28 May 2016

The Oracle on the Parkway #nlpoli

Crude oil was trading north of US$50 a barrel for about 30 seconds this week.

What with the government's cash deficit being $3.0 billion and all, CBC had someone write up a little story about what that would mean for government finances.

You will see a lot of these stories when oil jumps because they are easy to write.

Could we be richer than we think? the headline asked.

Good question.

$1 change in crude prices brings the government an extra $23 million.  That means we could get an extra $230 million if oil averaged $50 a barrel this year instead of the $40 the government assumed in the budget. Extra 10 bucks a barrel, right?


So how much would crude oil have to hit in order to fix the financial mess for this year alone?

This year's budget calls for a total of $3.0 billion in new borrowing.  It would be $3.5 billion if we wiped out all the tax increases everyone thinks is too much to bear. We'd still have to close libraries.

If a $10 increase in oil would bring the government an extra $230 million, then we'd need a $152 increase in the price of oil to balance the current budget, without any further tax increases.

Oil would have to be almost $200 a barrel, in other words.

Even if we allowed for $1.3 billion in borrowing for Muskrat Falls,  we would still have to borrow $2.2 billion just to balance the books for everything else without any tax increases.  Oil would have to go up another $95 dollars a barrel.  That's oil trading at $145 a barrel  in other words.

You'd get rid of your tax increases.

But just think of what that would do to your daily spending.  Back in 2008, they figured that oil at US$200 a barrel would bring gasoline prices of about CDN$7.50 a gallon at the current Canadian exchange rate.  Really crude calculation would put that at about $2.00 a litre or roughly double what you are paying at Costco in St. John's this week. Everything you buy in the province would go up accordingly.

Not pretty.  All the folks claiming that the current tax hikes would bankrupt them can only dream about what oil at US$200 a barrel or even $145 would do.

Now for the extra bit of fun.

Muskrat Falls comes on top of that.

Look at last month's electricity bill.

Double it.

That's what Muskrat Falls will do to your household electricity bill, guaranteed, regardless of anything else, based on Nalcor's own figures right now.

Now think about all those other costs, again.

Yeah, CBC, maybe we are richer than we think.