Alberta’s economy and its politicians live and die with the fickle ebb and flow of oil prices.
You could almost hear the provincial NDP holding its breath as the price of West Texas Intermediate, the North American benchmark price, slowly edged up to around $65 per barrel, which is almost 50 per cent higher than where it was a year ago.
It’s easy to see why: the political survival of Alberta Premier Rachel Notley and her government could well depend on that rise.
Jason Kenney and his opposition United Conservative Party have been hammering the NDP over the growing debt being wracked up in Alberta.
It is a deepening fiscal and political hole that the NDP will only be able to fill with billions more in petro-dollars, cash that won’t appear unless the price of oil continues to go up.
With less than a year before Albertans go to the polls, the rising price of WTI could help the government pull off what it hasn’t been able to so far — balance the budget.
When Notley’s NDP took office in May 2015, the price of oil was hovering around $60 a barrel. Nine months later, a barrel of West Texas Intermediate was selling for less than $30.
That $5 billion gap in revenue contributed to a more than $6 billion deficit in the government’s first year, something that didn’t sit well with many Albertans, who like to see themselves as fiscally conservative.
The unease with the deficit seems to at least in part be reflected in recent polling data, which shows fewer than a third of Albertans support the ruling NDP and 58 per cent want to see a balanced budget.
As the price of oil recovers and that balanced budget becomes more possible, says Mount Royal University political scientist Lori Williams, the change in economic conditions could help shift the political fortunes of the provincial government.
“A short-term deficit with a realistic plan to balance or at least move in the direction of reducing the deficit will generate a little bit more tolerance for the deficit,” she said.
So with that in mind, a look at where the price of oil could be headed and what it could mean for Alberta’s finances makes sense.
First, let’s be clear, predicting prices in the volatile world of oil and gas is nearly impossible. And pinpointing their impact on the provincial bottom line is hardly an exact science.
This year, about $2.8 billion is expected to flow into the treasury from the sale of bitumen and crude based on an average price of $59 US per barrel for West Texas Intermediate over the fiscal year.
Kevin Birn of IHS Markit doesn’t see $100 oil any time soon, but he does believe the price could continue to rise.
Birn believes that oil prices will likely “fluctuate around the $70 mark” this year, although he says $80 oil is certainly a possibility.
The province says that for each dollar the price of oil rises, $265 million makes its way into the provincial treasury.
To put that in perspective, all things being equal, if a $65 US price holds for the year, the $8.3 billion provincial deficit would shrink to $6.7 billion (all deficit numbers in Canadian currency).
If the average price for the year were to rise to $75 US — not impossible since it touched $70 just last month — the deficit shrinks again to $5.1 billion. At $85 US per barrel, the deficit becomes just $2.45 billion.
Using just this single variable, Alberta’s budget would balance with a WTI price of around $91 US per barrel averaged out over the fiscal year.
Explore oil prices over the past calendar year with the interactive graph below:
Can’t see the graph? Click here for a version that should work on your mobile device.
Birn doesn’t expect the price of oil to rise that high and warns there is always the possibility of “downside risk” to oil prices, given recent trade rifts that could slow global economic growth.
There are also many other variables at play when calculating the impact that rising oil prices could have on the province’s budget.
One important consideration is the difference between the price paid for light and heavy oil, known as the differential.
Much of Alberta’s production is heavy oil from the oilsands, which is more expensive to refine and is sold at a discount. This price is known as Western Canada Select. The difference between it and WTI is the differential.
The provincial government has assumed that the differential for this fiscal year will be $22.35 US a barrel, meaning that Alberta producers will get that much less for each barrel of oil they sell compared to other producers.
This gap is often called the “bitumen bubble,” and the finance department assumes that for each dollar this differential goes down, the provincial government will get an extra $210 million in revenue.
So far, in the first two months of this fiscal year, that differential has been about $17.40 per barrel, about $5 lower than expected. If that price holds, you can knock another billion dollars off the provincial deficit, and the budget would balance at an annual average of around $87 US per barrel.
But University of Calgary economist Trevor Tombe says that number likely isn’t entirely accurate either.
He points out that as the price of oil rises and more Alberta bitumen and crude is sold, both the value of the Canadian dollar and interest rates will almost certainly rise, costing the province hundreds of millions of dollars.
Tombe says “all of these things are very closely interrelated,” so just looking at the change in the price of WTI doesn`t give an accurate sense of what the provincial deficit will be.
Add to that, increases in corporate and income taxes that would come along with higher oil prices, and, Tombe says, it is extremely difficult to pinpoint precisely how high the price of oil would have to rise to balance Alberta’s budget.
Once all of those factors are considered, an average WTI price of around $80 per barrel over a full fiscal year “starts to get into the right ball park” as far as balancing the budget, Tombe said.
Whether that number is attainable this year is almost impossible to predict, but it is likely a long shot.
The same could also be said for the provincial NDP’s chances of re-election, if the price of oil doesn’t continue to rise.
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Sherwood Park is a large hamlet in Alberta, Canada within Strathcona County that is recognized as an urban service area. It is located adjacent to the City of Edmonton’s eastern boundary, generally south of Highway 16 (Yellowhead Trail), west of Highway 21 and north of Highway 630 (Wye Road). Other portions of Sherwood Park extend beyond Yellowhead Trail and Wye Road, while Anthony Henday Drive (Highway 216) separates Refinery Row to the west from the balance of the hamlet to the east.
Sherwood Park was established in 1955 on farmland of the Smeltzer family, east of Edmonton. With a population of 70,618 in 2016, Sherwood Park has enough people to be Alberta’s seventh largest city, but technically retains the status of a hamlet. The Government of Alberta recognizes the Sherwood Park Urban Service Area as equivalent to a city.
Sherwood Park, originally named Campbelltown, was founded by John Hook Campbell and John Mitchell in 1953 when the Municipal District of Strathcona No. 83 approved their proposed development of a bedroom community east of Edmonton. The first homes within the community were marketed to the public in 1955. Canada Post intervened on the name of Campbelltown due to the existence of several other communities in Canada within the same name, so the community’s name was changed to Sherwood Park in 1956.
The Sherwood Park Urban Service Area is located in the Edmonton Capital Region along the western edge of central Strathcona County adjacent to the City of Edmonton. The majority of the community is bound by Highway 16 (Yellowhead Highway) to the north, Highway 21 to the east, Highway 630 (Wye Road) to the south, and Anthony Henday Drive (Highway 216) to the west. The Refinery Row portion of Sherwood Park is located across Anthony Henday Drive to the west, between Sherwood Park Freeway and Highway 16. Numerous developments fronting the south side of Wye Road, including Wye Gardens, Wye Crossing, Salisbury Village and the Estates of Sherwood Park, are also within the community. Lands north of Highway 16 and south of Township Road 534/Oldman Creek between Range Road 232 (Sherwood Drive) to the west and Highway 21 to the east are also within the Sherwood Park urban service area.