By Scott Hennig,
While the recent drop in the price of natural gas and oil may help ease the pocketbook-pain of motorists and homeowners, it is going to inflict pain on the provincial treasury. The reason is quite simple – the lower the price of oil and natural gas, the less money the government collects.
With petroleum prices dropping back to earth, and oil sands and upgrader projects being shelved, the provincial government could be looking at stagnant or even falling revenues for Budget 2009. While the government has no control over the world or North American prices of these commodities, it still has to deal with the consequences.
Falling prices would not cause much of a problem if resource revenues were a small portion of all government revenues, but they are not. Last year, royalties from oil and gas revenues made up 29 per cent of all provincial government revenues, down from 32 per cent the year prior and 40 per cent the year prior to that.
To put this into context, provincial income taxes were only 22 per cent of provincial revenues last year, 20 per cent the year prior and 13 per cent the year prior to that. However, the recent upward trend in these revenues has been assisted by a booming oil patch.
Beyond year-to-year bounces in resource revenues, oil and gas prices in the first seven months of this fiscal year have seen more volatility than an Oilers/Flames hockey game.
Oil prices hovered around $100US/barrel in April, and then shot up to just under $150US in early July, only to come crashing down to just above $60US in late October. Similarly, natural gas prices hovered around $8/GJ in early April, jumped to over $11 in mid-June, cratered to below $6 in mid-September, and have slowly climbed to around $7.
The impact of a $1/barrel decrease in the yearly average price of oil is a $130-million loss for Alberta taxpayers. For example, had the government budgeted oil to be $100/barrel (as some critics demanded) when it really ended up being $70, the province would be short $3.9-billion – roughly equivalent to the entire advanced education budget for this year.
Thanks to the changes to royalty rates, next year the Alberta government will be even more susceptible if prices swing wildly. In 2009-10, a $1/barrel decrease will result in a $211-million loss. Under the above example, that means the province would be short $6.3-billion – roughly equivalent to the entire K-12 education budget for this year.
And that’s just oil.
A $1/GJ decrease in the price of natural gas is a $1.14 billion loss for the government this year and a $1.66 billion loss next year.
The finance minister has claimed that everything will be okay with this year’s budget thanks to many months of oil and gas being priced higher than expected.
However, if resource prices continue to stay low the government may not be able to maintain its torrid pace of spending for Budget 2009. In fact, increasing spending (without dipping into savings) may be completely out of the question next year.
A recent Ipsos-Reid poll questioned Albertans on what they would prefer their provincial government do if revenues dip: raise taxes, cut spending or run a deficit.
Only 14 per cent supported raising taxes. This is a good sign for those looking forward to the elimination of Alberta’s regressive health care premium tax on Jan. 1.
While running a deficit would – thankfully – be illegal under provincial law, only 20 per cent supported that idea anyway.
An overwhelming 73 per cent of Albertans supported cutting provincial spending. This should be no surprise as Alberta spends, per capita, by far the most in the country – so there’s certainly room for cuts.
While there are many factors at play that make future revenues uncertain, what is certain is that Albertans will not accept their provincial government raising taxes or running deficits. The polls say Albertans are prepared for spending cuts. Hopefully our provincial politicians are as well.