Front month light, sweet crude (WTI) settled at US$63.22 on the New York Mercantile Exchange Monday, down $1.45 from Friday's close.
Brent light sweet settled at US$60.30 a barrel down almost $27 from the provincial budget's assumed average price. Oil companies operating offshore Newfoundland and Labrador use Brent as the reference price for crude from the Hibernia, Terra Nova and White Rose fields offshore Newfoundland and Labrador.
While there is some uncertainty as to what effect falling crude prices will have on the current budget, a general recession in major markets and a lower price of oil could serious reduce provincial government revenues in 2009.
At an average price of US$60 a barrel, annual production of 120 million barrels and a dollar premium of 30%, the province's oil royalties would be something on the order of $1.5 billion. At 100 million barrels - slightly below the current year forecast of 111 million - the royalty take would be slightly more than $1.3 billion.
That is between $200 million and $400 million below the current year royalty projections in the budget.
To put that in perspective, bear in mind that if all the budget projections came true for the current fiscal year, the provincial government would be short $414 million on current and capital account and $794 million short overall.
Given the high oil prices at the front end of the fiscal year and the healthy consumer spending, the budget may come up balanced at the end of the year. It almost certainly won't be in a surplus as it hasn't been in surplus for the past two fiscal years by any measure most people would understand. If you have to borrow $110 million at the end of the year to pay off the bills and settle up accounts, then there was never really a surplus of $1.0 billion of $1.3 billion as claimed. It may have existed in some form of accounting but at the end, the budget came up cash short.
As an aside, the Premier tossed aside an opposition claim that there was confusion coming from provincial government statements on the economic crunch. He said something to the effect that the opposition spokesman didn't know the difference between cash and accrual accounting.
That's really neither here nor there. In his news release last week, Kelvin Parsons noted that Dominion Bond Rating Service had projected a surplus of $291 million while the provincial finance minister had forecast $544 million when he brought down the budget last year. Both those numbers are expressed on the same basis, as is plain from the context in the DBRS news release.
In other words, DBRS is projecting a smaller surplus than the one the government had projected. That much is absolutely correct: $544 million versus $291 million
By the same token, the comparisons at Bond Papers - which some may be finding a bit tedious at this point - have been done on a comparison of apples with apples.
No matter how one looks at it, the odds are high that the provincial budget for Fiscal Year 2009 (starting 01 April 2009), will have to either reduce public spending or undertake some borrowing. If the current budget were repeated exactly as is - exactly the same spending levels - and allowing only for the reduced oil revenues, the provincial government would have to borrow almost as much money as it would take in in oil revenues in order to balance the books.
Think about that for a second.
For the past two years, the provincial government has been able to underestimate oil revenues knowing that - in all likelihood - actual revenues would greatly exceed what they forecast. At the end of the year, they have claimed huge surpluses. In fact, the spending projections took into account the anticipated real price for oil, as opposed to the conveniently low-balled assumption. The auditor general made reference in his report earlier this year to the tendency in recent years to inflate spending based on highly volatile oil prices.
Starting this year, however, that pattern of low-balling revenues has essentially failed. The global downturn, now estimated to last into 2010, means that for at least one and possibly the next two fiscal years after this current one, the provincial government will be dealing with dramatically reduced revenues. At the very least, they can't count on the conjuring trick of windfalls to get them out of the heavy level of planned spending without resorting to borrowing.
And if you consider it, borrowing even a half a billion dollars a year is not a huge amount on a budget of $6.0 billion or more.
It is a huge amount if one considers doing that for a couple of years will add a billion dollars or so to the provincial direct debt.
It is a huge amount when one considers that at the same time, the provincial government is considering launching a development project on the Lower Churchill that could add as much as $6.0 to $9.0 billion on a public debt (accumulated borrowing) which is already hovering at about $8.5 billion.
Discussing the state of the current provincial budget balance may not be as useful and exercise as forecasting for 2009. The current administration may have to actually make difficult choices, for the first time in a very long time.
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