Governmental Economic and Fiscal Impacts from the Oil Price Shock and Strategic Considerations for First Nations

In our previous post we outlined some of the figures and preliminary impacts related to the recent significant drop in the price of oil. We noted that it will have both positive and negative reverberating effects on the Canadian economy. Although the longer term impacts on the Canadian economy are just beginning to be assessed, the table below summarizes some of the federal, provincial and First Nation economic and fiscal impacts in the next year based on the best available information at this time. 

As can be seen in the table above, the impact of the significant drop in oil prices will be negative on certain provinces’ economies and government revenues, most notably those of Alberta, Saskatchewan and Newfoundland. Despite this, there may actually be more urgency in regards to the construction of proposed pipelines (Energy East, Keystone, Kinder Morgan and Northern Gateway) as there remains a price premium for Western Canada heavy oil shipped to tidewater.

However, this may simply mean a sectoral shift in our country. The fall in the value of the Canadian dollar relative to the US dollar will make many Canadian exports more competitive on the world market. This could boost exports and investment into industries in BC, Ontario and Quebec. Since the exchange rate is one of the most significant determinants of the profitability of investments into mining, the mining industry should do relatively well as a result of the fall in the value of the Canadian dollar.

Very simply, the impacts will be negative on First Nation economies and governments that are dependent on oil royalty revenues and positive on First Nations that export non-oil or oil substitute resources and goods. First Nations may be on either side of the spectrum depending on the nature of their economies. As such, First Nations must think strategically about decisions related to their resources and economies. Some strategic considerations for First Nations in relation to the recent oil and foreign exchange events are as follows: 

1. Federal Government Expenditures – The federal government is strongly committed to balancing its budget in an election year. Federal revenues (royalties, income and corporate taxes, excise and sales tax) related to oil production will fall. They will have to reduce expenditures to balance the budget.  They will not cut transfers to provinces and individuals but they may cut transfers to First Nations to maintain a budget balance. This will increase tension between the federal government and First Nations and could increase First Nation interest in developing their own revenues through taxation.
2. Oil Industry Impacts – Many First Nation members have employment and businesses in the oil industry. Unemployment could rise and businesses could fail if lower oil prices are sustained for these First Nation members. To maintain their employment and businesses they will likely support initiatives that raise the viability of oil production. This includes initiatives to raise revenues (selling at world price instead of US price) or cut costs (transportation or production improvements).
3. Oil Royalty Revenue – Some First Nation governments are reliant on oil royalty and other oil related revenues. They will have a significant drop in revenues this year. They will have to consider a combination of expenditure reductions and new revenue options. This could create political uncertainty and increased interest in other taxation options in these communities.
4. Oil Price Differential Opportunity – Lower short term oil prices increase pressure to get oil to tide water because of the significant and possibly growing price differential resulting from increasing US oil supply between Western Canada heavy oil sold to the US and world prices. This is a good time to propose a First Nation tax on proposed pipelines or the product that flows through pipelines in First Nation territory.
5. New Competitive Advantages – Lower oil prices reduce the value of the Canadian dollar relative to the US. This creates a price advantage for Canadian resources and products sold to the US or for resources or products that Canada’s competes with from the US. Some First Nations may be positioned to participate in these competitive advantages and will be interested in initiatives that improve their investment climate associated with these opportunities related to land development (taxation, property ownership and capacity development).
   
6. Other Resource Opportunities – The reduction in the value of the Canadian dollar relative to the US will make mining ventures in Canada significantly more profitable.  At the same time, the federal and different provincial governments will be more interested in developing such projects as a substitute for oil revenues.  Gold is particularly interesting because the price of this commodity is rising.  This is going to make provincial governments with mining projects more interested in developing these and if necessary cutting a deal with the First Nations where they are located.