Reliance on oil a vulnerability: NDP
A sharp drop in the price of a barrel of oil has Finance Minister Tom Osborne “very concerned.”
Last Thursday, the price of a barrel of brent crude oil was just under US$50. By Monday, the price plummeted to US$34.
The shock comes amid a major influx of oil from Russia and Saudi Arabia into international markets, on top of reduced demand due to early impacts of the coronavirus on global economies.
In the 2019-20 provincial budget, the Liberals set a benchmark of US$65 per barrel, which was adjusted to US$63 per barrel in the December economic update, which saw a decrease in oil production increase the 2019-20 deficit from $575 million to $943 million.
Osborne says his department is not changing forecasts yet, but the shift in price is major.
“The 11 agencies that supply oil price projections to the province have not, at this stage, changed the long-term projections. Similarly, when the U.S. took military action and we saw a spike in oil, they didn’t change long-term projections. If this becomes a trend, they will,” said Osborne.
“It’s obviously concerning. I am very concerned any time we see a dip like this in the price of oil.”
At US$65 per barrel, the government expected to bring in just under $1.1 billion in royalties from offshore oil and gas production.
Memorial University economist Wade Locke says there’s no way to spin the drop as good news.
“It’s a big deal. Before, we had an expenditure problem. Now we have a revenue and expenditure problem,” he said.
“It’s not good.”
Locke says borrowing more money to make up the lost oil and gas revenues is a fraught path, as well.
“The ability to borrow is limited as well. Now, you have a situation where there’s a lot more risk to lend to you. We weren’t in a good situation before and we had revenue. Now we have less revenue, so we’re in a worse situation than we were before,” said Locke.
“So either we try to borrow some more or we reduce expenditures to come back in line with the revenues.”0
The net debt of the province is $13.4 billion (after the $2.5-billion Hibernia Dividend agreement is factored in).
Tory finance critic Tony Wakeham was unsure whether increased borrowing or expenditure cuts are needed to address the drop in oil prices.
“I think that’s the kind of conversation that needs to be had, an open and honest conversation with the minister. To open the books and to show us exactly what we’re facing as a province,” said Wakeham.
NDP Leader Alison Coffin says there’s a myriad of factors in what could be a major problem with relying on oil and gas as a province.
“We have a whole lot of things happening right now. We’ve got coronavirus, which was an unexpected thing that happened that’s affecting global economies. We have a price war that’s going on between the Saudis and Russia right now,” said Coffin.
“We also found out Russia just had an enormous discovery of oil. That means we have some supply issues happening, too. All of these things together cause us great concern because if you look at the auditor general’s report, repeatedly she’s talked about vulnerability. That means moving away from oil price and oil in general. Unfortunately, we haven’t seen the premier or the finance minister doing an appropriate amount of divesting. That means our economy is going to continue to be vulnerable until we start moving away from that.”