The Alberta government is facing a massive revenue shortfall in the next provincial budget caused by a so-called "bitumen bubble", which has the construction industry worried about cuts to spending on infrastructure construction and maintenance.
“We appreciate that the government is in a tough position, but there is an argument to sustain a good level of capital spending,” said Bill Stewart, vice-president of the Alberta Merit Contractors Association.
“Everyone knows we have a fiscal problem, but budget cuts can’t be done disproportionately or we will have negative long-term consequences.”
Premier Alison Redford made a television broadcast on Jan. 24 to outline her government’s financial problems to Albertans.
In an eight-minute speech broadcast across the province, Redford warned that the Alberta government will be facing an expected deficit between $3 billion to $6 billion, due to a drop in oil revenue.
“Today, 30 per cent of our budget is funded by revenues from oil and gas.,” she said.
“This means we are vulnerable to swings in resource prices, as we have seen with natural gas prices in the past, and now the price we receive for Alberta oil.”
According to Redford, the government forecast last year that West Texas Intermediate (WTI) oil would average about $100 a barrel in 2012.
This number is important because it is used by economists, governments and industry experts as a benchmark price for oil prices in North America.
WTI averaged about $94 last year.
The difference in price has cost the province almost $1 billion in royalty revenues since April.
However, Redford said the price of oil in Texas is not the real cause of Alberta’s economic problem.
“Historically, the price we receive for our oil has been a few dollars lower than Texas oil, and that differential had been manageable,” she said.
“But, since September, that gap in the differential has grown considerably and the trend is getting worse for the foreseeable future.”
The root cause of the problem is that Alberta exports most of its oil to the U.S., which is currently experiencing rapid growth in the production of oil.
As a result, Alberta is getting paid a little more than $50 dollars a barrel.
Redford said this “bitumen bubble” is responsible for the drop in oil revenue, the provincial deficit and the difficult choices about spending reductions that are being made as the government prepares to table the 2013 budget on March 7.
“We certainly wouldn’t want to see a return to what happened after 9/11, when the capital budget was brutally slashed,” said Stewart.
“But when the government decided to increase investment in infrastructure development, a lot of the capacity was employed by private sector clients. There was a shortage of capacity, which meant a lot of public sector jobs couldn’t find contractors.”
Stewart said the construction industry’s capacity has returned to previous levels, so there is a need to maintain stable capital funding.
For example, he said there are documented deficiencies in the budget for maintaining basic infrastructure.
In addition, there are a lot of people moving to Alberta each year, which requires new infrastructure construction. About 95,000 people moved to Alberta last year.