Hold onto your hats — and just be grateful you’re not this province’s minister of finance. Why?
Because, every year, the finance minister has to make an educated guess about where oil prices are going to be at the end of the fiscal year, and set his budget accordingly.
Two years ago, prices were lower than the province expected, and the financial plan slipped dramatically into deficit — scores of former provincial civil servants can tell you exactly what kind of an effect that ended up having on their own personal bottom lines.
This year, we’re still in deficit. But if U.S. Energy Department predictions are correct, Finance Minister Tom Marshall is going to have to come up with some even more interesting backflips if he hopes to get through next year and be back in a surplus position in time for the provincial election in 2015.
In last year’s provincial Sustainability Report, the government pointed out that, “Every $1 change in the price of a barrel of oil has a $26-million impact on revenue.” Likewise, “a one per cent change in the exchange rate impacts revenue by $27 million.”
Lately, the Canadian dollar has been weakening and that’s good for provincial coffers. In some years, as much as one out of every $3 in provincial revenue comes from oil, so changes in price affect the bottom line quickly.
But look out: while the government has been forecasting prices will hold steady around the $105-a-barrel range for the next two budgets, followed by an increase in price, the U.S. Energy Department’s Annual Energy Outlook 2014 Early Release Overview is pointing towards an almost 18 per cent drop in oil prices by 2017.
“The Brent crude oil spot price decreases from US$112 per barrel (bbl) in 2012 to US$92/bbl in 2017 in the reference case (in 2012 dollars), then increases to US$141/bbl in 2040 (or about US$235/bbl in nominal dollars) as growing demand leads to the development of more costly resources,” the report says.
That’s because of increasing oil production in some areas and rapid growth in shale gas natural gas production.
The same report suggests mammoth growth in U.S. natural gas production — it’s expected to increase by 56 per cent between now and 2040.
It’s certainly not what the province was banking on.
Taking into account predictions from four difference sources, the province said it was being conservative in suggesting that the $105-a-barrel price would hold.
The provincial government and the auditor general and almost everyone in the oil business repeatedly stresses the dangers of being a one-resource town; volatility, particularly in the short-term, is not only expected, it’s practically depended on.
But just imagine you had to plan a budget for your household, only to find as you closed in on the start of your budget year, that there might be 18 per cent less cash coming in.
It is the stuff that fiscal nightmares are made of.
And like it or not, when you’re the minister of finance, your nightmares have a way of waking up the whole province.