Friday, July 27, 2012


The free spending Progressive Conservative government's of the past decade have taken a cross-your fingers approach to fiscal planning coasting on the winds of good fortune.

Some of that good fortune, about $4 Billion can be found parked in various subheadings in the last provincial budget. Yet there is no Heritage or Sustainability fund.

That cross-your finger approach resulted in one heck of a projection in the 2012 opportunity budget which based government expenditures on a $120 barrel of oil. That oil is trading at $105 a barrel today and is likely to stay at the $100 a barrel level, or below,  for the rest of the year!

 Moody’s recently lowered its crude price assumptions to $90 for West Texas Intermediate in 2012, with an additional expected decline in 2013 to $85. In London, Brent North Sea has crude cut below the US$100 level.

This will result in a $700 Million dollar deficit this year and $1 Billion deficit next year! Many people are scratching their heads wondering, with all the prosperity around us, how can we be drowning in a sea of red? What will happen in the future, if we can not make it now?  Has this government been squandering Newfoundland and Labrador's wealth?

It looks like Lady Luck has abandoned Premier Dunderale. However there is still lots of time for Tsunami, or a war to break out in the Middle East!

Who determines which projection for the price of oil will be used for the budget process? How many independent projections were considered? Why was the overly optimistic figure of $120 a barell used instead of a more CONSERVATIVE number.

We now know how far off the province was with it's projection. It looks as if oil prices will stay in the $100 a barrel range for the next 18 months or so. That means a flash flood of red ink at the Confederation Building and lots of red faces at Treasury Board and Finance. 

Trinidad and Tobago pegged oil prices at $75 a barrel in it's 2012 budget. Alberta, who has a great deal of experience at this, pegged oil prices at an optimistic $99.25 a barrel for the upcoming fiscal year. The Saskatchewan government based it's budget on a $100-a-barrel benchmark.  

The provincial government is coping with a triple whammy, the complete loss of royalties from two offshore production facilities (for 1/4 of the year), a significant drop in royalties related to a sharp decline in oil prices &  the loss of $500 million from Ottawa through the Atlantic Accord.

Why, than, did this province go with such a rosy prediction? 

The public deserves a much better explanation, and understanding ,of the process by which government uses to peg oil prices. Surely we can do better!


Anonymous said...

Price forecasts are obviously based upon data from organizations that do that, such as PIRA.

The interesting point for me is that on past years the government was slammed for using a forecast that was low, so they could claim a surplus, and when this budget was released I recall pundits claiming that the gov't were finally using realistic forecasts.

While not necessarily a fan of the government, I think that this was a case of "damned if you do; damned if you don't"!

Peter L. Whittle said...

When I was writing the post, I thought, predicting oil prices in today's world economy is bit like trying to nail jello to the wall.

The windfalls were windfalls, oil prices jumped. In this case, I wonder why the most optimistic numbers were used in this province, while other jurisdictions seemed to use numbers that appear to be closer to the trend.

I have a tendency to shoot low, it is easier to manage expectations. What $120 oil proved is that the government needs that kind of revenue to keep up with it's spending, and even than they expected to be short.

Seriously, current account spending has been charting a course for disaster since at least 2005. The Conservatives do not have a record of success on controlling public spending. An increase of nearly $17 Billion, since 2004, in new spending, outpacing revenues is a train wreck waiting to happen!

Anonymous said...

"A train wreck waiting to happen". I watch Question Period and if this present Government listened to the NDP and the Liberals a train wreck would be minor. Listening to Michael and her bunch they think money grows on trees.

Peter L. Whittle said...

Well, all one can look at is the record of spending over the past ten years and wonder if this crowd thinks money grows on trees as well. Doubling government expenditures, not living within our means, letting the unfunded pension liabilities creep up again without setting up a heritage fund for the future, yea, a lot to be proud of on the fiscal front...train wrecks and spending like drunken sailors...

It is worrisome...the issue here is not the alternative, it is the government!

@mcmanustheautho said...

Two of the guiding principles for accounting are: Be Realistic, and be Conservative.

If the NL gov't wishes to use the PIRA numbers , that is fine, but they should take an average from the PIRA range or discount the PIRA figure by some percentage in the interest of being conservative.

The Dunderdale response to the growing deficit problem is hilarious: Ministers are to eliminate all non-necessary travel.

Firstly, shouldn't all travel at taxpayer expense be necessary in the first place?

Secondly, if you wipe out all NL gov't travel entirely, they would save approximately $11 million per year. That is nothing in a $1 Billion problem.

The Premier can't seem to grasp that a BILLION is a million, Millions.