Provinces feel the positives and negatives of oil price drop

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Energy-producing provinces are scrambling to cut costs while the long-struggling economies of Quebec and Ontario are in line for a boost as falling oil prices shake up the national economy.

The big question for provincial leaders as they prepare next year's budgets is whether low prices are a brief and unusual blip or a longer-term development that will lead to dramatic change.

Newfoundland and Labrador Premier Paul Davis is preparing for the more dismal view.

"There is a thought that lower oil prices may become the new normal, so we've got to make substantial adjustments to our budget," Mr. Davis told The Globe and Mail.

On Tuesday, Mr. Davis's government – which depends on resources for one-third of its revenues – revised its projected deficit for the current year from $538-million to $916-million.

"We know that in the coming year we've got significant challenges, because we rely so heavily on oil," the Premier said. "It will be significant next year and likely years after that."

Alberta and Saskatchewan – the two other leading energy-producing provinces – are already keeping a tight lid on spending in the face of expected lower revenue. Alberta said this week that revenues could be down $7-billion this year, while Saskatchewan says it will be able to stay in surplus this year thanks in part to higher potash revenue and strong agricultural exports.

Saskatchewan Finance Minister Ken Krawetz said next year will be more challenging should oil prices stay low.

"The economy of the province is still operating quite nicely. For government, though, on the revenue side – because we rely on oil to that degree – we are concerned about where that might go," he said in an interview.

"It definitely will be a bigger adjustment for next year."

BMO senior economist Robert Kavcic described Newfoundland and Labrador's revision as the first shoe to drop on the provincial scene.

"Get ready for more bad news from Canada's other oil-rich provinces," he said in a research note on Tuesday.

While lower oil prices hurt energy-producing provinces such as Alberta, Saskatchewan and Newfoundland and Labrador, they can benefit manufacturing provinces like Quebec and Ontario, especially with a lower Canadian dollar. Over all, the impact is negative for economic growth in Canada, which translates into less tax revenue for Ottawa.

Prime Minister Stephen Harper insisted on Tuesday in Quebec City that his government will still post a surplus next year, but that lower prices will mean less "flexibility."

"Even with dramatically lower oil prices, we will balance the budget," he said.

The sources of strength in the Canadian economy are about to shift, with CIBC World Markets reporting on Tuesday that Ontario will have the strongest growth in the country in 2015 and 2016. Ontario and Quebec could bring in about $3-billion in additional revenue next year as a result, according to CIBC chief economist Avery Shenfeld. Over all, CIBC estimates that lower oil prices will mean a loss of as much as $13-billion in revenue for federal and provincial governments combined.

Economists say it is very challenging to predict where oil prices will go, which does not help governments estimate future revenue.

Alberta Premier Jim Prentice warned this week that low prices may last "far longer" than expected.

Newfoundland and Labrador had been counting on oil prices of around $105 (U.S.) a barrel. Saskatchewan had expected an average price of $91. The price of North American crude has traded at about $56 this week.

Federal Finance Minister Joe Oliver hosted the provincial and territorial finance ministers in Ottawa on Sunday and Monday. Energy featured prominently in the discussions and the ministers received a presentation behind closed doors from Bank of Canada Governor Stephen Poloz.

Mr. Krawetz said his takeaway from those discussions is that while energy issues are a challenge, there is economic strength in all parts of the country and Canada is doing better overall than many other parts of the world.

"As prices of a barrel of oil have come down, I think you're seeing provinces like Ontario and Quebec, where the manufacturing has been in a decline in the last while, I think there's a great opportunity for them to benefit," he said. "I think I heard from everyone that there is strength in the Canadian economy … There isn't a province that's on the verge of a crisis. We heard that the story from each province was quite positive."

The federal government is projecting a $1.6-billion (Canadian) surplus for 2015-16, a figure that is based on the assumption that the price for North American crude will average around $81 (U.S.).

Ottawa has also set aside a $3-billion (Canadian) contingency for unforeseen events.