The School of Public Policy Releases Insightful Report Analyzing the Impact of Oil Prices on Alberta's Royalty Revenues: Exposes Serious Problem with Government Forecasting

CALGARY, March 24, 2015 /CNW/ - The price of oil just keeps collapsing — and Alberta's revenues are declining with it.
In January 2014, the price of a barrel of West Texas Intermediate (WTI) was $95.14. What started as a slow slide through much of the summer of 2014, became a sharp decline towards the end of the year. On March 17, 2015 the price of a barrel of WTI crude was $43.39.

According to a new report released today by The School of Public Policy and author Sarah Dobson, the government had not fathomed such a price drop could be possible.  That's perhaps understandable.  But the implications are serious. "Falling oil prices directly impact government revenues through bitumen and crude oil royalties, a significant revenue source for the government of Alberta," said Dobson today. 

This price drop motivated the authors to ask the question, "Exactly how does government forecast the price of energy, and the royalties from energy?"  The results are puzzling – even a highly trained energy economist could not determine how, exactly, the government forecasts prices and revenues.  "It's a black box," said Dobson.  A black box with serious problems. By the end of September 2014, the government had collected, $5.2 billion in bitumen and crude oil royalties, which was nearly $1.3 billion, or 33 per cent, higher than originally forecast.  How could estimates be so far off the mark?  In a province so dependent on resource royalties for its revenues, adding the unpredictability of unreliable forecasting puts fiscal planning at real risk.

So how does government forecast?  That's still a mystery.  The author uses several forecasting tools, and arrives at numbers that are quite close to reality, but was unable to match the government forecasts.  Replicating the 2014/15 budget numbers required many assumptions above and beyond those provided by the government.  Clearly, something needs to change.  The report concludes that it is imperative for the government to provide more information on how royalties are forecasted and the assumptions used. This will significantly increase the ability of experts to weigh in to improve forecasting, and thereby create a more stable and predictable revenue environment for Alberta. 

The paper can be downloaded at http://www.policyschool.ucalgary.ca/?q=research

SOURCE The School of Public Policy - University of Calgary

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