The North American energy glut is exacting a growing toll on the treasuries of Canada's western provinces, as corporate spending and profits fall far below expectations.
With oil backing up behind full pipelines and Canadian energy companies selling their most lucrative product at large discounts, corporate earnings are tumbling far below expectations.
That is contributing to a shortfall for the Alberta government, whose resource revenues between April and September were $1.4-billion less than projected in the budget.
Alberta's quarterly fiscal update shows a provincial economy operating at two speeds. Even as corporate growth is stalling, workers are prospering – and consumer spending is soaring in a province where strong wages and abundant jobs continue to lure tens of thousands of people to move west.
The divergence comes at a time of uncertainty for the oil patch, which faces difficult commodity pricing, investor concern about higher construction and operations costs and a dimming outlook for ebullient growth plans. Natural gas prices, which have staged a modest comeback but remain stubbornly low, have taken a similar toll on the British Columbia economy, where deficits are rising.
Alberta Finance Minister Doug Horner's update showed corporate profit growth expectations have fallen to 2.3 per cent, barely above inflation and far below the 11.8 per cent predicted for the current fiscal year.
At the same time, retail sales are up 8.9 per cent this year, and total personal income is expected to soar 6.7 per cent. Unemployment is falling and Alberta has created 58,600 jobs so far in 2012.
The good times are drawing in workers: the last six months have seen 42,000 people move to the province, roughly half from other provinces and half from other countries. For the government, personal income tax is up slightly above expectations, while the past six months have, in an odd twist, brought in $520-million more corporate tax than expected – a 35-per-cent gain that the government attributed to the closing of tax loopholes on income trusts and partnerships.
But it's clear the outlook for the corporate sector is not good, a prognosis Mr. Horner blamed on energy prices that are sagging under the weight of full pipes and burgeoning U.S. crude production, which has produced substantial discounts for the price of Canadian oil, and which are in turn hurting provincial finances.
The province still expects a $2.3-billion to $3-billion annual deficit, the same number it gave out in its first-quarter update three months ago. But it continues to rely on oil price expectations that are more optimistic than markets. For example, average NYMEX futures through to the end of March show a West Texas Intermediate oil price of $86.91 (U.S.), and a Western Canadian Select heavy oil price of $59.41 (Canadian). Alberta is budgeting for $92.50 and $70, respectively.
Every $1 drop in oil prices strips $223-million from the province – so an over-estimate of $10 a barrel has consequences of more than $2-billion.
Mr. Horner pinned the problems on the difficulty Alberta oil producers have had in getting their oil to lucrative international markets, where prices are far higher than in the U.S., which is effectively Canada's only energy export market today.
"This isn't a good situation to be in, and it's costing us," Mr. Horner said.
B.C. faces similar headwinds. In an economic update Wednesday, B.C. Finance Minister Mike de Jong said the province is facing growing financial pain. Resource revenues have been a particular trouble spot, helping drive the province's deficit up by half-a-billion dollars so far this year.
With the slump in natural gas prices driving down production in B.C., royalties have dropped $241-million from the original budget forecast. Weak coal prices have helped deliver another $144-million hit to the province's coffers.
The broader weakness in resource revenues is creating pain across the West. In a research note, BMO Nesbitt Burns found that "fiscal balances in British Columbia, Alberta and Saskatchewan (before Growth and Financial Security Fund transfers) are now tracking a combined $2.3-billion below budget." That's equivalent to 0.4 per cent of GDP, BMO said.
The retraction in government revenues comes amid early signs of corporate retreat. This week, for example, CIBC Capital Markets analyst Andrew Potter lowered his production forecast for Suncor Energy Inc. by 5 per cent. Suncor has been arguably the most vocal oil sands company in cautioning that it expects to focus on costs rather than growth.
Ben Brunnen, chief economist for the Calgary Chamber of Commerce, has tracked $1-billion in reduced energy investment in the past six months. "And that's a bit of a leading indicator for the economic fortunes for the average Alberta household and consumer," he said.
At the same time, observers say Alberta continues to bank on sunshine – even as the storm clouds gather.
"There's an underlying optimism" driving provincial plans to take on debt for new infrastructure construction, said Bruce Cameron, a Calgary-based pollster. "The optimism is that we're going to weather this storm and we're going to come out and be in the midst of a boom – and if we stop building now, we're going to be behind the eight-ball once the boom really hits again."