Slump in oil prices may slam provincial budget: Wade Locke
Factors that determine the province's revenues from the petroleum industry — at least for the for the first five months of the 2014-15 fiscal year — were either on par, or above, what the government had forecast.
But economist Wade Locke says recent trends point to a downward spiral as the price of oil continues to slide.
“They're pretty close on what they thought. Up to now it’s more of less on track," Locke told CBC News.
"But the trend is not good."
Three key factors in budget
In the March budget, then-finance minister Charlene Johnson said the province was forecasting oil prices to average US$105, an exchange rate of 91.25 cents on the American dollar, and production of 86.2 million barrels of oil.
Oil revenues account for roughly one third of the province's revenues, and any significant variations in any or all of these three factors could have serious ramifications on Newfoundland and Labrador's economic fortunes.
With the fiscal year now at the mid-point, Locke decided last week to do an analysis, and the results were mixed, he said.
The price of Brent crude was trading well above the forecast of US$105 per barrel for the first four months of the fiscal year, peaking at roughly US$115 in June, but a downward trajectory began in July and continues to this day.
Early Thursday morning, Brent — the type of oil that is closely followed in Newfoundland and Labrador's oil industry — was trading at US$94.10 per barrel. The Canadian dollar is currently worth 90 cents in U.S. currency.
Locke said every dollar below the forecast price of oil represent between $20 and $25 million less for the provincial coffers.
“If that were to continue on like that, or even at that level, that’s a problem for everybody concerned,” Locke noted.
On budget day, Johnson forecast a $537.9-million deficit.
Targets may be missed
If the current trend continues, Locke noted, "they won’t hit what they thought they were going to hit, and the deficit will be greater ... and there will be some kind of consideration about what it means for expenditures."
Meanwhile, the offshore industry produced some 26.64 million barrels of oil over a four-month period between April and July, according to figures publicly available on the Canada-Newfoundland Offshore Petroleum Board (C-NLOPB) website.
Figures for August and September are not yet available.
At that rate, the industry will produce just under 80 millions barrels, six million barrels below forecast.
“No one knows how to predict this stuff with 100 per cent accuracy,” Locke said.
“All you can do is look at all the information available to you and try to make the best decision you can.”
The government will deliver a mid-year economic update in the coming weeks, and Locke is not sure how the province will react to the recent slide in oil prices.
“If you believe this trend is going to continue downward, there is a real issue. If you think it’s a short-term phenomenon, they are OK to now," he said.
Finance Minister Ross Wiseman was out of the province Wednesday and not available for comment.