Authors Note:
I had planned this series in three parts. Of the two already posted, the first dealt with provincial government spending and the second with
revenues. The proposed third part was originally intended to contain a long term sustainability plan for the province.
which were heavily annotated with statistics and graphs. In the course of writing, I found it difficult to be thorough without raising the plethora of issues
the province currently faces. As a
result, the script has grown to over 20 pages, and it is still not
finished!
Gnarley has kindly provided space throughout this summer, to
continue this colloquy. I expect it will comprise an additional six to eight posts. The new plan will conclude with a single
post in which the various parts will be reflected in a single reference.
Gnarley cherishes debate, I would be grateful if readers submitted their ideas
in the comments section.I have examined
the numbers in detail. I am convinced it will be a challenging road
to return to balanced budgets.
in this province if the solution to our fiscal problems are to truly reflect
the views and interests of all sectors of our society.
The government needs ideas and, likely, the Opposition parties, too.
for your continued interest. JM
No More
“Cheaper oil is here to stay, and
energy companies need to adjust to that reality. I do think the industry needs to prepare for
lower for longer” Bob Dudley, CEO, British Petroleum, April
21, 2015
themselves for more volatility in the oil market, with prices staying around
current levels for a while” Rex Tillerson, CEO, Exxon Mobil, March 2015
“Oil prices should reach a
long-term equilibrium of $90 per barrel, but it is impossible to predict when
prices would return to those levels… Oil prices were poised to remain volatile
in the mid-term” Ben van Beurden, CEO, Shell
“This is my fifth rodeo. We’re going into a world that’s going to be
characterized by lower, gradually rising prices and a lot of volatility.” The shift for ConocoPhillips away from
billion-dollar projects that take years or decades to complete is rooted in a
belief that crude prices could gyrate wildly for years to come. Any price
recovery in the near term will be modest, as slowing U.S. production helps push
up prices to between $70 and $80 a barrel within three years” Ryan
Lance, CEO ConocoPhillips
“I’m planning for five years of
low oil prices, in the low $60s per barrel” – Scott Sheffield, CEO, Pioneer Natural Resources
“We’re planning for $60 oil.
I think there’s still a lot of ‘whistling in the graveyard’ mentality.… One
could hope for $75 oil but you’ve got to plan for lower.” Stephen Chazen, CEO, Occidental Petroleum
“We currently expect oil prices
(Brent) to average around $75 per barrel for this year, below the global
marginal cost of production due to the current oversupply scenario, and
increase gradually towards the $85 per barrel mark over the next two years, as
the supply becomes tighter due to the recent cutbacks in capital spending by
almost all major oil companies and the growth in demand picks up to more
normalized levels” R.A. Walker – CEO Anadarko
We’ve assumed prices for 2017 of
around $80 per barrel and then a careful rise after that” Eldar Saete, CEO Statoil
will view 2014 as the year in which the historical supply – demand relationship
was reestablished for oil. The shift was driven
by a number of factors though the chief reason is technological advance.
supply side, proven technologies in horizontal drilling and fracking are
unleashing vast reserves of shale oil and gas.
On the demand side, machines that require oil are becoming much more
fuel efficient; curbing consumption in the developed economies. In the new economies of
Asia, demand for oil is slowing in those regions, too..
ways the collapse in oil price is a technology story. The result is that price growth from 2007 to 2014, a period in which oil averaged over 100 USD/barrel, can be
viewed as an anomaly. We are now in for
a prolonged period of volatility in which the lower prices echo the 20 year
period following the oil crisis of the 1970’s.
Figure 1 clearly communicates that the oil price spike from 2006 to 2013
may well be considered just a spike.
geopolitical crisis can always change the price equilibrium. But, as is evident
from the quotes that prefaced this post, oil companies are adjusting for a
fundamental shift in the present oil economy. They are cutting staff, and reducing costs to an extent which
documents their belief the slowdown is not a short term phenomenon.
exposure to the oil and gas sector, Newfoundland and Labrador will be
particularly hard hit by the downturn. The province has been caught flat-footed. The collapse in current oil revenues (i.e.
royalties) have had a dramatic impact which is being mitigated by massive
government borrowing. However, as the
price remains depressed for longer periods, the reductions in other revenue
sources (Income tax, sales tax) will only exacerbate the revenue shortfalls. Alas, the long term solution is not sustained
borrowing.
serious conversation and an action plan for our future. A dose of fiscal reality, perhaps, is just
what this province needs.
A Record of Stimulated Unsustainability
with good intentions to manage the new energy fueled wealth. They began their tenure, in 2004, with a
reduction in government spending. In
2007, they generated a long term plan to shape an energy strategy. Contained within the Energy Plan was a projection
for long term oil prices, as shown in Figure 2.
Term Oil Projections – 2007 Energy Plan
those long term projections. They began to
make long term decisions based on short term oil prices. Taxes were cut, government spending was
increased by 35%, and infrastructure projects were initiated. The fiscal policy changes were enabled by
peak production and record oil prices, which occurred simultaneously.
provincial government took a fundamentally strong economy and made it “white
hot”. Salaries were raised at a pace far outpacing
inflation. It fueled a real estate boom, and caused an increase in the cost of
doing business in Newfoundland and Labrador.
It impacted our long term competitiveness on the global market.
government’s economic advisor, Wade Locke, said the stimulus was a good thing.
2013, it was difficult to argue otherwise.
People were making small fortunes from real estate valuations; new
graduates in skill trades and professions could look forward to six figure
salaries after a couple years of getting their ‘ticket’.
Related to this article:
government did exactly what it should not have done.
boom. They made long term policy changes,
such as increasing the size of the public service, based on a short term spike
in oil prices. They implemented major
public works projects at the exact time that we were executing mega projects. The measures
contributed to cost overruns on Hebron, and on other offshore developments. The inflationary impacts will be the cause of lower royalties
when those facilities come on line.
to 2010, initiated an unprecedented boom.
However, it was the stimulated expansion that fundamentally destabilized
the long term economic stability of the province. Now, as we commence a predicted contraction
of the economy (i.e. a recession) following the completion of several mega
projects, the collapse in the oil price will only serve to magnify all those
negative impacts.
government be doing in terms of fiscal policy?
or Expenditure Cuts?
the economic downturn.
budget” the government is actually increasing spending in 2015. They are borrowing heavily to fund both
infrastructure and for current account (program expenditures). The
2015 Budget is, in fact, a stimulus budget; it just happens that the stimulus is
less than in the previous five budgets!
correct action to take?
Newfoundland and Labrador make long term adjustments to reflect the new oil
reality, and to correct the fiscal imbalance?
II of this series, it is clear to the Author that the government should be
basing their mid-term policy on annual revenues in the $6.8 billion range. The Finance Minister is
projecting long term spending in the $7.5 billion range. As shown in
Figure 3, in the absence of any real reduction in government spending, or a major increase in oil prices, we will be running $700 million deficits for the
next five years.
Forecasted Revenue – Versus Provincial Government