Oil price plunge could cause substantial loss of revenue for N.L.

The sharp drop in oil prices Monday could cause major problems for Newfoundland and Labrador’s economy, according to one economist.

If low prices persist, that means problems for provincial budget, says economist Wade Locke

Economist Wade Locke says the loss of oil revenues will worsen the province's already challenging fiscal situation. (Gary Locke/CBC)

Newfoundland and Labrador's finance minister says Monday's sharp drop in oil prices is "very concerning," and a situation the provincial government is watching.

In the House of Assembly on Monday, Tom Osborne called the steep drop "a global crisis."

"It is obviously very concerning to see oil drop the way that it has," Osborne said.

"While this is very concerning, we obviously need time to analyze it. We've spoken with the folks that provide oil price projections. They haven't yet changed those projections.… They will if this turns out to be a trend as opposed to a blip."

West Texas Intermediate crude fell $11.80 US to $29.48 per barrel and international benchmark Brent crude — used by the Newfoundland and Labrador government to calculate projected oil revenue — fell $12 to $33.20.

Finance Minister Tom Osborne says plummeting oil prices will mean re-evaluating the upcoming budget. (CBC)

Osborne said if the drop in prices continues, the province will have no choice but to borrow more, adding to its deficit and debt.

"If this is prolonged, it will have an impact on borrowing. If it's only for days, I think we can weather the storm and it won't impact the amount we need to borrow," he said.

"But if we see it for several weeks, or even several months, it will most certainly have an impact on borrowing and on oil price projections."

The finance minister also said the drop in prices will mean ongoing work to prepare the next budget will have to be reevaluated.

"Officials were well underway in terms of getting ready. In any budget decision, you have to rerun the numbers. It's quite complex," he said.

"Much of that work was well underway. With this happening since late last week and a tumble in oil prices, we need to re-evaluate where we are with that process and whether or not we can anticipate any longevity to this."

Drop means headaches for N.L. budget: economist

The sharp drop could cause major problems for Newfoundland and Labrador's economy, according to one economist.

Wade Locke, professor of economics at Memorial University, says the province loses $20 million for every dollar drop in the price of a barrel of Brent crude oil.

"[It depends] how long it goes on for, but if it persists for a period of time they will lose a substantial amount of revenue," Locke said.

The dive in prices started on Sunday evening after Saudi Arabia kicked off an all-out price war in the oil market, announcing it would be removing any production caps.

That move sent the price of crude tumbling more than 25 per cent, and came on top of existing fears over the coronavirus currently spreading around the world.

Locke said Monday's drop, combined with recent oil spills and production shutdowns in the province, will likely make for a greater deficit than what was projected in last year's budget.

"All these things together … independent of the fall in the price of oil, there was serious concerns about the fiscal situation of the province before that," he said.

"With less revenue, it's just going to make the problem worse, not better. There's no obvious good side to this particular situation."

Adviser Larry Short says Monday's drop in the price of oil will have a devastating effect on the province. (Stephanie Tobin/CBC)

Investment advisor Larry Short says the province will likely suffer huge losses, which will only become more detrimental as prices remain low.

"Whether it's $500 million or $700 million, the net effect is going to be devastating," he said.

Short said Newfoundland and Labrador is caught in the crossfire of an oil price war between Saudi Arabia and Russia that could continue for some time.

"The question is, are the Saudis and the Russians negotiating in public, are they trying to come to some sort of agreement in order to set their production and price levels, or is this a longer term effect that will take a number of months?" he said.

"It comes down to, are they playing tick-tack-toe or is this a game of chess, all depending on how long this particular price war goes on."

But, falling oil prices may not be all bad news. Short said there could be long-term benefits for the province as other types of oil production, like hydraulic fracking, are forced out of the market.

"If this downward turn in prices does stay for a considerable period of time and it does knock down those American fracking companies, it means the traditional producers then are able to raise prices higher in the future,"

"The irony is that in the short run, this is really painful for the province, but it probably means that long term, oil prices would rise even more in the future."

Oil important but volatile: Abbott

Monday's events show that oil is important but volatile, Liberal leadership candidate John Abbott says, and instead of borrowing more money, the province needs to focus on cutting back on spending and diversifying the economy.

"We now have to step back, look at our expenditures. If we were spending at the same rate as other provinces, we would be running a surplus at this point." he said.

"That's where we really have to focus our efforts: look at the expenditures, look at where we can divest of operations that really are not part of our core and start to pay down the debt and reduce the deficit."

Abbot said there are possibilities to reduce spending and move away from the province's financial reliance on oil, and "everything is on the table."

Andrew Furey, the other candidate for the provincial Liberal leadership, was unavailable for questions from CBC News on Monday.

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