For those who have been following along with the discussion of oil prices and provincial government revenue, it’s interesting to compare the price of crude oil at comparable parts of the fiscal year.
On Monday, as you may recall, we took a look at production. As the chart showed, offshore oil production in 2009 is well below production last. It’s so far down in fact that the provincial finance department’s predictions for 2009 might prove to be as accurate as the work of some late-night television psychic.
Here’s a rough look at daily spot prices for Brent crude for the period 01 April to 30 June in both 2008 (blue) and 2009 (red).
So prices were down by something on the order of 40 to about 50% and production was down by 14% in April, 39% in May, and 18% in June. That pretty much guarantees that revenues would be off as well compared to the previous year.
Sure enough, figures obtained from Natural Resources Canada confirm that. Figures for September confirmed the general pattern for the first half of the fiscal year. Oil revenues are running about 15% below the provincial government’s budget forecast.
Not 15% below the December fiscal update that talked about bringing in something like $1.8 billion in oil royalties but 15% below the budget forecast of $1.26 billion.
Provincial government oil royalties are a function of production, the royalty formula and the exchange rate for the Canadian dollar. In the front end of the fiscal year there was a bit of a premium for a cheap Canadian dollar. But as the Canadian dollar has climbed against the American greenback during the past six months, any premium that resulted from selling oil in U.S. funds and then converting to Canadian dollars vanished.
And if you look at the actual royalty figures it’s pretty clear that the improved royalty rate coming from Hibernia in payout couldn’t offset the drop in production, the drop in price and the shifting exchange rate. That’s a clue to the magnitude of the change in oil revenues. Even with all three fields in the optimum royalty condition, royalties are well down in 2009.
Just to keep close track of all this, your humble e-scribbler will have to go looking for the October and November royalty figures later this month That way it will be much more clear if the trends established in the front end of the year are continuing. Odds are they have carried on, despite the claims from the finance department in December.
As a last point, consider that a forecast by the Canadian Association of Petroleum Producers in 2009 showed offshore oil production declining in Newfoundland and Labrador over the next five to seven years. There’s a bit of a peak close to 2020 and then things trail off again as some of the older fields dry up.
That’s the sort of information that should be guiding provincial government budgeting. Revenues aren’t going to be climbing ever higher. Demands for essentially services will, however, and the costs associated with that will rapidly escalate. This is an old refrain around these parts as regular readers well know.
That doesn’t mean there have to be spending cuts; it just means there has to be greater fiscal discipline, consistent and prudent planning and some serious attention paid to reducing the province’s debt load. In other words, the provincial government needs to be doing exactly the opposite of what it has been doing for the past three years.
There is hope.
Until last fall, you’d never have heard a cabinet minister admit what your humble e-scribbler and others have been saying for years.
But first Paul Oram and then others admitted the provincial government’s fiscal plan is unsustainable.
Acknowledging there is a problem is the first step toward doing something about it.
Let’s see what happens.
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