Oil’s decline not only hurting western provinces

New data from the National Energy Board suggests tougher times are still to come for many resource-dependent provinces.

Resource dependent provinces like Alberta, Saskatchewan and Newfoundland and Labrador have been hit on all sides due to lower revenues from weak oil prices and resulting increases in unemployment.

But another source of financial trouble is the slowdown in bids from oil companies on major exploration projects. The National Energy Board said Wednesday that sales of the right to drill on Crown land across the country’s west are at their lowest point in 17 years.

Land sale revenue in the western provinces hit $322 million in November with one month left in the year, the NEB said. That’s one-third the amount in 2014 and significantly less than 2008′s record $7.4 billion.

And while the total area of land involved in land sales went up this year compared to 2014, the revenue per hectare dropped significantly from $745 last year to $193 as of October 2015, according to the NEB.

At the same time, oil prices continue to decline, going below $40 US this week.

Hurting households nationwide

“Falling oil prices dramatically affected household incomes in Alberta, Saskatchewan and Newfoundland and Labrador, as one would expect,” Brandon Schaufele, an assistant professor at Western University’s Richard Ivey School of Business, tells Yahoo Canada News. “That effect is actually larger now than in the pre-2000 period.”

And while the effects of the downturn in the resource industry are being most strongly felt in those provinces, Schaufele says his research shows that all of Canada is feeling the pain.

“The effects are much smaller but consistently across the board, falling oil prices caused an effect in pretty much every province except PEI,” he says.

That wasn’t historically the case, Schaufele says, but Canada’s economy is much more integrated today than in previous times: workers are more easily mobile between regions, and the economies of other provinces provide goods and services to the resource sector.

Long-term volatility

The only thing he can comfortably predict about the resource sector in the long term is that it will remain volatile, Schaufele says.

“Things look pretty grim for the energy sector in Canada in the short run,” he says.

But the long-term prognosis may not be as bad as some fear.

For example, Alberta’s recent announcements about changes in climate and greenhouse gas policies put it ahead of the game nationally, Schaufele says. If that opens up the chance to build pipelines that were previously rejected — most notably, Keystone — then that could open up new markets for the province.

But other provinces are feeling the sting of the decline in the resource industry more sharply. Newfoundland and Labrador is significantly more dependent on revenue from the resource industry than other provinces, Shaufele says, which makes it particularly vulnerable.

“Newfoundland is the most resource dependent province in the country,” he says.

The province has already increased personal income taxes rates, he says, as has Alberta. Saskatchewan has reduced some deductions that can be taken.

“The amount that they’ve increased them is roughly proportional to the amount that they decreased them when the price of oil was increasing,” Shaufele says of tax rates. “This is how governments tend to react: when prices fall, taxes increase.”

While that approach may be popular with a public that wants governments to spend during the good times, it’s not necessarily the best long-term approach to an inherently volatile revenue source, Shaufele says.

“Resources create a lot of volatility for government revenues. Governments need to understand how to manage this volatility,” he says. “But there are not easy fixes.”