Oil price plunge scary for Saskies
Impact of a prolonged slump
While not as dire as the impact on Alberta’s energybased economy, plunging petroleum prices could make a big dent in Saskatchewan’s economy and the province’s finances this year.
It all depends on how deep oil prices plunge and how long they remain submerged, but some analysts believe that an extended price drop could be damaging, if not disastrous, for energy-dependent economies, like Saskatchewan’s.
Of course, no one knows how long or deep oil prices will plummet. We do know that since June, when a barrel of West Texas Intermediate crude peaked at $107 US, the benchmark WTI price has fallen 22 per cent in less than four months.
The current price in the low $80s US is considered below the cost of production, which is closer to $90 to $95 US per barrel, according to BMO Capital Markets. Consequently, they say, prices shouldn’t stay this low for long.
But they could stay in the $80 US range for a couple of quarters, given the glut of oil on world markets and the gloomier global economic outlook. That said, what would be the impact on Canada and, more importantly, Saskatchewan?
First of all, Canada is a major net exporter of crude oil, with the energy sector contributing 22 per cent of all non-housing capital spending. So sharply lower oil prices are generally seen as a negative for the Canadian economy.
However, there are some positives. Consumers benefit from lower prices and non-oil producing companies may enjoy more sales due to the lower Canadian dollar. Overall, the negatives slightly outweigh the positives, which could trim Canadian GDP growth by 0.2 per cent in 2015, BMO says.
Regionally, the beneficiaries and victims vary widely. Ontario and Quebec manufacturers would benefit from the lower loonie and stronger U.S. demand, while Alberta and, to a lesser extent, B.C. and Saskatchewan could see their economic growth trimmed if oil prices remain depressed.
Naturally, Alberta has the most to lose, as energy is still the key driver of the provincial economy. The fourmonth slide in prices has already caused some projects to be postponed and the province’s treasury could see a $2-billion cut in revenues for every $10 US drop in WTI.
Here in Saskatchewan, the impact is not as dramatic, as the oil sector accounts for about 20 per cent of GDP, while oil royalty revenues account for about 13 per cent of provincial revenues, or $1.6 billion out of total revenues of $11.9 billion.
According to the provincial finance ministry, a $1 US change in WTI price equals a $20-million change in royalty revenues, so $10 per barrel price drop would amount to a $200-million hit to the provincial treasury — so roughly one-tenth of the financial impact that Alberta’s treasury would sustain.
“Pound for pound, Saskatchewan would likely be hit somewhat less hard” than other energyproducing provinces, despite the fact the province was forecasting $99.89 US per barrel WTI — nearly $20 US above the current price, BMO says.
But here’s the rub. Alberta’s economy, which was projected to grow by 3.7 per cent this year, could see its growth clipped to 3.5 per cent in 2014 due to the slump in oil prices. Saskatchewan, which was hoping to post 2.2 per cent GDP growth in 2014 — less than half the 4.8 per cent growth posted last year — is now expected to post a paltry 1.0 per cent growth this year. And that was before the slide in oil prices.
BMO attributes the precipitous drop in economic growth to Saskatchewan’s significantly reduced agricultural production this year, versus the bumper harvest last year. In fact, the change from a record crop of 38.4 million tonnes in 2013 to a “more normal crop” in 2014 could chop 1.5 points off Saskatchewan GDP growth this year, BMO says.
Could a prolonged slump in petroleum prices push Saskatchewan into zero or even negative growth in 2014, or even (gasp) a recession? BMO isn’t saying, although it’s unlikely this late in the year.
One thing is for sure, the bean counters in the Ministry of Finance will be burning the midnight oil trying to keep the budget balanced.
Meanwhile, enjoy filling up your SUV with the lowest gas prices in months.