Alberta Must Resist Spending Binge Amid Oil Price Surge

The war in Iran and disruptions to energy corridors have driven up oil prices, benefiting Alberta's finances. However, this windfall could be short-lived if not managed properly.

Resource revenue is inherently volatile, fluctuating between highs of $27.4 billion (accounting for 33.2% of total revenues) in 2022/23 and lows of $3.6 billion (6.5% of total revenues) in 2015/16.

The Smith government's February budget projected a $9.4 billion deficit in 2026/27, with $13.2 billion in resource revenue expected to account for 17.7% of total revenues. However, oil prices have surged above $100 per barrel since the war began, potentially reducing or eliminating this deficit.

Every $1 change in West Texas Intermediate price has a net impact of $680 million on Alberta's bottom line, with the province needing an average price between $74 and $77 per barrel to balance its budget. To avoid another debt binge when resource revenues inevitably decline, the government should save a portion of revenue in the Heritage Fund.

The fund would turn volatile resource revenue into a more stable financial asset, reducing pressure on governments to increase spending during good years. However, the Smith government must show discipline with its spending and not hike it further with this potential windfall.