Albertaâ€™s dominance of Canadaâ€™s economic performance is under threat from plunging oil prices.
The sharp declines, if sustained, will slow an economic ascendancy that has seen the oil-rich province close to matching Ontario and Quebec in economic power, with Alberta expanding faster than the Canadian economy in all but one of the last 10 years.
â€œOur economy here is basically driven by black stuff in the ground,â€� said Kevin Dell, who manages about C$1 billion ($890 million) for the city of Edmonton, including Alberta bonds.
The bear market in crude, fueling a decline in the Canadian dollar, also threatens to undermine the countryâ€™s main driver of growth and one of its biggest sources of export revenue, according to Mark Chandler of RBC Capital Markets. He estimates Canada was on pace to export C$90 billion in oil this year.
â€œThe biggest concern is how quickly it feeds through on the income and notably in terms of exports,â€� said Chandler, head of fixed-income research at RBC Capital.
Falling oil prices may also hamper capital spending, â€œa big part of the outlook for the Bank of Canada next year,â€� he said. One-third of private sector capital spending in the country is tied to Albertaâ€™s oil industry, Chandler said.
Alberta, which relies more on royalties from mineral extraction than any other Canadian province, will take a revenue hit of about C$1.5 billion this year if oil prices remain at current levels, compared with government projections, according to estimates from Bank of Montrealâ€™s Robert Kavcic. Alberta based its latest budget forecast on oil at about $97 a barrel, compared with the closing price of about $82 a barrel Wednesday for West Texas Intermediate.
For Alberta, lower oil prices will be partially offset by a Canadian dollar that plunged to a five-year low yesterday, boosting the value of exports when repatriated to Canada. The weaker Canadian dollar will offset falling oil prices by about C$1 billion, leading to a net C$500 million loss for Albertaâ€™s coffers in the current budget, Kavcic said. In August, Alberta revised its budget surplus forecast to C$1.4 billion for this fiscal year.
The impact could be more substantial in coming years if oil prices donâ€™t rebound, he said.
â€œIf you look out to 2015-16 and if their assumptions have to come down for the whole forecast horizon, then you would have a much more significant miss,â€� Kavcic said.
While the Canadian dollar has weakened along with oil prices, giving an added boost to manufacturing-heavy provinces like Ontario, the economic impact of lower oil prices nationally is â€œa small net negative,â€� said Doug Porter of Bank of Montreal.
As a result, BMO Capital Markets will reduce Albertaâ€™s growth forecast to 2.9 percent in 2015, down from a projection of 3.3 percent, and cut national growth to 2.4 percent from 2.5 percent.
â€œThe negatives arrive pretty quickly and the positives show up with a bit of a lag,â€� said Porter, chief economist at BMO Capital Markets.
There will also be an impact on government finances. Porter estimates the oil plunge will reduce federal government revenue by about C$3 billion annually.
In its July monetary policy report, the Bank of Canada forecast national growth will accelerate to 2.4 percent in 2015 from 2.2 percent this year, largely on increasing business investment. The Bank of Canada will revise its estimates Oct. 22.