Oil price slide threatens prosperity of Canada's West: report

The recent drop in oil prices is threatening revenue streams of resource-rich province such as Alberta, Saskatchewan and Newfoundland and Labrador, a new report says.

However, economists say other parts of Canada could potentially benefit from slumping oil prices.

BMO Capital Markets senior economist Robert Kavcic has crunched some numbers showing that Alberta could be hardest hit if oil prices stay low, since the province is budgeting for West Texas Intermediate (WTI) at $97 U.S. per barrel for fiscal 2014-15. The price of oil is now around $85, its lowest level in more than two years.

“After a strong start to the year for prices, there’s now downside risk here if prices stay at or below recent levels for the remainder of the fiscal year,” Kavcic said in a report titled “Life with $85 oil.”

“Longer-term plans (mostly in the $95 range) would also be at risk if these prices stick.”

Kavcic said Alberta would see a $1.2-billion hit, but the blow would be offset by about $500 million thanks to the weaker Canadian dollar. Both Saskatchewan and Newfoundland’s budgets have slightly higher oil price assumptions built into their budgets, but he said those provinces wouldn’t be as deeply impacted as industry leading Alberta.

“$85 oil is still high enough to support activity,” Kavcic said in an interview. “Below that and they could run into problems and see economic growth slow down.”

BMO is forecasting oil prices will inch up slightly, to the low $90-range, for the rest of this year and into 2015.

Bear market

Oil prices have been steadily dropping since the mid-summer, when they were sitting comfortably above $100 per barrel, amid concerns over slowing growth of economies in China and across parts of Europe. The price slid by as much as 2.5 per cent to $83.59 a barrel in New York on Friday, according to Bloomberg. At current levels, oil price are now considered to be in bear market.

The drop comes as the Organization of the Petroleum Exporting Countries (OPEC), which supplies 40 per cent of the world’s oil, said Friday oil output has increased the most since November 2011. Total OPEC output grew by 400,000 barrels per day (bpd) to 30.47 million bpd, driven by higher output in Iraq and Libya, according to the latest monthly report.

"Among the many moving parts in global financial markets in recent weeks, the slide in oil may be the most noteworthy (and the most important for Canada)," BMO chief economist Doug Porter said in a note. "Of course, while the drop in US$ terms has been especially deep, what mostly matters for Canada (and government revenues) is what’s happening to oil in [Canadian dollar] terms.”

He said the lower loonie (now trading around 89 cents U.S.) has “somewhat softened the blow for domestic producers.”

For example, he said Thursday’s prices translated to C$95.75 per barrel.

“That’s down about 15 per cent from the $110-to-$115 range prevailing earlier this year. However, it’s still (slightly) above the five-year trend in prices,” Porter said in a note.

Oil price overreaction?

David Madani, an economist with Capital Economics, said the oil price slump shouldn’t threaten Canadian producers.

"Canada’s position as a large energy net exporter obviously means that it is exposed to any slump in world oil prices," he said in a note. "Should the recent slump in oil prices persist, then that would certainly leave its mark on aggregate national income. But we doubt that this latest slump will seriously threaten production prospects, since many producers currently enjoy healthy profit margins."

Madani also noted the benefits of lower oil prices for other sectors in Canada.

"While lower oil prices are bad for Canada, the benefit to other net importing nations may boost economic growth, promoting stronger non-oil exports from Canada. This would help to cushion the blow to Canada’s economy."