High oil prices a potential boon for beleaguered Alberta

This column is an opinion from Trevor Tombe, an associate professor of economics at the University of Calgary. For more information aboutCBC's Opinion section, please see theFAQ.

After falling sharply last year (even briefly turning negative), oil prices have been on a welcome tear lately.

This month, the price of a barrel of West Texas Intermediate (a common benchmark) exceeded $70 US per barrel for the first time since 2018. Only six short months ago, that same barrel would fetch barely more than $40.

Not since early 2008 have we seen oil prices rise so quickly. And in percentage terms, recent year-over-year increases are among the largest on record. To be sure, further oil price increases appear unlikely. Investors currently locking in contracts for future oil deliveries are betting prices fall but only modestly.

For a province that produces roughly 1.3 billion barrels of oil per year and whose economic and fiscal challenges have been the most significant in a generation higher oil prices provide much needed relief to Alberta's provincial budget and a boost to our slowly recovering economy.

Potentially massive fiscal windfall

In its latest budget released earlier this year, Alberta's government budgeted oil prices of $46 per barrel. By 2023/24, they hoped prices would rise above $56. These projections are now far below both current prices and current expectations. Based on where investors are betting oil prices will be, the best guess is for oil to average $68 per barrel this fiscal year fully $22 per barrel more than the government planned for. I illustrate this below.

This is a massive gap. Today, each $1 per barrel change in oil prices (sustained over a year) is worth roughly a quarter of a billion dollars to the government's bottom line.

Each day that prices remain at their current level means roughly $10 to $15 million more in government revenue than was planned for. Looking out over the current year, Alberta could see revenues increase by as much as $5 to $6 billion. So a projected $18 billion deficit this year may come in at $12 billion instead. That's still a sizable fiscal hole, to be sure, but it's a welcome improvement.

Looking even further to the future, the budget projected oil at $55 per barrel for the 2022/23 fiscal year while the market today expects $63. In 2023/24, the budget projects $56.50 while the market expects $59. These smaller differences still matter.

Over the next three years, higher oil prices may mean an additional $12 billion that Albertans won't need to borrow to fund public services. Instead of our government's net debt exceeding 26 per cent of Alberta's GDP by 2024, it may come in at less than 22per cent. This is over $2,500 per Albertan in lower public debt by 2023/24.

We may very well be on a path to balance by 2024 or 2025 without new or higher taxes. This previously optimistic scenario now appears tantalizingly plausible.

Potential boost to Alberta's economy

High oil prices means more than a smaller deficit. Higher oil prices may generate higher rates of economic growth which means higher incomes and more jobs for Albertans.

Earlier this year, the government expected Alberta's economy to grow 4.8 per cent in 2021. More recently, the Conference Board of Canada (in an analysis that accounts for rising oil prices) expects growth to be 6.3 per cent. But if prices remain near their current highs, growth could exceed seven per cent and total employment may, just may, fully recover COVID-related job losses by the end of the year.

It's tough to quantify the benefits precisely, but the government's own "high price" scenario released in Budget 2021 provides a good guide. This scenario has oil prices averaging $61 per barrel over the next three years, which is just below the current market expectation of $63. So let's run with it.

That analysis suggests high oil prices could see over 60,000 additional jobs being created by 2024 along with an additional $30 billion in annual economic activity that year. Most striking, it could mean a full economic recovery from COVID could arrive next year a full two years earlier than previously projected.

Alberta's economic recovery from COVID has lagged behind all other provinces so far. This could soon change.

Uncertainty and risk remains

High oil prices at least in the short term are a welcome boon. But it won't last. At some point, eventually, prices will fall again due to one unexpected development or another.

There's little the government can do about broader economic swings beyond helping individuals and businesses through challenging times. But it can directly control its own fiscal decisions and wean Alberta's budget off its resource revenue dependence.

There has been some progress. In 2014, the last year Alberta ran a (modest) surplus, an oil price of roughly $91 per barrel was required. After oil prices plummeted not long after, former premier Jim Prentice raised taxes and restrained spending. That budget's return to balance required $75 per barrel of oil. Fast forward to former premier Rachel Notley's last budget in 2018, and it too projected a return to balance reliant on high oil prices $73 per barrel in that case.

There is currently no projected path to balance thanks to COVID-19, but I suspect there soon will be. And if Alberta does return to balance on the backs of oil prices in the $60-$70 range, previous decisions by former governments deserve some of the credit. But more work will be needed. Despite these gradual improvements, Alberta's fiscal fortunes remain tightly tied to oil. Mostly by choice.

It doesn't have to be this way. So while we benefit from the current high prices today, we should think about the longer term and plan prudently for a future where finally finally! articles like this one are no longer worth reading.

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