'Difficult to predict': Alberta government confronts highly volatile oil prices as it prepares forecast for upcoming provincial budget

High oil prices will be a cornerstone of Alberta’s upcoming provincial budget, but forecasting the volatile commodity amidst international conflict in Eastern Europe could prove to be a difficult task for finance minister Travis Toews.

As inflation surges, oil prices are rising imminently closer to $100 per barrel and energy analysts predict it could skyrocket even higher if tensions intensify between Russia and Ukraine.

“This is probably going to add another $10 to $15 to the spot price here today,” said Jeremy McCrea, director of energy research at Raymond James Ltd.

“For the for the Alberta government to try and forecast it’s extremely difficult to predict. Russia is your third largest producer in the world and there's some concerns about what this potentially do for sanctions. Barring that, we've actually seen for the last year a real tightness in overall global supplies.”

McCrea adds that back in 2017, Alberta changed its royalty rate framework to have a higher royalty rate under higher prices, which will benefit the Alberta economy and potentially balance the books for the first time since 2014-15.

“We haven't seen these prices going back since we surpassed the peaks in 2014 and now, we're going back to 2008 to where these Canadian oil prices are here today, so I think it’s going to be a big surprise in terms of how strong the provincial budget is going to be here.”

Rory Johnston, market economist at investment firm Price Street agrees that prices are going to increase, adding that conflict between Russia and Ukraine could play a central factor.

He says production is above 10 million barrels a day, but a lack of supply could force the price upward.

“If that production were to drop substantially, the market is extraordinarily tight globally, and prices would absolutely surge,” Johnston said.

“I think that's the challenge that we're facing right now is if you actually had a true loss of Russian production, there isn’t any clear guide rails that would prevent us from kind of really blowing out the top on the oil market.”

Johnston notes that this is an unlikely scenario if Russian oil exports see a decline.

“You have markets likely pricing in a very small tail risk of a very large impact, which really distorts things because it makes it seem like the end is near, whereas probably we may have moved from a five per cent possibility of a big disruption to a 10 per cent possibility,” he said.

“There is still a 90  per cent chance that we're not going to see a big loss of Russian barrels and prices are going to kind of come back from here.”

University of Calgary’s scientific director for the School of Public Policy, Ron Kneebone is also taking a more cautious perspective on the price of oil, noting that the province should forecast below the $90 per barrel range.

“I would even go lower because of the uncertainty and I’m not blaming the government for this, because who knew what was going to happen in Ukraine,” Kneebone said.

“Higher oil prices is really good news, it allows the government to reduce the size of its deficit, even balance or reach a surplus but it doesn’t get us out of the woods because we’re still relying on a very large amount of oil and gas royalties.”

Kneebone added that the province should focus more on reducing its reliance on oil and gas royalties moving forward and ensure its next budget isn’t dependent on rosy oil prices.”

The current price of the U.S. Benchmark West Texas Intermediate (WTI) crude sat at $US92  a barrel Wednesday morning, while Brent crude prices remained strong at the $96.72 mark.

The increase in prices along with tensions in Ukraine have now resulted in the U.S. and other countries including Canada to introduce a first round of economic sanctions against Russia.

Russia, which is one of the world’s largest oil and gas producers has since sent troops into eastern Ukraine prompting the International Energy Agency (IEA) to put out a statement earlier this week.

“The IEA is monitoring with growing concern Russia's recent statements and actions, and their potential implications for energy markets,” read the statement.

'CAREFUL APPROACH' WITH PRICE FORECAST

In February of 2020, Alberta’s UCP government projected in its provincial budget that the price of oil would average $58 a barrel for the year. At the time of that announcement, WTI prices sat around $47 and were already sinking in the early stages of the COVID-19 pandemic

Oil prices have since shot up by more than 20 per cent and could have a major impact on energy demands.

Finance Minister Travis Toews announced this week he will be wearing the same pair of cowboy boots he purchased from Calgary’s Alberta Boot Company last year.

“We’ve taken surgical, thoughtful careful approach and over the last three years we’ve managed to curb our spending down, in fact we’ve flattened it out,” said Toews Wednesday

CTV News reached out to Toews’ office for comment on oil price forecasts, but was told we would have to wait until Thursday for more details.

However, Toews has previously noted that the province is not considering a $90 to $100 oil forecast, but rather taking a more ‘cautious approach.’

Last February, the finance minister predicted an $18.2 billion deficit. By November, the projected deficit shrunk to $5.8 billion as some economists believe the province could now be back in the black.

The budget will be tabled on Thursday.