Joe Anglin MLA
RIMBEY-ROCKY MOUNTAIN HOUSE-SUNDRE
Alberta’s largest customer and the world’s largest consumer of crude oil, the United States, announced today that its crude oil inventory storage levels stand at approximately 60 per cent, or 80-million barrels above last year’s levels. At this production and storage pace, inventory levels south of the border are set to reach an all-time high in 2015. The U.S. oil inventory (supply) levels are significant for Alberta’s economic out-look. Simply stated as the supply of oil rises – prices drop! While no one can accurately predict the future price for a barrel of oil, rising oil inventory levels in the U.S. signals a drop in Alberta’s oil revenues.
Oil companies that prepared for a drop in price will suffer through lower oil prices, as many have done in the past when the price of oil collapsed. Those companies that did not prepare for a drop in oil prices will suffer the most. In some cases they will not survive if the price remains low for any length of time. Eventually their assets become a buying opportunity for the more astute companies. Such is the way of the free market!
Watching the free market mechanisms function may be interesting for the employed economic spectator, but it does little to ease the stress and strain on the individual worker standing in the unemployment line. Unemployment and drop in business activity, particularly small business activity, is a serious problem for Alberta’s economy. Alberta’s government could very well learn from the companies that prepared for the drop in oil prices when it introduces this month’s budget.
Many companies that prepared for the lower oil prices did so by hedging their position. They trimmed capital (inefficient) spending, and hedged the price of oil. Hedging the price of oil is a market strategy that companies use to protect their investments from a drop in the price of oil. It’s a market strategy the Alberta Government has never used and no one can explain why. As the Prentice government roles out its austerity budget this month, Finance Minister, Robin Campbell, needs to explain why we don’t hedge our resource (oil) revenues to protect taxpayers from a drop in oil prices. Had the Redford government employed hedging strategies in last year’s budget, we would not be talking about a $7 billion dollar budget deficit today. If the Prentice government hedges its oil revenues in the forthcoming budget, thereby locking in the price of projected oil revenues, further risk of a budget deficit can be avoided.
Alberta’s economy is extremely fragile right now. By all indications, private sector unemployment is expected to rise as the price of oil drops or remains low for any length of time. If this month’s proposed 2015 austerity budget fails to lock in the price of oil (hedge), and unnecessarily exacerbates unemployment, this failure could be the catalyst for a recession. It’s time this government hedged its resource revenue, stabilized its budget and stopped gambling with the economy.