As oil money dries up, Alberta's financial woes laid bare

Ever since Jason Kenney and the United Conservative Party took power in Alberta, they have repeatedly argued the province has a spending problem. That's where they have centred their fiscal focus.

Thursday's fiscal update, however, showed just how bad the revenue side of the government's finances has become — the plight of the oilpatch is leaving a giant hole in the budget.

Revenue from the oilpatch is expected to be $1.2 billion this year, down from the $3.9 billion forecast and a far cry from better days in the sector, such as 2014-15 when those revenues were $8.9 billion.

Revenues from the oil and gas sector haven't been this low since the early 1970s, according to government documents.

The oilsands are especially woeful. Bitumen royalties were expected to generate more than $3 billion this year, but instead could now provide just $686 million.

Many oilsands projects are generating little to no positive returns this year, according to government documents, since many are unable to turn a profit.

Projected corporate income tax revenue has been cut in half.

Massive deficit

The oilpatch's struggles, in addition to the impacts of the pandemic, have contributed toward an expected deficit of more than $24.2 billion.

That is equivalent to roughly 8.1 per cent of the province's GDP. Not only is that the largest in Canada and the widest shortfall on record for Alberta in several decades, but it would be the "largest deficit recorded by any province over the past 35 years," according to Robert Kavcic, an economist with BMO Capital Markets.

Kenney's government will need to figure out where it will find the money to pay its bills.

"The challenge for Alberta will really show itself over the medium term, with the energy sector likely to remain restrained and some fundamental issues (like revenue sources) possibly needing to be addressed," said Kavcic in a research note.

The government's fiscal update on Thursday provided little insight into what choices they will make to help rectify the situation or when the province could eventually return to a balanced budget.

Watch | Alberta on track to record-setting $24.2B budget deficit:

Instead, Finance Minister Travis Toews explained how it will take a while to return to pre-pandemic levels, when the economy was already sputtering.

"The road to recovery will be slow and fragmented. Real GDP is not expected to surpass 2019 levels until after 2022. Unemployment is unlikely to fully recover until after 2021," he said in a speech to the legislature.

Getting out of the red

On the same day, neighbouring Saskatchewan provided its own fiscal update and, despite similar pressure from depressed oil and gas activity, the government expects to have a balanced budget by 2024.

In Alberta, the plunge in oilpatch revenues is "significant" and creates a "sizeable dent in the budget," according to Charles St-Arnaud, chief economist with Alberta Central, the central banking facility for credit unions in the province.

The worst of the province's economic hit is likely over, he said, but he would still like to see a plan from the government or expectations for the years to come.

"With growth coming next year and with the unemployment rate expected to lower next year, should we expect revenues to gain back?" He said in an interview: "With that, you could have probably gauged what to expect on the resource revenue side."

The answer to the province's revenue shortfall isn't easy to find. Introducing provincial sales tax is often suggested by economists, but there is little political will by any past or present Alberta government to do it. Moreover, a new sales tax would only narrow the deficit, not solve it.

For now, Alberta remains an overwhelming petro-economy and as such, it faces the same uncertain outlook as the oilpatch itself.

Addiction to royalties

Since the pandemic, the sector has struggled with too much oil production and too little demand for fuels. Oil prices have stabilized around $40 US for the North American benchmark, West Texas Intermediate. At that price, some companies are able to turn a small profit, but it is not enough to spur new drilling.

That oil price also remains fragile. Companies and countries around the globe continue to limit how much oil they supply to keep the market from being awash in crude and send the price spiralling down again.

The reliance on the oil and gas sector is nothing new, as the University of Calgary's Ron Kneebone detailed in a 2013 research paper about Alberta's finances. He compared it to a substance-abuse problem.

"The substance is fossil fuels, and the province has become hooked on the revenues from oil and gas sales to fund its spending on health, education and social services. As we are so often told, the first step in beating an addiction is admitting that a compulsion has gotten out of control," he wrote.

Industry headwinds

The difference today is how bad Alberta's finances have become and the industry's inability to help because of its own poor health.

The state of the oilpatch was reflected south of the border this week; Exxon-Mobil is being kicked out of the Dow Jones Industrial Average.

Exxon was one of the most valuable companies on Earth as recently as 2013, but it's now losing money and its stock price, like many oil and gas companies in North America, has slowly fallen over the last five years.

The headwinds facing the sector can't be ignored, according to Barry Schwartz, chief investment officer at Baskin Wealth Management.

"We've seen just the beginning of the electrification of the overall transportation system around the globe. And it's hard to imagine that fossil fuels will be leading in terms of market capitalization and profitability going forward, so I guess I applaud the folks at the Dow," he said in an interview earlier this week.

"You can't just be married to a business or a business model forever. You got to be on top of things, and really recognize: that was then and this is now," said Schwartz. "It's hard to imagine this trend reversing."

For now, the capital investment, jobs and government revenue generated by the oilpatch remain restrained in Alberta.

Royalties from the oilpatch have cratered and the government will have to figure out where to find money to battle its hefty deficit, let alone pay off the nearly $100 billion in debt the province has accumulated.

While Kenney and the UCP have tried to shine a light on government spending, it's becoming increasingly clear they'll need to take a hard look at where they get their money, too.