Sinking oil prices could trim $1.2B from Alberta royalties

A new economic report warns plunging oil prices could carve $1.2 billion out of Alberta’s royalty bonanza, although the blow will be somewhat softened by a falling loonie.

Oil prices dropped four per cent this week, closing up a nickel Friday to $85.82 US per barrel on the New York Mercantile Exchange after hitting a two-year low of $83.59.

Benchmark prices for West Texas Intermediate (WTI) crude have dipped about 20 per cent since June, due mainly to rising oil production in the United States and slower global demand.

As Canada’s largest oil producer, Alberta is budgeting on collecting more than $9 billion in resource revenue this year — with more than half coming directly from bitumen royalties.

But the latest price dip indicates “there’s now downside risk here if prices stay at or below recent levels for the remainder of the fiscal year,� says a report Friday from BMO Capital Markets.

“In the short term, you are probably looking at some downside to overall provincial revenues now,� report author Robert Kavcic, a senior economist with BMO, said in an interview.

“I don’t think it necessarily means you have to have any kind of drastic cut in spending yet. It’s probably a bit premature to start talking about that.�

In Alberta, the spring provincial budget was based on oil averaging $95.22 US a barrel. Every $1-a-barrel drop in prices over the course of the year would cost the treasury $215 million.

As crude prices continue to weaken, however, the Canadian dollar is falling, helping to soften some of the blow of shrinking oil revenues. A weaker loonie boosts the value of oil exports, and the demand for export products priced in Canadian dollars.

The BMO report says while Alberta would be looking at roughly a $1.2-billion hit to royalties if oil prices stay where they are, that trend would be offset by about $500 million thanks to the weaker dollar.

The Canadian dollar fell to 89.15 cents US on Friday.

Crude prices are collapsing because demand growth is slowing at a time when output is expanding from several countries, including the U.S. and Russia, the largest suppliers outside the Organization of Petroleum Exporting Countries (OPEC).

“Given a lot of the growth concerns coming out of China and Europe and so much more production in the U.S., we will probably be seeing prices a little bit weaker than we’re used to recently,� Kavcic added. “To get really concerned though in Alberta, you’d probably need to go down below the $75 to $80 range on a sustained basis.�

Gerald Kastendieck with Alberta Finance said Friday the province is watching the situation, but isn’t making any changes to its budget due to recent market gyrations.

“We know that oil prices are volatile,� he said. “While oil may be down at the moment, exchange rates are also low and so there’s some offsetting there.�

But Wildrose MLA Rob Anderson said falling oil prices are a worry because the PC government relies so heavily on volatile energy prices to bankroll its day-to-day spending.

With oil hovering around $100 a barrel for several years, the Tories should have done a better job balancing its books — and avoided taking on debt, he said.

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