Are the oil price forecasts in Alberta’s budget too optimistic?
A sub-plot in Alberta’s recent budget is whether the government’s oil price forecasts—and thus revenues derived from this source—are too optimistic. Of course, forecasting oil prices is fraught with difficulty, as evidenced by the wide variety of estimates available. So it is imperative that the government use the most reliable and up-to-date estimates available, with an eye towards conservatively budgeting oil prices. However, many of the forecasts used to project oil prices in the budget are already out of date.
The Alberta government collects data from 13 private sector forecasters plus a basket of confidential forecasts to arrive at the estimated oil price used for budgeting purposes. For 2016, seven of the 13 organizations have provided more recent publicly available oil price forecasts than what is contained in the budget.
For these seven organizations, table 1 displays the West Texas Intermediate (WTI) oil price forecasts for 2016 used in the budget, the revised forecasts, and the dollar difference. For one source that provided a forecast range rather than a specific prediction, we used the higher value to provide a conservative estimate.
WTI Forecast in the Budget vs. Subsequent Forecast, 2016
Source (as of Oct. 28)
Difference Relative to Budget
* indicates that the higher value in the forecast range was used
The table shows that all seven organizations have revised their estimates downwards. The average estimate of the seven subsequent forecasts is $53.4 per barrel—a difference of $7.6 per barrel relative to the assumption used in the budget for 2016/17, which is $61 per barrel.
Notably, on page 37 on the budget, the Alberta government estimates that a $1 decline in the price of oil translates into a $170 million negative impact to the bottom line. If revenue estimates fall short, Alberta’s projected deficits could worsen.
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