Higher crude prices and weaker loonie could offer provinces royalty windfall

Resurgent oil prices this year could deliver three provinces unexpected windfalls and maybe improved political fortunes if crude stays strong.

Sagging prices have weighed heavily on resource-based economies in recent years, putting the squeeze on provincial budgets that rely on petroleum revenues.

But with oil prices tracking higher than expected this year, a new analysis from BMOCapital Markets says Alberta, Saskatchewan, and Newfoundland and Labrador, could each seegains inroyalty revenues.

A soft Canadian dollar, which traditionally trades higher when energy prices climb, is providing a further lift.

"For those three provinces, it's a pretty big help," BMO senior economistRobertKavcic saidin an interview.

"Because oil is doing what it's doing,we're seeing a lot more level playing field in terms of economic growth across the country."

Despite recent turbulence, oil prices are much improved over last year when an oil glutdampened crude prices. Oil prices have been bolstered by to a strong U.S. economy, supply disruptions in Venezuela, and geopolitical concerns in other oil-producing countries, including Iran.

On Friday, the price of a barrel of West Texas Intermediate oil, the North American benchmark, closed at $68.26 US. Brent crude, the world benchmark, wastradingover $72 US on Friday.

Alberta, Saskatchewan, and Newfoundland and Labrador each budgeted more conservatively in their assumptions of where crude prices would go.

Alberta budgeted for an average oil price of $59 US per barrel WTI, while Saskatchewan anticipated $58. Newfoundland's budget anticipated $63 US for Brent crude.

For every $1risein average oil prices for the year,there is corresponding jump in provincial revenues.

In Newfoundland's case, for every $1 increase in the price of oil, the provincialcoffers could jump by $23 million, according to the report.

This would be a "much needed positive" for the province, which faces a $683-million deficit this year "despite a wave of aggressive tax and restraint measures," Kavcicwrote in his analysis.

He suggestedif oil prices hold, the province's shortfall could be choppedby roughly a third.

BMO's report assumes WTIprices will average around $67 US a barrel for the fiscal year.

Those kind of priceswould be a big help inSaskatchewan, which budgetedaprojected $365-million budget deficit in 2018-19.

Improving oil prices, as well as potash, could contributeup to $220 million in additional revenues, thereport said.

But the biggest impact could be in Alberta where every $1 US change from the projected oil price represents a $265 millionadjustment to Alberta's bottom line.

If Alberta crude isn't hit with unexpected transportation bottlenecks like last year and the loonie's weaker forecast holds, Kavcic said the province could be looking at about $3 billion of upside.

Those revenues, if realized,could be applied against Alberta's forecast deficit of $8.8 billion.

"That said, the boost from prices could be partly offset by the outage at Syncrude, and any desire to ramp up program spending in-year," Kavcicwrote.

"Alberta has an election coming in 2019 and, while we won't speculate on political strategy, this could be taken as an opportunity to rebuild fiscal credibility in a province that has historically been the most conservative in Canada."

Mount Royal University political scientist Duane Bratt said it won't be easy.

Jason Kenney'sUnited Conservative Party has been attacking the government's handling of the economy and Albertans' mindsmay be hard to changeeven with some positive fiscal news next year.

"There's a good news story for the NDP to tell here,"Bratt said.

"The question is whether the swing voters over the last three years have just given up on any credibility from the NDP. That's the challenge that they've got."