Budget blues climb as oil prices continue to drop
Our fortunes are literally tied to a commodity that has been losing substantial value in recent weeks
This week's Corporate Research Associates poll — showing an unmistakable slide in support for the governing Tories — is almost certainly not the only graph with a downward trend that's causing concern in Confederation Building.
Undoubtedly, the finance department is keeping an anxious eye on the price of oil, which has been in a steady decline for weeks. In a province that has come to count on fuel-based royalties, this is a mighty migraine in the making.
Here's a snapshot. The price of Brent crude — the type of North Sea oil on which Newfoundland and Labrador bases its financial forecasts — was trading Friday below US $98, well below the prices of around $110 we were seeing in early May.
Much more significantly, it's substantially below the price of $124.12 that the government established as it baseline for this year's budget.
That estimate seemed somewhat reasonable in the winter, when oil prices were climbing. But oil prices have been sliding since April, and at this point are not showing much sign of an immediate rebound.
(By the way, when you see oil prices in the news, it's often the price of WTI, or West Texas Intermediate, that's most commonly cited. That price, currently in the low-to-mid $80s, is worth watching, but it's not the one that means the most to Newfoundland and Labrador. Brent is much more similar to what's pumped off the Grand Banks, and therefore a better determinant of what the treasury can expect.)
The estimate for this year, incidentally, is significantly higher than last year, and indeed every year over the last decade. Last year, government picked a price around $108; the year before that, it was just $83. Remarkably, the price eight years ago was $28.13.
Oil price assumptions in Newfoundland and Labrador budgets, by year
I remember Loyola Sullivan, the finance minister of the day, telling reporters at the 2006 budget lockup that the $57 projection of the day was reasonable, and probably conservative, even though he was still getting used to what then was a soaring figure.
That price — which seemed high compared to the rock-bottom prices that delayed development of the industry — now seems catastrophically low.
Why does the price of oil matter? Let's have a look. For the current fiscal year, which began in April and ends in March, the government has offshore oil royalties projected at $2.225 billion. That is, far and away, the greatest single source of provincial tax sources (personal income tax, the next largest, comes in around $949 million), and represents a clean third of all government revenues, including transfers from the feds.
In other words, one out of every three dollars flowing in to the government to pay for all its services is directly connected to the price of oil. There are other, less direct revenues, too, like the corporate and personal income taxes that are connected to the offshore.
Brent oil is trading at about 80 per cent of what had been forecast, which means that every week it hangs around that price means, roughly, about 20 per cent less revenue … all other things remaining equal.
Yes, we're just over two months into the fiscal year, but the trend is worrisome, particularly given that we already know some of what's in store.
Rougher waters ahead
Finance Minister Tom Marshall already warned us this would be a tough year. There will be less overall production, due to maintenance work involving the Terra Nova and White Rose fields. As well, the Atlantic Accord, which provided a multi-billion-dollar boost since Danny Williams's iconic "we got it" moment from January 2005, has now run its course.
Most consumers, of course, will not be calling for higher oil prices any time soon. After all, the slide in the oil market has directly translated into lower prices at the gas pumps. A litre of gas now in St. John's is selling for around 1.296 (or a good bit less, if you know where to shop), or about 16 cents off the last high set in the first week of April.
But a drop in oil prices matters to all of us. It matters to NAPE members and CUPE members, who have already been told to dial down their expectations for wage increases.
It matters to the health care system, which is already trying to do more with less by turning around productivity rates and instituting managerial accountability. It matters to towns and cities, which saw a massive increase in stimulus-related infrastructure spending in recent years, and must realize by now that those days are in the past. It matters to schools, where parents and administrators wonder how many teachers will be on staff next year.
In other words, every department, every agency, in one way or another relies on money derived from the offshore oil industry. And then there are other sectors, like real estate, retail, offshore suppliers, travel and hospitality … the list goes on.
So, too, does every politician, particularly those on the government benches, who have been trying to cope with increased public expectations that the spending of late will not only continue, but expand.
Perhaps there are more connections between the two charts — oil prices and public opinion polls — than I might have first thought.