L. Ian MacDonald

March 19, 2020

 

As the COVID-19 coronavirus pandemic justifiably monopolizes public attention these days, another major story — also with serious economic implications — is playing out in Alberta.

When the Alberta government released its budget estimates for the coming fiscal year on February 27, Premier Jason Kenney’s numbers were based on oil priced at US$58 a barrel.

With that, Kenney tabled a $57 billion budget with a $6.8 billion deficit. And before they voted on it in the legislature on Tuesday, Kenney topped up a $20.5 billion provincial health budget with another $500 million for dealing with the COVID-19 crisis. But since that will presumably be coming from the feds, Edmonton stuck to its deficit forecast of $6.8 billion.

If only.

As Kenney has been talking this week, the benchmark price of West Texas Intermediate tanked again, to $20 at Thursday’s opening, though it rallied to nearly $26 at day’s end. The Canadian Crude Index opened in single digits below $9 though it closed at $13.30, up 54 percent on the day.

Every dollar drop in the price of oil costs the Alberta government $350 million in foregone royalties and revenues. Every $10 drop costs $3.5 billion. A $30 drop, about where we are now, costs Edmonton more than $10 billion.

For Alberta, these numbers announce an existential crisis, not just for its government and economy, but for its very way of life.

Oh, for the days of Peter Lougheed, when the price of oil tripled in the 1970s, and then tripled again. And again. The oil bonanza enabled Lougheed to create the Heritage Trust Fund, $14 billion by the time he left office in the mid-80s. What Kenney would give to have a rainy-day fund like that in today’s dollars, rather than the mere $17 billion the Heritage Fund was valued at in 2017.

Alberta isn’t the only oil-producing province. Saskatchewan is in the oil business, too, as is Newfoundland and Labrador with its offshore oil.

But Alberta is the heart of it, the heart of Canada’s leading export industry, even more so than the automotive sector.  This would be the same auto industry where the Big Three—Ford, General Motors and Jeep-Chrysler—are closing North American plants for an indefinite period. Slumping sales because of a pandemic are one reason, to say nothing of an overriding health issue—it’s hard to do social isolation on an assembly line.

What no one in the Alberta government or oil industry could have predicted last month was the price war between Saudi Arabia and Russia, the world’s two largest producers of crude after the United States.

With global demand slumping sharply because of COVID-19, the Saudis wanted to reduce supply and maintain prices. The Russians wouldn’t play, so the Saudis flooded the market and slashed prices instead.

And what of the Americans in all of that? Well, the Saudis are evidently annoyed that the Americans, because of shale oil, are now self-sufficient and exporting a refined product.

The Saudi-Russian oil war caused the stock market to crater last Monday, and it’s been trending south ever since because of that and the pandemic. The Dow, recently near 30,000, is now settling in around 20,000. In Toronto, it’s much the same story, with the TSX plummeting from nearly 18,000 to the 12,000 range.

For Donald Trump, the crash of the stock market is politically inconvenient, to say the least, in an election year.

The irony is that the Saudis and Russians are supposed to be his friends. He jumped to the defence of Saudi Crown Prince Mohammed bin Salman after his palace organized the assassination of journalist Jamal Khashoggi of the Washington Post. And Trump has defended Vladimir Putin, to whom he is evidently beholden for the Russians’ treacherous involvement on his behalf in the 2016 U.S. election.

What have MBS and Putin done for Trump lately? Check the markets.

The oil crash and market losses have brought Justin Trudeau and Bill Morneau to an understandable conclusion—fiscal frameworks be damned.

The emergency package they’ve brought in this week is quite creative — $27 billion in new program spending, and $55 billion in deferred payments such as taxes and mortgages.

The $27 billion up front is only 1 percent of GDP, and as the prime minister pointed out, Canada has that margin, with the lowest debt-to-GDP ratio in the G7. As for the other $55 billion, Finance Minister Morneau not only has all-party support in the House, but the approval of the financial establishment, from the central bank to the chartered ones, from Governor Stephen Poloz to the CEOs of the Big Six.

It was a uniquely interesting moment when Poloz appeared with Morneau last Friday, and again this Wednesday as the package was being announced, even though he had no bank rate cut to announce himself in the wake of the U.S. Federal Reserve cutting its rate to virtually zero.

It’s unheard of for the governor and the finance minister to make a joint appearance. There is a prevailing sense of a separation of powers between them, not constitutionally but in practice.

But in that sense, their appearing together may be another kind of statement—one that speaks for itself in the present context. All hands on deck.

L. Ian MacDonald is Editor and Publisher of Policy Magazine.