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Varcoe: 'We haven't seen anything yet' — Volatile oil markets meet Alberta's revenue roller-coaster

'We do have a volatile budget and resource revenues are the key driver of it, but going forward it’s going to get even worse,' said U of C economist Trevor Tombe

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As of late Tuesday morning, Alberta’s projected deficit for the incoming budget was — theoretically — sitting at $1.1 billion.

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If that came to pass, it would be a far cry from the $9.4-billion in red ink Finance Minister Nate Horner was forecasting just two weeks ago when he released Alberta’s new fiscal blueprint.

That ugly deficit outlook for the budget year that starts April 1 was predicated, in part, on the price of West Texas Intermediate (WTI) crude averaging US$60.50 a barrel.

Yet, based on oil futures at $72.60 a barrel at midday Tuesday, University of Calgary economist Trevor Tombe calculates that if that price held for the upcoming fiscal year, it would shrink the deficit by more than $8 billion.

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And with WTI crude closing at US$87.25 a barrel on Wednesday, Alberta’s deficit would suddenly turn to a river of black ink if oil prices averaged that level during 2026-27.

“We do have a volatile budget and resource revenues are the key driver of it, but going forward it’s going to get even worse,” Tombe said Tuesday during an address at the U of C’s School of Public Policy to discuss Alberta’s fiscal situation.

“We’ve talked about a royalty roller-coaster before, but we haven’t seen anything yet.”

Indeed, global oil prices have bounced up and down like a pogo-stick in the past week, topping $119 a barrel at one point Monday before tumbling by more than $24 to close the day above $94.

The variability is underscored by new forecasts warning oil could potentially reach $200 a barrel if the war in the Middle East drags on and continues to disrupt global energy supplies.

“We have entered a new (price) regime here,” Ryan McKay, senior commodity strategist at TD Securities, said in an interview.

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“The likelihood of seeing sort of these sky-high prices, it really just depends on the duration of this. And as time goes on, it becomes more likely.”

A report released Wednesday by TD Securities declared that oil is now “repriced higher across all scenarios,” even if the war ends quickly.

An immediate end to the conflict would make it unlikely for Brent crude prices to drop below $70 to $75 a barrel in the medium term, it states.

“In our sort of most optimistic scenario with regard to this . . . we’re looking at a $75 stabilizing price,” McKay said.

However, a war that drags on for three months before the critical Strait of Hormuz is reopened is more impactful, with TD expecting prices would risk moving toward at least $150 a barrel by mid-April.

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This would lead to a higher postwar price floor nearing $90 a barrel in the medium term, due to lasting supply damage and inventory rebuilding, the report states.

“In a world where there seems to be limited direct attacks on energy production capabilities, we would expect Brent oil to average $150 to $200 a barrel, in the second quarter,” the study adds.

“If regional energy infrastructure is significantly damaged, that range could be as high as $175 to $250.”

Such a swing would come with major economic repercussions, including higher inflation for consumers and businesses.

“It’s when you move into the longer-term war, oil prices that move beyond $150 . . . that’s where demand destruction sets in,” said Rich Kelly, TD Securities head of global strategy.

A separate report released Wednesday by Scotiabank said as more regional energy infrastructure in the Middle East has come under attack, and as International Energy Agency countries have agreed to release 400 million barrels from their strategic reserves, “the global oil market faces two extreme diametric outlooks.”

It said oil prices could fall to $70 a barrel if the U.S. decides to end the conflict, but a further military escalation in the form of a ground invasion of Iran could cause prices to spike to $200 a barrel.

This wide range shows just how unpredictable energy markets have become as supplies are unable to get to market.

Meanwhile, a price forecast released Tuesday by the United States Energy Information Administration (EIA) projects Brent crude oil will stay above $95 a barrel for the next two months, and exit the year around $70.

For the entire year, U.S. benchmark crude would average almost $74 a barrel, up $20 from the EIA’s previous forecast — and it would come close to balancing the province’s financial books.

This serves to illustrate a broader point for Alberta.

As oil production in the province continues to set new records, and more oilsands projects shift into paying a higher royalty rate, the revenue swings are amplified for the Alberta treasury.

In 2000, every $1-a-barrel change in the price of WTI crude over the course of the budget year shifted provincial resource revenues by $150 million.

For the new year, it’s $680 million.

“The sensitivity of the budget to oil prices is something that we have never experienced before,” said Tombe.

“We’re more reliant on it, and it’s even less stable.”

Alberta’s finance minister isn’t about to recast the new budget based on a few weeks of volatility.

The province’s oil price forecast and deficit figures are updated after the first-quarter results are released in August.

“I think everybody should just be mindful that what goes up, will come down,” Horner told reporters at the legislature this week.

Yet, if Wednesday’s closing WTI crude price of $87.25 a barrel continued throughout the new budget year, it would translate into a surplus in the neighbourhood of $10 billion to $11 billion, Tombe estimated.

“This is an unusual moment,” he said.

“Even if we’re in a world of normal oil price volatility, the budget is now many times more sensitive to any given change in oil price than we’ve ever seen before.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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