Alberta's Fiscal Challenge
Alberta has a good economy and a growing population. But our forecasted revenues for oil and gas have dropped unexpectedly. This affects our bottom line.
During a televised address to all Albertans on January 24, Premier Redford outlined the situation Alberta is facing and why.
Alberta gets a lower price for our oil
There's more than one price for oil around the world:
- Heavy oil produced in Mexico (Maya)
- North American price (West Texas Intermediate — WTI)
- Alberta price (Western Canadian Select — WCS)
WCS price is currently very low.
The price of oil, including Alberta's oil, is determined by supply and demand. A shortfall of oil in one part of the world can affect supply and, in turn, drive up its price. Too much supply, on the other hand, can drive the price down.
Other factors also affect oil prices. The quality of the oil and its location (how close it is to where it is needed) have a role in determining its selling price.
Oil prices have been volatile — rising and falling throughout the year. What we refer to as the "bitumen bubble" — the spread between the different prices and the lower price for Alberta's WCS — is called the differential.
- Benchmark Crude Prices (PDF)
A lower price for WTI impacts government revenue. Add to that the difference in price we get for Alberta's oil, WCS, compared to WTI and there's a further impact on government revenue. This has grown faster and will be sustained longer than predicted.
Selling Alberta oil for $30 less than the benchmark price costs the Canadian economy about $27 billion a year. That's around $75 million a day.
Alberta's oil price forecast
Today, about 30 per cent of Alberta's budget is funded by oil and gas revenue. The bitumen bubble and the lower price of oil means the Alberta government will collect about $6 billion less in revenue.
When Budget 2012 was prepared, Alberta's forecast for WTI was just slightly under what major forecasters, banks, the federal government and other provinces were also forecasting.
- 2012 Oil Price Forecasts (PDF)
The drop in revenue will have an impact on decisions that are made in Budget 2013. In order to understand the complexities of how a provincial budget is set, a new online tool is available to Albertans to allow them to build their own provincial budget.
Through this online simulation tool, Albertans make choices about priority areas they would focus on.
The website provides a broad cross-section of programs and services that are housed in each government department. Each service and revenue selection is calculated immediately, showing the user the impact their decision makes on their budget.
What government is doing about it
Even before this situation, the Alberta government had been working on a plan to address decreasing oil prices.
Alberta needs to access new markets for our resources. We essentially have one customer — the United States — and one means to ship our oil to them. The U.S. buys our product, but at a discounted price because they have many different suppliers to choose from.
They are also projected to become the world's biggest oil producer by 2020.
That's why we are advocating for a Canadian Energy Strategy, looking to increasing exports to Asia and supporting upgrading in Alberta. We need to increase our pipeline capacity and increase the price paid for Canadian oil.
Premier Redford will also host the first annual Alberta Economic Summit on February 9. The summit will be an opportunity to discuss the economic challenges facing the province while also offering potential solutions for Albertans.
The drop in oil revenue is significantly affecting Alberta's bottom line in the billions of dollars. By taking action, we will ensure our province can continue meeting the needs and priorities of a growing province now and in the future.