There was a time when being Canada’s second-largest oil producer was something to brag about. With oil prices losing more than half their value in six months and no end in sight, producing provinces, such as Saskatchewan and Alberta, are becoming objects of pity, not envy.
Admittedly, oil isn’t as important to Saskatchewan’s economy as it is to neighbouring Alberta: Saskatchewan gets about 12% of its government revenue from oil and gas. But oil is the Saskatchewan government’s single largest source of non-renewable resource revenue at $1.6 billion a year, so the ruling Saskatchewan Party government is getting nervous about what an extended price plunge could mean for provincial coffers.
With every US$1 drop in the price of a barrel of oil costing the provincial treasury $20 million, Finance Minister Ken Krawetz has every reason to be nervous. While the drop in oil prices is offset somewhat by the lower loonie (because the province’s resources exports are denominated in U.S. dollars, every 1¢ decline in the loonie adds $30 million to the treasury), Krawetz is going to have to sharpen his pencil when preparing the 2015-16 budget, expected in March.
Premier Brad Wall already has warned municipalities to tighten their belts and expect less in municipal revenue-sharing in the coming year. Currently, municipalities receive the equivalent of one percentage point of the provincial sales tax.
Besides lower resources revenue, sustained low oil prices will have a negative impact on oil well drilling, oil production and, ultimately, employment – especially in the southeastern oilpatch where costly Bakken light oil is produced.
But low oil prices are not Saskatchewan’s only economic problem this year. Potash prices continue to sag below US$300 per tonne, a far cry from the almost US$1,000 per tonne in the heady days prior to the 2007-09 global financial crisis.
Potash, one of three constituents of fertilizer (the others being nitrogen and phosphorous), still is feeling the fallout from the collapse of the Belarusian potash cartel in July 2013.
Talking about fallout, the fear that followed the Fukushima nuclear plant disaster in Japan in 2011 continues to weigh down uranium prices in Saskatchewan, which produces about one-third of the world’s uranium supply. Prices rallied somewhat to US$40 per pound in late 2014, up from US$35 in 2013.
Nevertheless, production of both potash and uranium is expected to increase in 2015 as potash companies bring new expansion projects onstream and Cameco Corp.’s Cigar Lake facility – the world’s second-richest uranium mine – operates at full production for the year.
Agricultural commodity production also is expected to recover from an off year in 2014, when 28.8 million tonnes of grains and oilseeds were produced: that’s a 25% decline from 2013’s record harvest of 38.4 million tonnes. The 2015 crop is expected to be average, which would mean a 4% increase in crop production over last year. But crop prices remain depressed, with wheat and canola prices declining by 26% and 29%, respectively, in 2014.
Despite the ongoing and unsettling negative news around oil and other commodities prices, 2015 should see a rebound in Saskatchewan’s economic growth, from the tepid 1.1% real gross domestic product (GDP) growth in 2014 to 2.8% this year, according to a report from Royal Bank of Canada.
The province’s Ministry of Finance opted for a more conservative 2.3% real GDP growth in 2015 in its mid-year report in late November.
Of course, that was before oil prices nosedived to the mid-US$40-a-barrel range in January, the lowest since the collapse of oil prices in 2009.
On a more positive note, Saskatchewan is expected to retain its title as having the lowest unemployment in Canada, with a projected 3.9% jobless rate in 2015, vs the national rate of 6.4%, according to the RBC report. Job growth is expected to remain strong at 2% this year – the highest among the provinces.
Similarly, retail sales are projected to increase 4.3%, once again leading the nation.
Saskatchewan’s projected inflation rate at 1.8% in 2015 also is highest among the provinces. Despite that, Saskatchewan also leads the nation in something the RBC report calls the “discomfort index” (inflation plus unemployment rate), which, at 6.0, was the lowest among the provinces.
But that was in October 2014, before the slide in oil prices that eventually became an avalanche. Until global oil prices start moving back into the US$60-a-barrel range (the break-even level for much of Saskatchewan’s oil production), the discomfort index will be uncomfortably higher this year for many of Saskatchewan’s residents.
With a provincial election expected late this year or in early 2016, things could get very uncomfortable for Wall and his Saskatchewan Party government, which is entering its ninth year in office.
GDP, 2013 ($bil.): 83.2
GDP % change: +5.5
2014-15 surplus ($mil.): 70.9
Estimated net Debt ($bil.): 4.5
Per capita wage growth, % change 2013-14: +3.2
Household disposable income, per capita: $33,126
Figures from latest available reports/estimates
Sources: Conference board of Canada; Province IE chart
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