And he says while his advisers expect oil to rebound slowly over the coming years, the budget may remain in deficit until 2018.
"It's the most serious fiscal circumstance we've seen in a generation in this province," Prentice said in an interview Thursday.
"Things have turned so dramatically that we've gone from a $1.5-billion surplus in November to what looks like a $500-million deficit based on today's projections.
"And there's actually precious little we can do about that. We've been belt-tightening in government for the last quarter."
Oil prices, the lifeblood of Alberta's economy, have been in free fall since last summer, tumbling from US$100 a barrel to below US$50 a barrel this week.
"It's like landing a 747 and you're coming in on the runway. We're in the last two months of the fiscal year. You can't either increase your revenue or decrease your expenses in any meaningful way," said Prentice.
The province predicted a barrel of West Texas Intermediate would average $92 a barrel this fiscal year ending March 31. That was revised to almost $89 in November as prices fell.
Each $1 drop in the average price over the course of a year costs the province $215 million.
Prentice said that in next year's budget the plan right now is to budget for oil at $65 a barrel, but he said that would still mean a $6.7-billion drop in projected resource revenue.
He said the forecast average price for the 2016-17 year will be $75 a barrel, which would still leave a $4.9 billion deficit.
"The third year we should start to return to a balanced budget," he said.
The problem, he added, will be if oil prices remain below the $50 a barrel mark for the long-term.
"If oil prices persist at sub-$50 per barrel, we essentially have no oil revenue, and it opens up a revenue hole in Alberta's finances that approaches $10 billion," he said.
The premier said they are now looking at a combination of three options: reducing expenditures, increasing revenue, and dipping into the $5-billion contingency fund.
He said they'll use the contingency fund to cover off this year's deficit but otherwise everything is on the table.
Prentice declined to be more specific on the types of cuts or revenue generation plans being considered.
In past weeks, he has said he won't impose a sales tax but has refused to rule out hiking corporate or income taxes or making changes to the tax structure.
He has also said the province needs more fundamental economic changes so that day-to-day spending is not hostage to swings in oil prices.
This year's budget also forecasts the debt for capital projects to reach more than $11 billion.
Prentice said the latest numbers were crunched with the aid of an ad hoc team of cabinet ministers struck before the Christmas break.
The committee, along with Prentice, is comprised of: Finance Minister Robin Campbell, Health Minister Stephen Mandel, Municipal Affairs Minister Diana McQueen, Energy Minister Frank Oberle, Infrastructure Minister Manmeet Bhullar, and Jobs Minister Ric McIver.
Also on HuffPost