincial books to recover. He added that it was unlikely Ms. Notley could balance the budget by 2018. "It would be an enormous challenge and probably one that isn't worth the political risk," he said.

Both Mr. Rose and Mr. Hirsch said the government should consider spending more on infrastructure projects at a time when the weak economy has reduced costs.

"This is exactly the right time for these kinds of projects," Mr. Rose said.

Former Bank of Canada governor David Dodge is currently working on an infrastructure plan for Ms. Notley's government that is expected by the end of the summer.

"The minister's priority is ensuring that people have good work in these times," Ms. Nader said. "While we are seeing tougher conditions, we still have significant room to grow our economy by driving innovation and diversifying our economy by investing in infrastructure."

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