Falling Oil Prices Could Generate Federal Deficits – TD Economics

Oil Prices Falling

Oil Prices FallingTHUNDER BAY – Oil prices continue to fall. The drop in royalty revenues for the Alberta and Canadian Governments are expected to impact both governments in negative financial directions.

TD Economics states, “The recent decline in oil prices has led to much analysis of their impact on the Canadian economy. Among the topics that has garnered a great deal of interest is the impact of falling oil prices on the federal fiscal outlook. This is particularly the case in 2015, as it is an election year and great political weight has been put on the fortunes of the economy and returning to surplus following years of deficits”.

“In the absence of new measures to raise revenues or cut spending, TD is projecting budget deficits in fiscal 2015-16 and 2016-17 as opposed to the surpluses expected at the time of the Update. Beginning in fiscal 2017-18, we expect the government will continue to show surpluses over the remainder of the projection”.

Finance Minister Joe Oliver, in a fund-raising email to Conservative supporters on January 13th states, “I’m excited about 2015. Not only because of the election this October, but because 2015 is the year Canada will have a balanced budget”.

Oliver adds, “Sadly, not everyone is celebrating with us. Justin Trudeau has made it clear a balanced budget is not a priority. He doesn’t realize the damage his risky schemes pose to our economy – or maybe he doesn’t care. What is clear is our commitment to a more prosperous Canada and a stronger economy – starting with a balanced budget this year”.

The dropping price for oil has companies starting to cut their budgets for 2015.

Today, Suncor Energy Inc. significant spending reductions to its 2015 budget in response to the current lower crude price environment. The cuts include a $1 billion decrease in the company’s capital spending program, as well as sustainable operating expense reductions of $600 million to $800 million to be phased in over two years offsetting inflation and growth.

“Our integrated model and strong balance sheet have positioned us well for the price downturn,” said Steve Williams, president and chief executive officer. “Cost management has been an ongoing focus, with successful efforts to reduce both capital and operating costs well underway before the decline in oil prices. However, in today’s low crude price environment, it’s essential we accelerate this work. Today’s spending reductions are consistent with our commitment to spend within our means and maintain a strong balance sheet. We will monitor the pricing environment and take further action as required.”

Suncor is implementing a number of initiatives to achieve the cost reduction targets. These include deferral of some capital projects that have not yet been sanctioned, such as MacKay River 2 and the White Rose Extension, as well as reductions to discretionary spending. Budgets affecting the company’s safety, reliability and environmental performance have been specifically excluded from the cost reduction program.

Suncor has also implemented a series of workforce initiatives that will reduce total workforce numbers in 2015 by approximately 1000 people, primarily through its contract workforce, in addition to reducing employee positions. There will also be an overall hiring freeze for roles that are not critical to operations and safety.

Major projects in construction such as Fort Hills and Hebron will move forward as planned and take full advantage of the current economic environment. These are long-term growth projects that are expected to provide strong returns when they come online in late 2017.

Suncor has issued an update to its 2015 guidance to reflect, among other items, reduced spending and lower pricing and related assumptions. Production guidance for 2015 has not changed.

Suncor’s fundamental goals remain the same, with operational excellence, capital discipline and profitable growth remaining key to its business strategy. In fact, today’s announcement reflects the application of these principles, in the context of the current low price environment.

“The strategic decisions we’ve made are consistent with our unwavering focus on capital discipline and operational excellence,” said Williams. “We will continue to carefully manage our spending priorities: sustaining safe, reliable and environmentally responsible operations, providing a meaningful, competitive dividend for our shareholders and investing in profitable growth.”

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