* Economists says oil hedges could protect budgets
* Recommendation comes after Alberta warning
* Falling oil prices cut into provincial revenue
CALGARY, Alberta, Jan 29 A prominent economist
recommended on Monday that Canada's provinces consider hedging
their exposure to volatile energy prices, less than a week after
Alberta's premier warned of a C$6 billion ($5.98 billion) budget
shortfall because of deeply discounted Canadian oil prices.
Avery Shenfeld, chief economist at CIBC World Markets, said
Canada's provinces should consider locking in oil prices to
provide some certainty to budgets that can be thrown out of
whack by commodity swings.
"Provincial finance ministers are now acutely aware that a
bountiful surplus can turn into a gaping deficit in a hurry when
commodity prices slip," Shenfeld wrote in a research report.
Alberta, Canada's largest oil producer and the biggest
exporter to the United States, is dealing with plunging resource
revenue as a lack of pipeline capacity backs up oil in the
province, pushing crude prices to as much as $40 per barrel
below the U.S. West Texas Intermediate benchmark.
The province's premier, Alison Redford, took to television
last week to warn voters of a C$6 billion shortfall caused by
the unexpectedly low prices. Alberta relies on the oil industry
for nearly a third of its revenue but does not lock in a price
Hedging can be used to guarantee prices but it can backfire
if the price of oil rises above the hedged price. Missing out on
a potential windfall may be the reason that politicians have
steered clear of the practice.
"In a rising commodity price environment, hedging could be
seen as either money spent to protect against something that
didn't happen or giving up some of the upside," Shenfeld said.
"So it's probably something that politicians and their advisers
have looked at but (they) haven't been willing to take the risk
of making the wrong call."
Shenfeld points out that the provinces routinely hedge to
manage interest rate risk on debt but avoid energy hedges even
though the financial risks can be greater.
In Alberta, a $10 per barrel drop in oil prices costs the
province C$2.2 billion, while revenue in Saskatchewan and
Newfoundland and Labrador, the two other major oil-producing
provinces, declines by C$200 million.