KAPLAN: War-driven oil prices are no excuse for Alberta’s fiscal complacency

Lennie Kaplan is a former senior manager in the Fiscal and Economic Policy Division of Alberta’s Ministry of Treasury Board and Finance.The US/Israeli military action against Iran has thrown another “monkey wrench” into Alberta’s volatile financial outlook. The Alberta government should not use the prospects of higher short-term crude oil prices to avoid making the prudent medium to long term decisions to eliminate the deficit, reduce its spending, save more oil and gas revenues into the Heritage Fund, and pay down the province’s $92 billion debt.According to Rystad Energy, “the Strait of Hormuz, between the Persian Gulf and the Gulf of Oman, is the sole maritime outlet for roughly 15 million barrels per day (bpd), or nearly 30% of global seaborne crude oil trade. A closure would instantly halt crude exports from Kuwait, Qatar, and Iraq, which remain entirely dependent on this route. While Saudi Arabia and the United Arab Emirates (UAE) possess bypass pipeline infrastructure, combined capacity of roughly 6.5 million bpd falls well short of full export volumes, leaving 8–10 million bpd exposed. In total, a sustained closure could remove between 10 and 12 million bpd from global supply.”This could send crude oil prices skyrocketing to over $100 USD per barrel, in the short term, according to some observers..Today, I am calling on the Alberta government to amend its fiscal framework to ensure that all cash surpluses arising from a short-term higher oil price environment due to the conflict are allocated solely to repayment of debt and deposits into the Heritage Fund, and not used to build up the Alberta Fund to support more spending, one-time or otherwise.Alberta’s current fiscal framework, the Sustainable Fiscal Planning and Reporting Act (SFPRA), requires that year-end cash surpluses be allocated 50% to repayment of debt and the Heritage Fund and 50% to the Alberta Fund. The Alberta Fund allows the government to support “one-time” spending initiatives that do not lead to permanent increases in government spending. The definition of “one-time” spending initiatives that do not result in permanent increases in government spending is at the Treasury Board's discretion.Alberta’s finances remain highly vulnerable to changes in economic circumstances and are not well placed to absorb another major material fiscal shock. Hoping for a sustained rebound in crude oil prices to $100 USD per barrel or higher is not a viable option for fiscal planning. This type of wishful thinking has largely plagued Alberta’s fiscal planning for decades..Current fiscal planning in Alberta places too much emphasis on achieving short-term objectives, which can be variable and even arbitrary, at the expense of important longer-term considerations. Fundamental changes are required to position government finances for the “new normal,” marked by volatile revenues driven by rapidly changing energy prices and the impacts of population aging and the energy transition, among others.Budget 2026 should have been a legacy moment for the Alberta government. It needs to fix its budget problems once and for all and reduce the province’s addiction to using energy revenues to fund current programs and services.The Alberta government should no longer make budget decisions based largely on the price of crude oil on international markets. It needs to better manage spending, transform oil and gas revenue into financial assets through long-term savings, manage upside and downside risks, make Alberta a leader again in fiscal transparency and reporting, and restore the province’s AAA credit rating. The government can’t do this if it places its bets solely on higher oil prices.Lennie Kaplan is a former senior manager in the Fiscal and Economic Policy Division of Alberta’s Ministry of Treasury Board and Finance, where, among other duties, he examined best practices in fiscal frameworks and program reviews, and savings strategies for non-renewable resource revenues. In 2019, Mr. Kaplan served as Executive Director to the MacKinnon Panel on Alberta’s Finances.

KAPLAN: War-driven oil prices are no excuse for Alberta’s fiscal complacency

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