Deficit or surplus? Alberta budget on ‘knife’s edge’ amid sluggish oil prices

Slumping oil prices are bringing some relief for drivers filling up their gas tanks this winter, but they’re also delivering a financial hit to some provinces as they prepare their next budgets — notably Alberta.

Oil prices have fallen by almost 40 per cent since reaching a high of more than $120 US per barrel in 2022. Oil was trading at more than $90 in September, but this week, prices have fluctuated in the low $70s (all figures in US dollars).

The Alberta government wraps up public consultations on its next budget this week, and experts aren’t sure whether the province will be able to balance its books when the next budget is unveiled in February.

Alberta is on a “knife’s edge,” said University of Calgary economics professor Trevor Tombe, as it’s too hard to predict if the province will project a budget surplus or deficit for the next financial year.

“If we go into this coming fiscal year starting April 1 with $72 per barrel, that might put the government into a situation where they either have to revise their spending plans or face a modest deficit,” he said in an interview.

The price of $72 is likely the province’s break-even point right now, Tombe said, considering the government’s own financial projections. Every $1 change in North American oil prices brings a $630-million impact to Alberta’s bottom line.

“There’s a big difference between the mid 70s and the low 70s, and that’s got to be what’s occupying the government’s mind right now,” he said.

Sagging oil prices have helped lower the rate of inflation in Canada, and most economists are forecasting that commodity prices will remain relatively unchanged for the rest of 2024.

National Bank of Canada chief investment officer Martin Lefebvre told CBC News on Thursday that he expects an average oil price in the range of $65 to $80 per barrel.

Other recent predictions for the price of West Texas Intermediate — typically regarded as the benchmark for crude oil — include $65 by Morningstar DBRS, $72 by Deloitte Canada and $75 by ATB Financial.

“Pretty steady, to be honest,” Robert Kavcic, senior economist with the Bank of Montreal, said about the price of oil in 2024. “We don’t see a whole lot of movement.”

Balancing the books

Alberta collected a petro-powered surplus of $11.6 billion in the 2022-23 budget year and was on track for a $5.5-billion surplus this current fiscal year, which ends on March 31.

“If they’re really tied to a balanced budget, then there’s not that much wiggle room given what we’re seeing in oil prices today,” Kavcic said about the province’s next budget.

“It depends what they do on the spending side as well. So they can obviously respond to changes in oil prices,” he said, with an expectation of oil averaging in the mid to high $70s per barrel in 2024.

There are many other factors beyond the government’s control that have an impact on Alberta’s finances, including the strength of the Canadian dollar, the difference between oil prices in Western Canada and the United States, and the value of other commodity prices such as natural gas.

Wars and unrest in the Middle East could propel prices higher, while an increase in oil production and a sputtering global economy could keep oil prices down.

It’s a change of fortune compared with the last few years, when hefty oil and natural gas prices provided a major revenue boost for the Alberta, Saskatchewan and Newfoundland and Labrador governments, along with the federal government. Provincial governments collect royalty payments on oil and natural gas production.

“We know that oil prices will continue to be volatile and fluctuate,” Alberta Finance Minister Nate Horner said in an emailed statement. “We need to remain focused on paying down debt and saving for the future. We are committed to reducing the debt burden on Albertans today and the next generations.”

Geopolitical risk

Oil prices spiked following Russia’s invasion of Ukraine in February 2022, and there remains the possibility that geopolitics could send prices higher again.

Yemen’s Houthi rebels targeted a U.S.-owned vessel this week in the Gulf of Aden after Washington signalled it will re-designate the group as “global terrorists.” The Houthi attacks, including in the neighbouring Red Sea, are a response to Israel’s military operation in Gaza.

So far, the incidents haven’t had much impact on commodity prices because oil production and transportation around the world are continuing, said Dane Gregoris, a Calgary-based analyst with Enverus Intelligence Research.

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Even if there are disruptions to the supply of crude, many OPEC countries have the ability to begin pumping more oil out of the ground, he said, especially after the cartel recently decided to cut back on supply.

“There’s a lot of production capacity that could turn on rather quickly. So I think that’s why the market sees through some of the geopolitical risk,” Gregoris said.

Meanwhile, oil production is expected to climb in Canada this year, as well as in countries such as Guyana and Brazil.

Global demand for oil is expected to set another record in 2024, but the increase will be relatively muted, experts say, because of the stagnant economy in most parts of the world.

Oil prices will likely result in a small surplus or deficit for Alberta, but the government still remains in a much better financial position compared with other provinces when considering its economic outlook and debt-to-GDP levels, BMO’s Kavcic said.

“Alberta at this point is head and shoulders above the rest of the provincial pack in terms of where they are from a fiscal perspective,” he said.