Varcoe: ‘We’re not going to panic’ — Alberta’s deficit deepens to $6.5B as oil prices sag, revenues fall

The see-saw effect of lower oil prices and a higher loonie is denting the bottom line of Alberta’s budget this year.

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It’s also causing another case of budget whiplash, courtesy of Alberta’s royalty roller-coaster picking up speed.

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In the government’s first-quarter financial update released Thursday, the province reported a sizable drop in resource revenue. The deficit is now projected to grow by $1.3 billion since the spring budget to $6.5 billion for the current fiscal year.

If that occurs, Albertans will have seen a nearly $14.8-billion financial swing between last year’s hefty surplus of $8.3 billion and this year’s expected red ink.

“I don’t think Albertans should panic, because we’re not going to panic. We’ve seen substantial surpluses. We’re in a deficit position now. There are a few things globally that aren’t going our way, but we’re leading the country in economic growth,” Finance Minister Nate Horner said in an interview.

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“We are going to look under every rock and make sure we aren’t a spending outlier everywhere, and protect government services.”

Total spending during the April-to-June period was slightly higher than forecast in the budget, while a $1.4-billion drop in resource revenue is now expected.

Oil prices have declined this year because of concerns surrounding rising OPEC+ production and U.S. tariffs reducing global energy demand. Benchmark U.S. oil prices closed Thursday at US$64.60 a barrel.

During the first quarter, the province also used about $1.5 billion of its $4-billion contingency fund, with $706 million allocated to emergency and disaster relief, such as fighting wildfires.

Add it all up and the fiscal year that ends next March is shaping up to deliver the largest deficit in five years.

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“The specific tariff impact between Alberta and the U.S. hasn’t been as dramatic as we planned for, but the overall global uncertainty through global tariffs . . . has shown us a challenge in a different way,” Horner said.

“That’s been through the price of oil and our strengthening dollar against the U.S. dollar. So, it’s come at us a little differently.”

For a province that relies on royalties for 23 per cent of its revenues, this is familiar, but treacherous, terrain.

The province posted hefty budget surpluses in the past four years totalling $28 billion, powered by strong energy prices and a population boom. Before that, it recorded a string of six consecutive deficits.

“This government simply doesn’t know how to manage the money that Albertans have given them to manage,” said NDP MLA Court Ellingson.

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In the spring budget, the province forecast that benchmark West Texas Intermediate (WTI) crude prices would average US$68 a barrel this year, but has pruned that figure back to $63.75. (It’s projected oil prices would need to average around $74 a barrel for Alberta to run a balanced budget.)

“We are price-takers in a global market,” said Calgary Chamber of Commerce CEO Deborah Yedlin.

“Albertans and our members will expect the government to be prudent, in terms of how it looks at the rest of the year from an expenditure standpoint.”

Every $1-a-barrel drop in WTI crude over the course of the year lowers revenues for provincial coffers by $750 million.

Ten years ago, that figure stood at $170 million. In 2005, it was just $99 million.

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With rising production and more oilsands projects shifting to paying a higher royalty rate, Alberta has become more vulnerable to fluctuating commodity prices.

“That sensitivity is only going to grow from here, potentially by the end of the decade reaching $1 billion to the government for every $1 per barrel change,” said Trevor Tombe, an economist at the University of Calgary’s School of Public Policy.

“That does mean more fiscal risks. But on the flip side, Alberta has got the strongest balance sheet in the country, and so it’s able to manage and carry those risks.”

In the first quarter, the price difference between WTI and Western Canadian Select heavy crude was smaller than expected, which helps the government’s finances.

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The differential was forecast in the budget to average $17.10 a barrel this year, but that has been lowered to $11.90. Every $1 decline in this light-heavy oil differential bolsters government revenues by $740 million.

A third complication for the province is the stronger Canadian dollar, which is forecast to average US72.5 cents, up from 69.6 cents in the budget.

A higher loonie reduces the value of Alberta’s oil and gas exports, crimping provincial revenues.

Heading into this year’s budget, the province was bracing for U.S. tariffs to be a drag on Alberta’s export-powered economy. Yet, more than 90 per cent of energy heading south is tariff-free, as it’s deemed compliant with the Canada-United States-Mexico Agreement.

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The provincial economy is forecast to expand by two per cent this year, up slightly from budget estimates. 

The problem with Alberta’s fiscal situation is that nearly a quarter of all government revenues come from oil and gas, which are highly volatile, while it faces gradually increasing expenses for public services, said Alberta Central chief economist Charles St-Arnaud.

“Some years, it’s great, we’re swimming in money. But this year, we’re not,” he said.

“Unless we’re willing to have what I would call the ‘adult discussion’ to reduce the volatility in our revenues, we’ll continue to have to play yo-yo with our deficit.”

Earlier this month, Premier Danielle Smith cautioned Albertans to “brace themselves” if a lower oil-price environment hits, as some forecasters have suggested.

Ellingson said people should be worried by the premier’s language suggesting spending cuts are likely to come to services that they require.

Horner said he doesn’t want to immediately react and change government spending to match oil prices, which means “we’re going to have to weather” some turbulence.

“Everyone talks about the oil roller-coaster and our reliance on non-renewable resource revenue. That’s very real,” he said.

“And we have to manage our surpluses well so that we can withstand some deficits.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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