Annex 10: Illustrative Financial Impacts of the Panel’s Recommendations

Robustness of results with respect to oil and gas prices

The Panel also considered it important to examine the results of its formula under different oil and gas prices. These prices have traditionally been very volatile and have had major impacts on Equalization entitlements.

As Table 8 shows, the price of oil and gas has fluctuated from a low of US$13.70 and US$2.00 respectively in 1998–99, to a high of US$59.80 and US$9.40 in 2005–06.

Table 8 – Oil and Natural Gas Prices (1995–96 to 2005–06)

¹ Price of WTI Crude Oil in U.S. dollars (nominal) per barrel
² Price of U.S. Natural Gas in U.S. dollars (nominal) per MMBtu
³ Average from April 1, 2005 to February 20, 2006

While many simulations could have been developed to analyze the impact of different oil and gas prices, the Panel wanted to:

• Limit the simulations to two alternative scenarios: a high price and a low price simulation (this annex already contains a large number of other impacts, and the Panel wanted to keep the number of tables manageable)
• Use a range of oil and gas prices (the difference between the high and low prices) that is sufficiently wide to clearly demonstrate the direction of change in entitlements, yet still realistic for the near future
• Use data that were readily available to provinces to allow them to verify the Panel’s simulation.

The Panel therefore decided on the following two scenarios:

1. The High Energy Price Scenario assumes oil and gas revenues² identical to those reported by provincial governments for fiscal year 2005–06, when average prices were US$59.80 and US$9.40, respectively. This is equivalent to a 21 percent increase in the oil and gas revenues used to calculate the 2007–08 Equalization entitlements under the Panel’s formula.
2. The Moderate Energy Price Scenario assumes oil and gas revenues identical to 2003–04, when average prices were US$31.40 and US$5.30, respectively. This is equivalent to a 28 percent decrease in the oil and gas revenues used to calculate 2007–08 Equalization entitlements under the Panel’s formula.

In the Panel’s view, these scenarios reflect a sufficiently wide but realistic price range that can be easily replicated by the provinces based on data readily available from within the Equalization system.

The results for 2007–08 are presented in Table 9.

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