Revenue Squeeze

The good news story for those who use natural gas to heat their water, cook or warm or cool their homes, is very bad news for BC's Minister of Finance. Natural gas prices peaked at around $15 (US) per thousand cubic feet in late 2005. Now they are down to just over $6 (US), a drop of more than 50%.

It can get a little tricky comparing natural gas prices, not only because of quotes in different currencies but also because of different units of measurement and delivery points. When she tabled her budget in February 2006, Finance Minister Carole Taylor assumed prices would average $8.55 this year (Cdn$/gigajoule at plant inlet), before falling to $8.27 next year and to $6.87 in fiscal year 2008-2009. A thousand cubic feet of natural gas equals 1.042 gigajoules and the exchange rate assumed in February's budget was 0.86 US$/C$. A note in the budget documents said: "A price change of C$1.00 per gigajoule results in about $300 million revenue change." The spot price in mid-June is slightly more than C$3 less than what was assumed in the budget. If that price holds, it will put a hole of between $500 million and $1 billion in Taylor's budget, which estimated $2.277 billion from natural gas royalties. Of course, the government usually underestimates several revenue sources so higher transfer payments, more revenue from the property transfer tax or an increased take from corporate or individual income taxes could make up for the hit on natural gas prices. It will be the end of September before the First Quarter Financial Report is released for April through June 2006; by the time that report is released we'll have a good idea whether prices remained lower than assumed for almost half the fiscal year.

The graph shows U.S. natural gas wellhead prices (US $ per thousand cubic feet) between March 1976 and March 2006 (source: US Energy Information Administration). It helps to dispel some of the myths the Campbell Liberals spread about the 1990s, and it shows why some may have thought that low energy prices would go on forever. During the 90s, natural gas prices averaged $1.92 (US$/Mcf). Over the last three years they averaged $5.95 (US$/Mcf), more than three times as much. As has been the case with coal and copper, anyone can look good when commodity prices reach record highs. BC's balanced budget has a good deal to do with good luck, which could turn sour, as it already appears to be doing with gas prices. Keep in mind, however, that even at the new lower rate of about $6.09 (US$/Mcf), the price is still more than three times the average 1990s price.