The price of Brent crude fell below US$40 per barrel on Friday, reaching a seven-low year and further eroding Newfoundland and Labrador's already tenuous fiscal situation.

The continuing slide is being blamed on weakening demand and warnings of a glut.

It's more sobering news for a province heavily dependent on royalties and economic spinoffs from the oil industry.

Memorial University economist Wade Locke said Friday that it puts the incoming Liberal government and premier-designate Dwight Ball in a very challenging situation.

"Right now we have a serious problem, and some would even label it a crisis," said Locke,

The provincial government had prepared the 2015-16 budget based on assumptions that oil would average $62 per barrel, but the actual numbers have been well below that for most of this fiscal year.

'I don't envy Mr. Ball'

The outgoing Progressive Conservative government was forecasting a record $1.1 billion deficit, but that figure is now expected to reach $1.8 billion as hundreds of millions in oil royalties are erased from the balance sheet.

The Newfoundland and Labrador government bases its budget assumptions on Brent crude, as it's closest to the type of oil produced at Hibernia and other fields. (CBC)

Locke, who routinely advised previous PC governments on fiscal policy, believes the drop is not a long-term challenge, but said some tough decisions have to be made.

"Whatever the new government does, they need to take into account that their actions will have impacts on the rest of the economy," said Locke, referring to speculation that the new government will be forced to cut expenditures in a province where an especially large percentage of workers are employed by the public sector.

"I don't know how you meet the things you can meet, and live within the fiscal realities we know you now have to live in," he said.

"I don't envy Mr. Ball and I don't envy the new finance minister. They're in a difficult situation and there's no obvious and easy way out of it."

The new Liberal government will take the reins of power on Monday, when Ball and his first cabinet will be sworn in.