Tuesday, April 07, 2009

Alberta Province Projects Deficits on Lower Oil Revenues

Globe and Mail (Toronto) - Alberta Tightens Pursestrings Despite Downturn
Bloomberg - Alberta Offers Incentives to Drillers as Revenues Decline
Vancouver Sun - Alta. to Post $4.7B Deficit

The Canadian province of Alberta will face its first deficit in 16 years due to declining oil and natural gas revenues. Alberta, which holds the second-largest reserves of oil in the world behind Saudi Arabia, had been growing rapidly and spending large amounts on infrastructure and resource development. The Alberta government projection puts the deficit at C$4.7 billion, which would be the largest in the province's history.

The red ink is being driven by struggles in the oil industry. Companies' spending on oil extraction--which involves extracting oil from bitumen found in vast deposits of sand--is expected to drop by half, to $10 billion. Overall resource revenues for the province, headlined by oil and natural gas, will fall by C$6.4 billion. Oil prices that are expected to hold at US$55 in the near future are contributing to lack of spending on oil development.

The Alberta government expects to run budget deficits for three years prior to a return to surplus. The government is also expected to offer incentives to encourage oil drilling, contributing as much as C$1.5 billion. Unlike other provinces, however, Alberta will not embark on a stimulus spending campaign to jolt its economy back to life. Instead, the province will impose measures of financial austerity such as a 9.6 percent cut in capital spending.

Although some construction industry and labor leaders warn that Alberta's inaction during the crisis could cost 100,000 jobs, the government predicts a more modest 15,000 loss in jobs. Overall, Alberta's economy will shrink by about two percent in 2009.

1. Given the better-off condition of Canada's economy compared to other large economies, which priority should Canadian leaders be more concerned about: immediate stimuli measures or preventing large deficit spending?

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