Slumping crude prices won’t only affect Canada’s oil companies, but also the provinces they call home.
BMO Nesbitt Burns has calculated the cost to Alberta, Saskatchewan and Newfoundland and Labrador were prices to hold at, or sink further from, their recent levels through the rest of the fiscal year.
In a report titled “Life with $85 oil,” senior economist Robert Kavcic noted that Alberta, of course, would be hit hardest, followed by Saskatchewan and then Newfoundland.
His comments come as oil, whose decline now surpasses the 20-per-cent mark that constitutes a bear market, sank further today.
The American benchmark, West Texas Intermediate, now sits below $84 (U.S.) a barrel, and Brent below $90.
Mr. Kavcic noted that the three Canadian provinces have based their fiscal 2014-2015 budgets on oil prices of between $97 for WTI and $105 for Brent.
“After a strong start to the year for prices, there’s now downside risk here if prices stay at or below recent levels for the remainder of the fiscal year,” he said.
“Longer-term plans (mostly in the $95 range) would also be at risk if these prices stick.”
Mr. Kavcic calculated that oil royalties in Alberta, which assumes a WTI price just shy of $97, would be whacked to the tune of $1.2-billion (Canadian), though the overall impact would be lower because of a $500-million boost from the softer Canadian dollar.
(That does not include any impact, be it positive or negative, from the spread between WTI and the western Canada benchmark.)
“Pound for pound, Saskatchewan would probably be hit somewhat less hard (even though their price assumption is higher), while Newfoundland and Labrador would have some serious thinking to do,” Mr. Kavcic said, referring to the fact that Saskatchewan WTI at just below $100 (U.S.) and Newfoundland bases its books on Brent at $105.
In a separate report, Mr. Kavic's colleague Douglas Porter, BMO's chief economist, looked at how the sliding Canadian dollar plays into all of this.
“While the drop in US$ terms has been especially deep, what mostly matters for Canada (and government revenues) is what’s happening to oil in C$ terms,” Mr. Porter said.
@ 2014 The Globe and Mail
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