Monday, December 1, 2014

THE SLIPPERY SLOPE

Oil prices continue to slide today. Prices are back at a level last seen five and a half years ago.

Murray Edwards, chairman of Canadian Natural Resource told the Financial Post, that "Prices could spike down to $30, $40. It got down to $35 in 2008, for a very short period of time."  Shares of Canadian Natural fell more than 9% Friday amid a sell-off in oil stocks following the plunge in crude oil prices. 

At this stage it is impossible to tell if the recent plunge in oil prices is a short-term correction or a long term trend. What is certain is that in this province, where oil has become the new staple, it is a bit of a suicide run.


The government pegged provincial expenditures on royalties based on $105 a barrel oil, roughly $35 more than it is trading for today. The impact may not be felt right away as there is a slight three month buffer between todays price and what our oil has been purchased for. 

Our government has been caught flat-footed, unprepared and without any contingency plans for the economic catastrophe brewing as a result of its unsustainable spending and the golden goose producing fewer golden eggs.

Late last week the Premier announced a spending and hiring freeze in a desperate scramble to reduce expenditures. Even before the recent devaluation of oil, the province has posted two straight deficit budgets with a third projected this year.

Successive auditor generals have warned that spending is out of control and that corrections have to be made. Spending under the Progressive Conservative government is up 58% from when they assumed power in 2003. In fairness, they reduced the net debt from $12 billion in 2004 to a current level of $9.1 billion. Unfunded public-pension liabilities account for 75% of that.

Oil revenue makes up more than 1/3 of the provincial governments total revenues.  Over the past ten years the economy has seen the closure of two pulp & paper mills and the mothballing of the iron mine in Wabush.

We have no reserve funds for an emergency just a ballooning systemic deficit and a dream that the Muskrat Fall's project will transform our economy into one less dependent on non-renewable resources.



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