Low oil prices may affect government budgets, but they also offer some benefits to individuals. Gasoline prices have dropped nation-wide to about $1 per litre. Lower transport costs also lead to reduced prices for consumer goods. And to reduce the risk of the “oil price shock”, the Bank of Canada cut interest rates by a quarter per cent to 0.75% in late January – good news for homebuyers.
Since June 2014, the price of oil has dropped more than 50%, currently hovering below US$50 per barrel (WTI). That price slide is impacting provincial and federal budgets in a big way. Here are some numbers that explain how.
Alberta, Canada’s biggest oil-producing province, receives on average 29% of its revenues directly from non-renewable resources. Alberta based its 2014-2015 budget (ending March 31, 2015) on average oil prices of US$95.22 per barrel, so actual royalties are now much lower than forecasted.
The result is that Alberta is expected to end this fiscal year with a $500 million deficit and face up to a $7 billion revenue shortfall next year.
To compensate for lower resource revenues, Alberta is considering a variety of options, including spending cuts, changes to corporate and personal income tax rates, and even introduction of a provincial sales tax. (It is estimated that a 5% sales tax could result in $5 billion of revenue for Alberta.)
This of course leads to another impact – an election. Alberta Premier Jim Prentice may call a general election this year, rather than waiting until spring 2016, to ensure his government has a mandate to make these kind of major budgetary changes.
Oil prices have dropped 40% since the end of November, making budgeting a challenge.
At the national level, low oil pricing has a less direct effect, primarily impacting the personal and corporate tax base mean lower corporate texes mcuh eax base.dians. nd territories, . Lower oilpatch company revenues mean lower corporate taxes, while personal income tax revenues take a hit because of layoffs. Thus, low oil prices are also making some big federal budget impacts.
In its report Fiscal Impacts of Lower Oil Prices (January 27, 2015), the Parliamentary Budget Office stated that with continued oil prices in the US$48-$51 per barrel range, Canada will run a deficit of $1.2 billion this fiscal year, even with dipping into the contingency fund. For the next fiscal year (starting April 1, 2015), Federal Finance Minister Joe Oliver is delaying the release of the 2015-2016 budget until at least April, citing oil price uncertainty.
Even interest rates have been dropped because of lower oil prices. The Bank of Canada cut interest rates by a quarter per cent to 0.75% in late January 2015. Bank Governor Stephen Poloz said the cut provides insurance against risks stemming from the “oil price shock”.