Alberta's oil production cut weighs on economic forecasts for province

The Conference Board of Canada and Scotiabank Economics have both ratcheted back economic growth forecasts for the province in light of the government's decision to impose oil output cuts.

Economists expect oil curtailment to slow growth, but premier says GDP will see 'quite a bump' in late 2019

A pumpjack pulls oil out of the ground in central Alberta. (Kyle Bakx/CBC)

Alberta's oil production cuts — aimed at shrinking a costly glut of Canadian crude — are now weighing on expectations for the province's economic growth in the year ahead.

The Conference Board of Canada and Scotiabank Economics have both ratcheted back growth forecasts for Alberta's economy in light of the province's decision to impose oil output cuts. 

Premier Rachel Notley said Tuesday the government understood there'd be a "slight hit" to Alberta's gross domestic product (GDP) because of the curtailment, but added it must be weighed against the cost of doing nothing to address Alberta's oil price woes. 

"We also believe that we're going to see quite a bump in terms of GDP near the end of the year, and into 2020, as a result of these actions," Notley told reporters in Calgary, adding the government is also working on moving more oil by rail and in pipelines.

Alberta's curtailment strategy went into effect on Jan. 1, enforcing a temporary 8.7 per cent production cut, or roughly 325,000 barrels a day, in raw crude oil and bitumen.

It came amid calls from some oil company CEOs for a mandatory cut that would reduce a regional crude glut. The backlog of oil was sinking oil prices and, according to some analysts, costing the economy tens of millions of dollars every day.

Since the strategy was announced in early December, the gap between Canadian and U.S. crude benchmarks has narrowed substantially. On Monday, the differential was under $12 US a barrel. Last fall, the gulf was over $50.

The Conference Board of Canada's chief economist, Pedro Antunes, wrote in a commentary published Friday that Alberta's oil curtailment will likely be effective in shoring up prices and heading off a decline in royalties. 

But Antunes said it is also "certain to have an impact on the province's economic performance."

If sustained through the year, the cutbacks could shave 1.6 percentage points off Alberta's previously anticipated headline GDP growth rate for 2019 of above two per cent, he said.

"This is a big, big hit," Antunes said in an interview Tuesday, pointing out Alberta's oil sector is responsible for about 25 per cent of the province's income.

"When you cut production by … the anticipated cuts that were put in place, of course that is going to have an impact on the volume of production and the economic activity associated with that."

But Antunes said it will be important to watch the overall effect of a complex strategy.

"If the [oil] price does kick up, then that will have other impacts within the economy," he said. 

"That'll help sustain profitability. It may help sustain investment a little better than might have been. It may help  essentially sustain government revenues and other areas of the economy.

"So this is where it's a bit of a trade off."​

Atunes' analysis follows a report bu Scotiabank Economics from earlier in the month that also forecast slower growth.

"Higher heavy oil prices relative to the WTI benchmark should allay the backlog of shipments built up amid a yawning discount, but cuts will weigh on oil and gas sector output," the report said.

"Accordingly, we have lowered our 2019 Alberta growth forecast by one [percentage point], to 1.5 per cent." 

Scotiabank said this will have implications for the national economy as well, adding that it expects Alberta to add just 0.2 percentage points to national growth in 2019, "far less than the 0.7 percentage point boost last year." 

The diminished economic activity resulting from the output cuts, Scotiabank said, "could dampen hiring and corporate profits, and, by extension, tax receipts."

Notley said the damage that struggling Canadian crude prices was at risk of causing to the industry as a whole "was already going to bring about a downward projection with respect to our GDP."

After introducing the curtailment policy, the price of Western Canadian Select oil has reacted "dramatically," she said. 

Alberta intends to scale back the curtailment as the oil glut clears, winding it down by year's end.

"Certainly from our perspective, we want to see it be as short term as possible, because reaching into the market to do something like that is not a best-case scenario," Notley said.