Alberta’s energy industry, government watch nervously as oil prices hit 4-year low

“This isn’t a crisis for the industry yet. The bigger problem will be for the Alberta government in its deficit.”

That’s how Richard Masson, an executive fellow at the University of Calgary’s School of Public Policy, sums up the impact of plummeting oil prices that fell to around $57 U.S. per barrel on Monday — the lowest in four years.

While the low prices have also led to drop in gasoline prices, it is the broader economic impact that both industry and government are concerned about.

The government of Alberta forecast a deficit of $5.2 billion for this fiscal year under the expectation that oil prices would average about $68. per barrel of west Texas crude (WTI) — and that’s without knowing the impact of U.S. President Donald Trump’s tariffs on the Alberta economy.

While the selling price for most Canadian oil, known as western Canada select (WCS) — which normally sells at a discount compared to WTI — has narrowed in recent months, if the low prices continue, it will put a huge hole in the province’s budget.

Masson estimates for every $1 decline in the price of oil — that lasts one year — it means a $750-million hit to the provincial government’s budget.

“It’s one of those things that puts pressure on every government program, and everything that the government wants to do. When they’re facing bigger deficits than they planned,” said Masson.  “So these are big numbers, $10 billion deficits.”

Asked for a response to the falling oil prices, the office of Alberta Finance Minister Nate Horner emailed a statement to Global News, reading, “we budget for the entire fiscal year and we are currently one month into that year.  The differential (WCS vs. WTI) remains around $9. compared to the budgeted $17. which will offset some of the revenue lost from lower prices.”

The finance minister’s office added, “we will provide an update on our revenue projections in August.”

Oil prices have plummeted on expectations that the global economy will slow in reaction to Trump’s trade war, and more recently on news the group of oil producing countries known as OPEC+ and led by Saudi Arabia could boost global oil production by about 2.5 million barrels per day by October — greatly increasing supply at a time demand is on the decline.

“The Saudis are a big producer. They have the ability to weather a storm much better than anybody else,” said Masson.

“If they keep on this path, they will end up with a bigger market share for themselves, even though it’s at a lower price, and eventually that will translate into them having a bigger market share when the price goes up again.”

Rory Johnston, an energy market analyst with Toronto-based Commodity Context, said if Saudi Arabia follows through on its threats, prices could plummet even further.

“If we get further confirmation that OPEC is going to proceed with this kind of full 2.5 million barrel a day unwind by October, we’re going lower from here,” said Johnston.

“It’s almost assured. There’s no way that this current oil market at these current prices can absorb that level of supply without further pain.”

While the low oil price will be a challenge for government royalties, Johnston said the Canadian oil industry is in relatively good shape to weather the storm.

“This is not anywhere near kind of a doomsday scenario for the Canadian oil and gas sector,” said Johnston. “But what it likely will mean is that Canadian oil production growth last year was one of the strongest in the world.

“All else being equal, if these prices persist, I would expect to see that pace of growth begin to slow a little bit.”

Johnston said lower oil prices may also have another unexpected benefit, because if the Americans are paying less for Canadian oil, it could help lower the Americans’ trade deficit with Canada, which has been a huge complaint of the U.S. president.

“If it wasn’t for crude oil, the U.S. has enjoyed a multi-decade trade surplus with Canada,” said Johnston.  “All else being equal, lower oil prices is going to mean a lower trade deficit with Canada.

“We have seen many, many times that Trump loves to just randomly take credit for things after they’ve happened for other reasons. The oil price could decline, the trade deficit of Canada is going to shrink, Trump could just declare victory then and there, right?

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