Oil rebound won’t fix Alberta’s finances
Without sales tax to fund current spending, the only option is significant cuts
Alberta Finance Minister Joe Ceci is still insisting the government’s books will be balanced by 2023, even after his latest fiscal update Thursday showed the province ended 2016-17 with a $10.8-billion deficit and $33.3 billion in debt.
I’ll have whatever he’s having because his fiscal reality — and that of the government’s — is clearly distorted.
No matter how you look at it, there’s little doubt the government continues to hope oil prices recover, bailing it out of the deep financial hole it continues to dig. Yet there is so much working against Ceci’s optimism.
The first, and obvious, place to start is with oil prices.
The combination of supply, demand, technology and what RBC Capital Markets, in a recent note, called “the financialization of oil markets” are affecting prices. And that’s before political issues are factored.
Those include NDP Leader John Horgan’s elevation to the premier’s office in British Columbia, Middle Eastern geopolitics and the recent shuffle in Saudi Arabia’s royal hierarchy that affirmed the kingdom’s commitment to economic diversification.
When it comes to B.C.’s new minority government, Premier Rachel Notley and Prime Minister Justin Trudeau are among those putting on a brave face, saying they look forward to working together in the spirit of co-operation. But Horgan has made no secret of his determination to frustrate progress on Kinder Morgan’s Trans Mountain expansion, even though the project falls under federal jurisdiction.
Alberta needs access to new markets for its crude oil and natural gas production. Without the confidence that pipelines will be built, significant investment dollars will not be committed to Alberta, especially by foreign players.
That’s not good for the economy. Nor is the fact the liquefied natural gas business is still hibernating.
Donald Trump has vowed to make LNG a priority south of the border. The worry, of course, is that with the U.S. moving faster than Canada there will be fewer opportunities for Canadian LNG to gain market share in developing countries.
Friday marked the end of the first half of the calendar year, and oil prices are off to their worst six-month start since 1998.
Prices closed Friday at US$47.92 a barrel for Brent crude and US$46.22 for WTI — declines of 15.5 and 14 per cent respectively since the start of the year. On a quarterly basis, both benchmarks posted their worst declines since the fourth quarter of 2015.
The weakness surprised many market watchers and experts. Data from the U.S. Energy Information last week showed oil stocks declining by 2.5 million barrels but it didn’t do anything to support prices.
The price swoon has sent the number jockeys back to their spreadsheets and price forecasts. The result, predictably, is anything but a clear consensus. Major banks, which had forecast year-end prices in the US$60 range have dropped their outlook to something closer to US$50. Goldman Sachs is predicting US$47.50 in the third quarter, while JP Morgan’s outlook is US$52.
All of this puts the Alberta government in an unpleasant spot.
It’s carrying a US$55 crude price forecast on its books, but WTI only averaged $49.89 over the first six months of 2017. With a growing belief that a Canadian interest rate hike is coming, the lift Canadian commodity players were getting on the currency translation from a weaker loonie is poised to diminish.
And things are not looking a whole lot better on that natural gas side, either.
While natural gas storage levels are below where they were at this time last year, they are still above the five-year averages in both Canada and the United States. The impact of this, is to put a lid on prices.
Low natural gas prices in the U.S. has lifted manufacturing activity, with $50 billion committed to new plants this year and next. Canada — and more specifically, Alberta — has yet to see a significant uptick of companies seeking to take advantage of the cheap supply, despite the fact Alberta natural gas is trading at a $1/per thousand cubic feet discount to U.S. production.
Which brings us back to the Alberta government’s pledge to balance its books by 2023.
That’s unlikely without increases in commodity prices, assurances on pipeline access and deliberate, significant and successful economic diversification.
All the magic at Hogwarts can’t deliver such a tall order.
Troubling is the fact there is no plan to bring the books into balance without some heavy lifting, or bold policy work. I’m not the only one tired of hearing the government of the day say they won’t establish a sales tax because Albertans don’t want one.
Without a sales tax to fund current spending, in the absence of a strong and sustained commodity price rally, the only option is significant spending cuts, which Albertans definitely don’t want.
Without a sales tax to fund budget commitments, Alberta remains hostage to policy — such as in B.C. — and opaque pricing objectives as controlled by OPEC, rather than taking control of its own destiny.
The government showed it was not afraid to lead on climate change policy and a carbon tax. The time has come to take the same leadership role in the context of a sales tax and seize control of the province’s fiscal and economic future.