06/19/2012 11:38 EDT | Updated 08/19/2012 05:12 EDT

N.L. premier says lower prices will spike budget deficit in oil-reliant province

ST. JOHN'S, N.L. - Newfoundland and Labrador Premier Kathy Dunderdale is warning of soaring budget deficits and tighter spending if oil prices used to project the province's fiscal blueprint stay far lower than forecast.

Europe's financial crisis has dulled regional demand for oil as it continues to affect sluggish economies in China and the U.S.

Falling prices have a direct impact on Newfoundland and Labrador, which relies on offshore oil for one-third of government revenues.

Finance Minister Tom Marshall anchored his budget, as the Progressive Conservative government has for the last nine years, using independent forecasts from New York-based consultant PIRA Energy Group. It pegged the average price for Brent crude at US$124 a barrel this fiscal year.

Brent crude was priced Tuesday at closer to US$96 a barrel, and there are signs of oversupply on the global market that could keep prices low.

Fluctuating oil prices may rebound throughout the fiscal year as they have in the past, Dunderdale told reporters Tuesday. But if they don't, "we will be several hundred million dollars more in debt than we are at the moment."

No short-term government job or service cuts are planned, she said. But she warned that "if we have to pull back on commitments in order to be fiscally prudent and to manage well, then that is certainly something that we're going to consider."

The province has already forecast a deficit of $258 million this year as maintenance work and refits affect oil production at two of its three major working sites.

"This is just a great exercise to demonstrate to the people of the province the volatility of oil, trying to forecast how much revenue you're going to get from it and the impact that it has on planning," Dunderdale said.

She noted that critics have accused her government in the past of deliberately low-balling budget predictions to dampen spending expectations — only to come up with massive surpluses.

For example, Marshall offered a dramatic mid-year budget update last November as he revised a projected surplus of $59.1 million for the last fiscal year to almost $756 million on the strength of higher than expected oil production and prices. The surplus tabled in the actual budget in April was $776 million.

Marshall denied any attempt to manipulate the numbers as he presented the fall fiscal update.

"We're trying to guess what the average price of oil's going to be, per barrel, for 12 months," he told reporters at the time. "Well, I'm no good at it. And you're no good at it.

"We rely on a company out in New York to give us advice and we take their numbers."

The province has racked up surpluses worth $5.5 billion in six of the last seven budgets but has projected deficits for this fiscal year and next year mostly due to a temporary dip in offshore oil production and the expiry of payments from the Atlantic Accord.

The joint offshore management program with Ottawa was worth $536 million to the province last year.

Provincial opposition New Democrat George Murphy, an oil price watcher who founded the Consumer Group for Fair Gas Prices, said the government should have sought two or three other opinions.

"I spoke about the price of oil in the budget and I thought the finance minister's numbers were too high. Based on the world condition, I couldn't justify $124 a barrel then and I can't justify it now.

"If the world financial situation gets worse than what it is — and there are a lot of projections that it will — we could see lower oil prices indeed. And I would put money on the downside of oil rather than on the upside right now."

Liberal Opposition Leader Dwight Ball said it's a good argument for separating out oil profits from future budgets.

"We've seen the volatility around budgeting because of the way we forecast and the way we budget our oil revenues. That's been a problem we've had for quite some time," he said. "Of course, we've been on the high end so it has been easier to absorb. But this year, we're certainly trending the other way."