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Every five dollar drop in the price of oil costs the federal and Alberta treasuries $1 billion each.

As recently as June, the benchmark price of oil was $105 per barrel. In September, oil was trading at $95 per barrel, the price both Ottawa and Edmonton used for their budget forecasting.

The price of oil has since plummeted to below $70 — more than $5 per barrel in the last week alone — on the news that OPEC would not cut production to maintain prices. On Tuesday, benchmark West Texas Intermediate was trading at $67 and change.

Do the math. That’s more than $25 per barrel below forecasted levels of only two months ago — and more than $15 below the projected price in Ottawa’s fall fiscal update of only three weeks ago.

How low can oil go? Try $30, suggests Murray Edwards, CEO of Canadian Energy Resources, and one of the most prominent leaders of the Alberta oilpatch. At an energy conference at Lake Louise last Friday he said: “Prices could spike down to $30 to $40. It got down to $35 in 2008 for a short period of time.

“The better question is where does it stabilize for a period of time, and the $70 to $75 area is probably not a bad place until you get more balance in terms of growth in demand and some supply response.”

The world price of oil doesn’t take into account the discount on Western Canadian Select from the oilsands which Andrew Leach, Enbridge Energy Policy Professor at University of Alberta, calculates has plunged from nearly $95 in June to $55 today.

And as Leach writes in Maclean’s: “The longer-term impacts, yet largely to be felt, will occur if projects start to be delayed or cancelled as a result of the drop in prices.”

So, three questions arise from the plunging price of crude. What’s the effect on the fiscal frameworks of Ottawa and the producing provinces, notably Alberta? At what point do new projects in the oilsands become financially unfeasible, and how much economic activity, and how many jobs, would be lost as a result?

And if oil production isn’t increased, will Canada need all these new pipelines to tidewater for export to new markets?

The Harper government has already done a show-and-tell on the coming surplus. In the next fiscal year, it’s projected to be $1.9 billion rather than $6.4 billion in last February’s budget. The difference is $3.2 billion in new spending on family tax breaks and child care benefits in the current fiscal year, $5 billion in the next one and $22.6 billion to 2018.

Over the next four years, the surplus is now forecast to be $18.1 billion, down from $32.9 billion in the budget.

The question is whether Canada needs all the proposed new pipeline capacity. And the answer is still, hopefully, ‘yes’ — by the time it’s all built.

But it turns out that forecasting the price of oil is a mug’s game. How much will the shortfall be and how will it be covered? Well, there’s a $3 billion contingency reserve that could come in handy. But beyond that, it may be a problem for the Harper government to deliver more election year goodies in the budget expected in February or March.

In Alberta, Premier Jim Prentice has already acknowledged that he faces some tough choices in his spring budget. No one in his right mind in Alberta would propose a provincial sales tax — good policy, but bad politics. Nor would Prentice be inclined to raise taxes a year before his election in 2016. Which leaves him with the prospect of cutting government spending, two-thirds of which is already allocated to health care and education. There’s a saying: To govern is to choose. Prentice is about to find out how true those words are.

Beyond the price of oil, Prentice may be looking at an economic slowdown in the oilpatch, resulting in a further decline of government revenues and royalties.

Canada now produces about 3 million barrels of oil per day, 2 million barrels from the oilsands. And we export 2.5 million barrels per day, more than 99 per cent of it to the U.S. (Enbridge alone transports more oil to the U.S. than does Saudi Arabia). The Canadian Association of Petroleum Producers has already revised its 2020 oilsands production forecast from 4 million to 3 million barrels per day. And with shale oil, the U.S. is on its way to self-sufficiency.

Diversifying markets is a necessity, but the question is whether Canada needs all the proposed new pipeline capacity. And the answer is still, hopefully, ‘yes’ — by the time it’s all built.

TransCanada’s Energy East project from Alberta to Quebec and New Brunswick alone would carry 1.1 million barrels per day. Its Keystone XL project would carry another 800,000 barrels per day from Alberta and North Dakota to refineries on the Gulf Coast of Texas. Enbridge’s Northern Gateway project from Alberta to the northern British Columbia coast would account for more than 500,000 barrels per day, and Kinder Morgan’s Trans Mountain Pipeline expansion project would add nearly 600,000 barrels per day.

None of this new capacity has been built yet and there are issues with environmental activists, communities, First Nations and, in the case of Energy East, two important provinces, Quebec and Ontario, which last week posted seven conditions. Prentice is in Quebec and Ontario Tuesday and Wednesday, doing some pipeline diplomacy with his new colleagues, Philippe Couillard and Kathleen Wynne.

“We’re happy to collaborate with Quebec,” Prentice said in French following his meeting with Couillard at the National Assembly. “Albertans share the pre-occupations of Quebec.”

For her part, Wynne declared ahead of Wednesday’s meeting that the Quebec-Ontario conditions were “principles, not stipulations,” and that Ontario and Alberta “have a very constructive relationship.”

Prentice, Couillard and Wynne are the three political actors who can make this happen. They are also three of the smartest people in the room. It’s a time for leadership.

L. Ian MacDonald is editor of Policy, the bi-monthly magazine of Canadian politics and public policy. He is the author of five books. He served as chief speechwriter to Prime Minister Brian Mulroney from 1985-88, and later as head of the public affairs division of the Canadian Embassy in Washington from 1992-94. The views, opinions and positions expressed by all iPolitics columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of iPolitics.

The views, opinions and positions expressed by all iPolitics columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of iPolitics.