Trouble in Eden

Falling oil prices cause havoc in Canada’s fiscal promised land

Trouble in Eden

For years the Alberta government downplayed its surplus forecasts by lowballing the price of oil, permitting an end-of-year bunny-from-the-hat routine—surprise, oodles of cash!—that finance ministers relished. But last August, as oil enjoyed its precipitous summertime climb—it peaked in July at US$148 a barrel, with some anticipating a near future of $200 oil—Finance Minister Iris Evans decided she should play a little fairer. She revised an earlier reckoning (a tidy surplus of $1.5 billion, calculated on $78 oil) to $8.5 billion, based on a less conservative estimate of US$119.25 per barrel. Now, with oil hovering around US$50, Evans likely wishes she’d left the bunny deep inside her hat.

Last week, she had to revise her forecast again, pegging the surplus at just $2 billion, a $6.5-billion tumble in three months. Analysts don’t see oil rebounding soon. Few in Alberta’s government have ever experienced a two-year slump. “The last time that happened was in the early 1980s,” says analyst Martin King, of FirstEnergy Capital Corp.

The province has meanwhile committed to an orgy of spending—$37 billion in last April’s budget, up almost 10 per cent from the previous year. So spooked are Albertans that many want the province to delay the $2 billion it committed to carbon sequestration technology, the backbone of Premier Ed Stelmach’s campaign to clean up Alberta’s “dirty oil” image. The commodities slump also means Alberta won’t this year contribute to the Heritage Fund, a savings plan designed for when its dwindling conventional oil and gas reservoirs run dry. Worth just $15.8 billion today despite having been created in 1976, it’s already lost $1.2 billion in six months due to the global financial meltdown.

Alberta’s current spending habits, combined with waning energy revenues, will put the province into deficit in as little as five years, says a report prepared by a government-appointed commission led by University of Calgary economist Jack Mintz. Released last Wednesday, the report says the province must boost the Heritage Fund to $100 billion by 2030—otherwise it risks having to raise the average tax rate a crippling 40 per cent over the next 15 years to make up the difference in shrinking oil patch kitty. That Mintz submitted his findings back in January suggests how anxious the government has been to make them public.

Still, last week was as odd a time as any. Also on Wednesday, Stelmach boldly lowered the royalties Alberta was to charge oil and gas companies, a move aimed at stimulating economic growth now that drilling has declined. The premier had unveiled new, higher royalties just over a year ago when commodity prices were soaring. Now the framework has been tweaked again, reducing Alberta’s take from some new conventional wells for five years (oil sands and existing wells aren’t affected by the changes). Then, early this week, he fiddled again, moving up the date for the weakened levies from Jan. 1 to Nov. 19 because companies had been madly cancelling rig contracts to wait for the more attractive royalties.

Critics say all this makes Stelmach look erratic. Worse, because the higher royalty rates had never actually taken effect, the province never reaped the rewards of run-up oil. Has Alberta missed the oil tanker entirely, then, with prices off $100 from July? “It was $50 a year ago—come on, man, we were growing like crazy then!” says Regional Municipality of Wood Buffalo Coun. Mike Allen, of Fort McMurray. Allen, who runs a musical instrument shop catering to oil sands workers, had one of his best months ever last month, slump or not. Confused? So, very likely, is Stelmach. But steering Alberta through swelling, falling oil is like performing sleight of hand on the high seas. Sooner or later, the rabbit gets sick.

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