02 January 2017

Praying for a miracle #nlpoli

People are talking about austerity but the simple truth is the people talking that way have a vested interest in exaggerating what is going on in the provincial government.

Yes, we *are* in a very dangerous financial state.

But... the provincial government is doing the bare minimum to keep the creditors happy while waiting nervously for oil to come back​.

In the meantime, there is no austerity and anyone who says otherwise is either ignorant or a liar. 

Some folks are looking at the price of oil and get excited over the teensiest of changes in the price per barrel.  They are missing some simple stuff, though, and at the start of the New Year, it is worthwhile for us to take a quick refresher in basic oil royalty math.

The provincial government is addicted to oil royalties. What the government gets in the way of royalties is a function of two things:  how much oil they produce offshore and how much they get for each barrel when the oil companies sell it.  In other words, royalties are a function of production and price.

Production:  we already know that offshore oil production will take a jump up again around 2019 when Hebron production comes on line.  In 2014,  the offshore regulatory board forecast annual production would hit something like 100 million to 110 million barrels for a couple of years.

Production would fall off rapidly after that, but for a couple of years, we'd see a lot of oil produced offshore.   To put it in perspective that would about half again as high as current production.  We are somewhere around 70 to 75 million barrels the forecast would put another 35 million barrels on top of that on the market.

Price:   Here's where things get a bit tricky.  While current provincial forecast is for oil prices to be less than $50 a barrel,  the National Energy Board is forecasting better prices than that around the time oil production peaks again.  The NEB October forecast put oil at around $70 a barrel within the next four years.

Royalties:  100 million barrels at US$70 a barrel would bring oil royalties on the order of $2.1 billion.  This year, the combination of low production and relatively low price means the government will barely pull in one third of that, or around $700 million. 

Remember what Dwight Ball said last January during some of his earliest interviews after taking office last January?  we "need to find a way to bridge us [from] where we are currently until the commodities rebound".

Rebound would be some time around 2019.  Maybe 2020. 

This stuff is really simple.  You just have to pay attention to what the politicians say. Most of them will tell you what is going on.  You just have to know how to interpret the comments.

And now you know.

The pols are looking for a miracle and as near as they can figure something miraculous will happen in a couple of years time, preferably just in time for the next election in late 2019.In the meantime, lots of people will track every tiny bump in oil prices in the unrealistic hope that the problem we face will magically disappear.

The closer we get to the budget,  the louder the noise will get from the public sector unions and their agents about cuts and austerity and all sorts of evil.  Just look back at last year, though, and you will see that what the government  crowd are trying to do is the opposite of austerity.    They are just trying to hold everything together until the oil comes back.