ST. JOHN’S, N.L. – The falling price of Brent crude is especially bad news in Newfoundland and Labrador, where the offshore oil sector accounts for one-third of government revenues.
Most analysts don’t expect a quick return to values that over the last decade plowed billions of dollars into the provincial treasury. And if nothing changes, an election-year surplus projected for 2015-16 after three straight deficit budgets could be out the window.
Brent crude sold Tuesday for about US$92 a barrel, down from a yearly high of US$115 in June.
The Newfoundland and Labrador budget last March was anchored on an average price of US$105. Every dollar below that costs the provincial treasury about $30 million, former finance minister Charlene Johnson said as she introduced the fiscal blueprint.
Finance Minister Ross Wiseman’s office said in a statement that the average price since then is US$106.
He was not available for an interview but he is scheduled to offer an economic update later this fall.
Provincial finances also hinge on an oil production rate of 86.2 million barrels, almost two million barrels higher than last year, and a Canadian dollar worth on average 91.25 cents compared to the U.S. dollar.
Patricia Mohr, a commodity market specialist at Scotiabank, said oil prices rose earlier this year as violence in Iraq raised the prospect of export disruptions.
Instead, shipments have continued. They are in addition to increased exports from Libya and a spike in U.S.-based shale production that have swelled supply and helped suppress prices, she said Tuesday from Toronto.
“International prices are being dragged lower by the huge development of the new oil shales in the United States. We probably also have a bit of a seasonal factor depressing oil prices.
“Many refineries take maintenance downtime at this time of year.”
Still, Mohr said she expects prices, with the exception of a slight uptick possible by the end of the year, to flatten or decline.
“I think international prices, including Brent, are probably going to be flat-to-down in the next 24 months.”
Liberal Leader Dwight Ball said the potential hit to the province’s bottom line is unsettling.
“If this situation were to continue for a year, with the offset that we have in our dollar versus the decrease in oil pricing, this could cost upwards of $300 million.”
Progressive Conservative Leader Paul Davis was sworn on Sept. 26 as premier. Under provincial law, he must call an election within the next year but has indicated he’ll bring down a budget first.
Ball said a major issue for his party is the extent to which the government relies on wildly unpredictable oil cash.
“We have to make sure there’s a buffer that we create within our budgeting process,” he said. “We have to adjust our one-time spending closer to the money that we receive from oil royalties.”
The province’s $7.8-billion budget last March forecast a deficit for 2014-15 of $538 million with net debt to reach $9.8 billion. It predicted a return to the black in 2015-16 with a surplus of about $28.5 million.
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