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Letter from Canada: Alberta waits for a boom that may not come

The Edmonton administration assumes that there will be another oil bull cycle. It may be wrong

The Alberta government has been running large budget deficits since the middle of the last decade, with both the leftist New Democratic Party and now the rightist United Conservative Party waiting for the next oil price boom to bail out the province. Instead, Alberta got another—albeit brief—oil price war earlier this year that was followed by the coronavirus-induced global economic depression.

These events have caused Alberta’s projected deficit for the fiscal year 2020-21 to skyrocket, leaving Premier Jason Kenney with a simple choice: get the province’s fiscal house in order through a combination of spending cuts and tax hikes once the worst of Covid’s economic destruction has passed, or risk the economic future of Alberta by continuing to wait for another oil price boom that may never come.

Fiscal mess

The Kenney government massively increased its forecast for Alberta’s deficit for 2020-21 to C$24.2bn ($18.4bn) in late August, compared with an original forecast of C$7.4bn at the end of February. Projected revenue was slashed by C$11.5bn, with non-renewable resource revenue representing about a third of the drop, while spending has increased by C$5.3bn. At roughly 8.1pc of the province’s GDP, this would represent the largest deficit in percentage terms of any province in Canada over the past 35 years.

Projected resource revenue for 2020-21 was slashed by over three-quarters, to a mere C$1.2bn, the lowest amount since 1974-75, not even adjusting for inflation. As a result, resource royalties are expected to account for only 3pc of Alberta’s total revenue this fiscal year compared with around 10pc based on the original forecast and a recent high of 18pc in 2014-15. Bitumen royalties are now forecast to be a mere C$686mn in 2020-21, down by almost four-fifths from the original forecast and trailing projected tobacco taxes at C$796mn.

C$24.2bn – Alberta’s forecast deficit

Based on the fiscal update, Alberta’s total debt will reach C$99.6bin by 31 March 2021, the end of this fiscal year, and net debt will be C$66.9bn, or 22.3pc of GDP. This compares favourably with the neighbouring provinces of British Columbia and Saskatchewan, at 22pc and 20.8pc respectively, but Alberta’s debt trajectory has been far more severe in recent years.

Moment in time

What the Alberta government has failed to realise since the middle of last decade is that high oil prices and the resulting oil sands boom were just a moment in time, barring a major and sustained geopolitical event in the Mid-East Gulf region.

The age of high-price oil came to an end last decade with the US tight oil revolution. The prospect of peak oil demand, given the near global campaign against CO2 emissions and rise of electric and hydrogen-powered vehicles, reinforces this change.

And the Covid-19 pandemic, along with the world breaking back into trading blocs under a New Cold War scenario, is pushing the timeline of peak oil demand forward. It is possible global oil consumption may already have peaked at almost 101mn bl/d last year.

Light crude prices have averaged c.$45/bl, on an inflation adjusted basis, since the beginning of the modern oil industry in 1859. And these prices have, as a rule, been supported by steadily rising global oil consumption over this period, not plateauing or declining consumption.

Major oil sands producers—most of which are now Calgary-based given the recent exodus of IOCs—appear to have in recent years come to a similar conclusion over the receding likelihood of another sustained price spike.

“Every credible forecast of future world energy consumption sees oil and gas continuing to dominate the supply mix for the next several decades” Alberta’s Recovery Plan

Although Canadian firms have retained  an appetite to acquire producing assets of fleeing foreign companies on the cheap, oil sands-directed capex has declined every year since 2014, when it hit a record high of C$33.9bn. It will be little more than C$7bn this year—possibly below the minimum level required to maintain current production.

But the Kenney administration does not appear willing to accept these apparent facts. “Every credible forecast of future world energy consumption sees oil and gas continuing to dominate the supply mix for the next several decades,” it wrote in Alberta’s Recovery Plan, issued in late June.

“Average private sector forecasts estimate that global oil and gas [sic] prices will recover to a West Texas Intermediate benchmark of at least $60/bl within 12 to 18 months following the return to global demand post-Covid.” It is not totally impossible that the administration could be right. But Albertans should be concerned if it is betting the house on it.

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