Varcoe: Low oil prices further cloud premier s soggy Stampede breakfast

Varcoe: Low oil prices further cloud premier s soggy Stampede breakfast
Another premier’s Stampede breakfast, another rain cloud hovered over Rachel Notley as she spoke to reporters at McDougall Centre.

Like last year’s event, the premier’s annual coffee-and-pancake gathering was marred by rain falling on Monday morning.

But a different kind of cloud — low oil prices — also loomed over the breakfast, as benchmark West Texas Intermediate crude sank to US$43.65 a barrel in trading during the day, before closing at $44.40.

Alberta has received a string of positive economic reports in recent weeks, from improving job numbers and rising retail sales to stronger housing starts. These are all reasons to feel optimistic.

Yet slumping oil prices continue to rain on the NDP’s parade as it celebrates a third Stampede since taking power.

If weak oil prices persist, it threatens to slow the recovery and blow a bigger hole in the province’s projected $10.3-billion deficit this year.

“Right now we are keeping a close eye on it. We know that the price goes up and down, we’re fully aware of that and we plan for that,” Notley said as rain pelted the crowd.

“We have laid out a responsible and careful plan to (balance the) budget at around 2023. And we know that’s where we have to get.”

The premier’s unwavering optimism comes just a few days after another credit rating agency sounded a warning about the state of the province’s finances and its growing debt levels.

DBRS said Friday it was maintaining the province’s AA (high) credit rating, but changing Alberta’s outlook to negative from stable.

The agency said the province continues to add on debt at a fast rate and “the province has yet to provide a credible plan to restore balance.”

The Notley government posted a $10.8-billion deficit last year, the largest in Alberta’s history, and overall debt levels now top $33 billion.

DBRS vice-president Travis Shaw said Monday the province is seeing signs of a turnaround. For instance, Alberta is projecting economic growth of 2.6 per cent this year.

Yet, he noted higher-than-expected oil prices and strong investment income last year didn’t translate into a smaller deficit, only additional government spending.

“Certainly, the direction of oil prices is going to continue to have a big bearing on Alberta’s economic fortunes,” Shaw added.

“As long as prices stay at these levels, we’re not expecting a significant pick up in terms of investment activity that would contribute to some more meaningful growth.”

In his spring budget, Finance Minister Joe Ceci forecast oil prices would average US$55 a barrel for this fiscal year, rising to $59 next year and $68 in 2019-2020.

These estimates now seem overly optimistic.

Since May, oil markets have slid from $50 a barrel, with concerns focused on oil inventory levels, rising U.S. shale output, as well as production growth in Libya and Nigeria.

The short-term drop in oil prices will impact provincial revenues this year, putting more pressure on the government to reach its own deficit target.

But the bigger concern is in the outer years, when the province’s forecast is for much higher prices — prices that are supposed to help whittle the mammoth deficit down to a mere $7.2 billion by 2019-2020.

At the premier’s breakfast, Ceci said he’s concerned about eroding oil prices, but pointed out the government has a $500-million financial cushion built into its budget projections.

“Everybody in Alberta knows it’s a volatile resource and you don’t want to bet the whole farm on it. That’s why we risk adjusted it,” he said.

But it’s not just government revenues squeezed by low energy prices; it could also affect oilpatch capital spending later this year.

Alberta producers ramped up drilling by 114 per cent during the first four months of the year, but there’s a risk investment levels will slip if low prices persist.

Last week, AltaCorp Capital lowered its oil price outlook by $6.50 a barrel to average $49.50 this year, and down to $52.50 a barrel in 2018.

Data from ARC Energy Research Institute indicates if oil prices remain in the low US$40-a-barrel range for the rest of 2017, it will crimp industry cash flow by 15 per cent this year and capital spending by $4 billion.

In turn, the number of wells drilled would decline by 740 to 4,425.

“If we continue to have $43-$44 by the end of September, it will definitely impact the winter drilling season,” said Peter Tertzakian, ARC Energy Research Institute executive director. 

“The end of the third quarter is going to be a pivotal moment for the industry as it makes its decision about winter drilling and what it sees into 2018.”

Of course, the recent oil price downturn could be reversed if OPEC takes additional action to prop up the market or if U.S. oil inventory levels drop more rapidly than expected.

As Calgarians know only too well, oil prices can be as fickle as rain falling on a soggy Stampede breakfast.

Just ask Alberta’s premier.
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