Life at $20 a barrel: What the oil crash means for Canada

As the price of crude plunges, and drags the loonie with it, the pain stretches far beyond the Alberta oil patch. What’s next for Canada’s economy?


 
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Oil Background. Matt Jeacock/Getty Images

Oil Background. Matt Jeacock/Getty Images

In September 2008, when thousands of riled-up Republicans filed into the Xcel Energy Center in Saint Paul, Minn., for the party’s national convention, the upcoming election wasn’t the only thing on their minds. Oil had soared to US$145 a barrel just months earlier, and though crude had begun to fall fast—a harbinger of the Great Recession—Americans fumed that they were still paying $4 a gallon at the pumps and the nation was gripped by anxiety over its reliance on the Middle East for its energy needs. So when party stalwart Michael Steele took the stage for his keynote address, he preached the bumper-sticker gospel of energy independence. “Drill, baby, drill!” he hollered. “Drill, baby, drill!” the multitudes roared back.

But away from the convention, a legion of energy companies were already doing just that, furiously exploring the oil fields of Texas, North Dakota, Colorado, and anywhere else they could park a rig. That drilling brought on the biggest energy revolution the world has seen in decades, one that continues to be measured in U.S. oil production at 40-year highs, glutted global crude inventories and a seemingly bottomless floor for oil prices. The price of a barrel of West Texas Intermediate crude, the benchmark measure for U.S. oil, fell more than 15 per cent last week, briefly dipping below US$30 on Tuesday, a 12-year low.

A growing number of grim forecasts are calling for even that demolished price to fall further. Last fall Goldman Sachs warned oil could hit US$25 as crude storage tanks reached capacity. In December a report from the International Monetary Fund argued new oil flowing from Iran could push prices even lower. This week analysts at Morgan Stanley made the case for US$20 oil based on the strengthening value of the U.S. dollar, which tends to push commodity prices lower.

(Todd Korol/Reuters)

(Todd Korol/Reuters)

Others have been even more pessimistic for longer, and their forecasts, once mocked, have taken on new gravity. In November 2014, when oil was still well above US$50 a barrel, U.S. financial analyst Gary Shilling, the author of The Age of Deleveraging, predicted oil would fall to between US$10 and $20 a barrel as producers in the U.S. and the OPEC oil cartel faced off over which side would curtail output first. This week Shilling reiterated his call. “Once the wells are drilled and the oil is flowing, the question becomes: what is the cost to get it to market? In the Permian Basin in Texas, that’s $10 to $20, and in the Persian Gulf it’s even lower,” he says. “They’re playing a game of chicken over who can stand lower prices the longest before a producer pulls out.”

Caught in the middle, of course, is Canada. While the shock was at first expected to be focused mostly on energy-producing provinces like Saskatchewan, Newfoundland and Labrador and the economic driving force of Alberta, there are now very real signs the pain is spreading to other regions. Last week Bank of Canada governor Stephen Poloz reminded the country of the hit we’re collectively taking: the drop in oil has delivered a $50-billion cut to Canada’s national income, equal to $1,500 per year for each man, woman and child. Then this week the Bank released the results of its latest business outlook survey, which polls firms on their investment and hiring intentions.

Related: The A to Z of the oil crash

“The negative effects of the commodity price shock … are increasingly being felt across most regions and sectors,” the report said, with business investment intentions falling to the lowest level since the 2008-09 recession and their hiring plans hitting 2010 lows. “When you look at the levels of these surveys of investment and hiring intentions, they’re historically consistent with negative growth,” says David Madani, the chief economist at Capital Economics, who says it’s a sign that “perhaps the economy is on the verge of a full-blown recession.”

Yet cheap oil offers a huge upside for consumers, and there remain plenty of optimists who believe that low oil and the beaten-down loonie—which dipped below US70 cents for the first time since 2003 this week—will not only provide a buffer against events unfolding in Alberta, but lead Canada’s manufacturing and non-energy export sector to new heights.

So what is unbelievably cheap oil: a blessing? Or a burden?

Back in mid-2014, before the oil crash began, Poloz addressed the imbalance between Canada’s oil-rich regions and the suffering rest. “We see a two-track economy,” he said. Now the direction of those tracks is fundamentally reversed, and Canada’s economic fate comes down to one question: can the old laggards pick up speed fast enough to head off a calamity?


Darren Calabrese/CP

Darren Calabrese/CP

Has it really been 10 years since a freshly minted prime minister Stephen Harper declared Canada an “emerging energy superpower”? It certainly hasn’t been that long since the world was hailing Canada for its resilience during the Great Recession. Envious observers in the U.S. and Europe talked of replicating Canada’s mix of fiscal prudence and regulatory oversight, while everyone wanted a piece of the economic action. Five years ago this week, Target (remember them?) announced its “bold” expansion here, joining a slew of American retailers hoping to capitalize on the relentless Canadian consumer. Foreign investment firms rushed to open shop. And with the loonie above parity after a decade-long commodity boom, the old demons of the 1990s—fiscal and political uncertainty, the brain drain, the hollowing out of Canada—seemed finally behind us.

Related: Was Stephen Harper the enemy of oil?

One by one, those beliefs and assumptions that affirmed our sense of economic exceptionalism have begun to unravel, and have been replaced by anxiety about where our growth will come from.

MAC03_ Nowhere is this more true than Alberta, of course—ground zero of the oil crash in Canada. After a year in which the oil patch shed close to 40,000 jobs, 2016 is expected to bring even more layoffs. That is having a knock-on effect across the province in real estate, auto sales and other business activity. The province has seen its unemployment rate jump from 4.4 per cent in October to seven per cent last month. The government’s finances are a shambles. Even man’s best friend has not been immune: Fort McMurray’s only animal shelter was inundated with surrendered animals before Christmas.

Related: The death of the Alberta dream

As bad as Alberta’s woes have been, non-energy regions have taken some slight measure of comfort in the belief—repeated by politicians, economists and bankers—that the pain would be contained to the Prairies.

But there are several ways the Alberta downturn could be transferred to other parts of the country. The most obvious is in the outsized importance of the Prairie province to Canada’s GDP and internal trade numbers during the boom years, and the gap it now leaves. In the first few years after the Great Recession ended, Alberta contributed roughly the same share to real GDP growth as Ontario, a province with a population 3.3 times larger. At the same time, business investment came to focus more heavily on opportunities in the oil patch. Poloz noted the shift last week: “Back in 2002, when oil prices were around US$25 per barrel, investment in the oil and gas sector represented about 17 per cent of total business investment here in Canada. By 2014, that figure had jumped to 30 per cent.”

Businesses in other parts of the country also benefited greatly from their exports to Alberta. According to Doug Porter, chief economist at Bank of Montreal, roughly 20 per cent of Canada’s manufacturing sector is tied to oil and gas.

The collapse in oil and other commodities has also weighed heavily on Canada’s stock market, which has fallen 20 per cent since mid-2014. The S&P/TSX Index is actually down nearly seven per cent from where it was five years ago, while during that time the U.S. S&P 500 is up more than 50 per cent. Porter says thanks to this, coupled with the volatility of the loonie, business and consumer confidence have suffered beyond Alberta’s borders.

The shares of Canada’s big banks are certainly feeling the hurt, as investors try to determine their full exposure to the oil patch. Fears that Canadian households are more indebted than they’ve ever been, both inside Alberta and out, amid such a stagnant economy—is also weighing on the banks.

To that end, bank CEOs used a financial services conference this week to assure investors the contagion will be limited, and that they have a firm handle on the credit quality of their loans to the energy sector. Bill Downe, the CEO of Bank of Montreal, said his bank is stress-testing its energy loan portfolio with oil at US$25 a barrel in mind. “You’ve got to ask yourself, how low could it go?” he said.

Frank Gunn/CP

Frank Gunn/CP

Still, the worry persists that heavily indebted energy companies may struggle to repay their loans. “When any sector goes on a downturn, the banks tend to pull back on the loans they’re willing to extend,” says Madani. “That makes the downturn all the greater.”

Tighter credit would hamper an already weak job market across the country. While the latest labour report from Statistics Canada for December beat expectations—close to 23,000 new positions were added—those gains were overwhelmingly in part-time or self-employed positions, and they went almost entirely to those aged 55 and older, bypassing the key 25 to 54 demographic. Last year, self-employment accounted for more new jobs than the private and public sectors combined. Of the previous four times that occurred, three came during recessions while the fourth was in 1995 as Ottawa cut government jobs to balance the federal budget. One thing that’s likely holding down employment across the country is the exodus of workers from Alberta, which the Bank of Canada noted in its business outlook survey is under way.

Even as Canada’s job market softens, the collapse in the loonie is putting a pinch on family finances. The majority of fruits and vegetables in Canada are imported, so the lower dollar means grocery stores have to pay more for produce—costs they’re passing onto consumers. The average Canadian household spent $325 more on food in 2015 than the year before, according to research from the University of Guelph Food Institute, and that’s expected to rise another $345 in 2016.


 

oil-price-gifIt’s an all-too Canadian story: one key sector falters, and the whole economy swoons. Logic dictates that the effects will even out—some businesses will benefit from a devalued loonie, while regions crippled by soaring oil prices five years ago will recover (hold tight, Ontario). The pain feels acute just now, says Porter, because those benefits take time to work their way through the system. “Canada has been through not just years but decades of very low commodity prices before,” he says, “and that didn’t consign us to decades of low growth.”

In fact, green shoots have been rising in places you might be forgiven for thinking were doomed to inexorable decline. Even as the dollar crashed this week, central Canada was riding a year-long surge of international demand for the products that once defined its industrial heartland: consumer goods, electronics, cars and automobile parts. Exports to the United Kingdom and China both rose, by 36.2 per cent and 19.7 per cent respectively, and if you subtract energy products, the country’s export economy had expanded by at least 13 per cent. “It’s healthy growth,” says Mike Holden, an economist with the Canadian Manufacturers and Exporters. “It just took longer to happen than you might have expected. The impacts of a falling currency don’t occur overnight.”

True to Canadian form, the winners haven’t done a lot of crowing—afraid, no doubt, that the good times can’t last. But look hard enough and you can find them. In the car-making capital of Windsor, Ont.—hard-hit in the last decade by the shift of auto production to Asia, Mexico and the U.S.—fully 8,100 people landed manufacturing jobs in 2015, thanks in part to Fiat Chrysler opening a newly retrofitted assembly plant. One local maker of factory machines, CenterLine Ltd., has seen sales double since the loonie went into decline and expects 25 per cent more growth in 2016. Lumber mills across the country, meanwhile, are running near full capacity, as exports of forestry products jumped 9.4 per cent, or almost $300 million. Furniture makers are shipping as much as they can south, with Winnipeg-based Palliser Furniture recently announcing it plans to open up a massive new showroom in Las Vegas for American retailers.

Of course, we’ll need a lot more such added-value jobs to fill the void left by the oil bust. But the sinking loonie and low fuel prices have other upsides. The tourism industry—oft overlooked despite its $88-billion annual contribution to the economy—has a chance to make up ground it began losing in 2001, when the Sept. 11 attacks scared Americans into staying home. Over the following decade, Canada tumbled from the eighth-most-visited country in the world to No. 17, while our annual take from international tourists fell nearly 13 per cent.

MAC03_2Today, there are signs of a turnaround. More Canadians are vacationing in their own country, while Brits, Germans, Chinese and Americans are showing up in larger numbers. Last year, Canada returned to international visitation levels seen before the financial crisis in 2008: arrivals by both air and vehicle went up about seven per cent. That’s an important gain, says Rob Taylor, vice-president of public affairs at the Tourism Industry Association of Canada, because, plainly put, foreign tourists are worth more. “If you’re coming from outside the country,” he says, “you’re likely to stay longer and spend more.” And when it comes to attracting Americans, the low price of gas helps. Border crossings like B.C.’s Peace Arch crossing and Niagara Falls, Ont., saw big bumps last year in incoming traffic.

The challenge, says Taylor, is to seize the momentum. After years of ignoring the U.S. tourism market, Ottawa is partnering this year with Canada’s tourism industry on a $67.5-million shared-cost marketing campaign in the U.S. aimed at drawing 400,000 more visitors over the next four years.

The initiative typifies a growing belief that, while a low dollar will indeed revive moribund industries, the country’s long-term future lies in selling services to people in other countries. Last August, the Conference Board of Canada noted that service industries defied last year’s brief recession, and now account for 70 per cent of the country’s GDP. More to the point, Canada’s export economy was driven during that period by services provided abroad, from management consultation to technological advice. Financial services and insurance led the way, doubling in foreign sales between 2003 and 2013. One of the few sure outcomes of the current turmoil is that a low dollar will accelerate this growth.

Another certainty: that we’ll all get some kind of break from crippling fuel prices. Seventeen months ago, with gas brushing $1.40 per litre, Canadians stood appalled at pumps watching price meters whiz higher—an average fill-up cost $90. “I’d wonder how much I could possibly do this,” Julie Vitro, who commutes 60 km each way from her home in suburban Woodbridge, Ont., to her teaching job in southwest Toronto. Vitro’s Mazda 3 is no gas guzzler. But keeping it fuelled up was costing about $360 a month, she says, while weekend ski trips in the family’s Hyundai SUV began to feel like an unsustainable luxury. “If it had continued to go up, I’d have had to move jobs, to a school closer to our home,” she says.

These days, Vitro’s fuel bill is down by a full third, allowing her and her husband, Mitchell, to carry on with the routines they’d worked hard to establish. She’s not the only suburbanite feeling like her way of life has been granted new licence by the oil crash. Property prices have held steady, despite predictions that long commutes and pricey fuel would result in empty stretches of track housing along the edges of Canadian cities. A recent jump in sales of SUVs and light trucks, meanwhile, speaks to renewed confidence in the auto-centred lifestyle that, until recently, urban critics suggested could not continue.

Truth is, says Tsur Somerville, an urban economics professor at the University of British Columbia, North Americans do not typically make decisions on where to live based on fluctuations in oil. “I never thought everyone was going to move downtown,” he says. “Not everybody wants to live in a condo.” If anything, Somerville notes, new suburbs have started incorporating features of urban culture that suburbanites now want, such as pedestrian-friendly neighbourhoods and commercial strips. To them, a short-run drop in fuel prices will feel like a pat on the back.


The Suncor tar sands processing plant near the Athabasca River at their mining operations near Fort McMurray, Alberta, September 17, 2014. In 1967 Suncor helped pioneer the commercial development of Canada's oil sands, one of the largest petroleum resource basins in the world. Picture taken September 17, 2014.  REUTERS/Todd Korol (CANADA  - Tags: ENERGY ENVIRONMENT)   - RTR47FRZ

The Suncor tar sands processing plant near the Athabasca River at their mining operations near Fort McMurray, Alberta, September 17, 2014. In 1967 Suncor helped pioneer the commercial development of Canada’s oil sands, one of the largest petroleum resource basins in the world. Picture taken September 17, 2014. REUTERS/Todd Korol

As the different factions of Canada’s economy struggle to adjust to the oil crash, the mystery remains: where will prices be next year, let alone five or 10 years from now? A sharp rebound in oil would bring with it a higher loonie, delivering yet another one-two punch to the nascent recovery in manufacturing and non-energy exports. On the other hand, if oil lingers at US$30 to $40 for 15 years as it did during the 1980s and 1990s (adjusted for inflation), it would mean new oil sands projects that have recently been postponed would likely be abandoned, while some higher-cost operations that are already up and running might no longer be feasible. And you can kiss any pipeline dreams goodbye.

Related: What we learned from Keystone XL

It’s entirely possible the worst-case oil scenario of US$20 a barrel does not come true. It was only in 2008 that everyone feared oil was headed to unmanageable heights. A Maclean’s cover story that June, drawing on forecasts from economists and oil watchers, examined what life would be like at US$200 a barrel. Oil peaked three months later. Likewise, the last time oil was at US$20 a barrel (after inflation) was March 1999, the same month a cover story in The Economist magazine warned of a world “Drowning in oil.” That marked the low point for prices. “This happens when you go through a major swing because people tend to be overly optimistic on the boom and overly pessimistic on the bust,” says Madani. “For Canada, the problem is oil has already fallen so far, it almost doesn’t matter if it’s at $40 or $20 because the long-run break-even cost for a lot of new oil sands projects is at $60 to $80.”

Even if prices do recover somewhat, there are factors working against oil returning to those levels any time soon. Saudi Arabia appears committed to pumping out crude as a way to recover market share lost to non-OPEC countries like Canada, the U.S. and Russia. At the same time, the fracking industry grows more efficient by the year. According to Shilling, productivity jumped by 30 per cent in 2014 and 25 per cent last year—and there is a continued growth in alternative energy, shifts to natural gas and the move to electric cars, all of which can’t be ignored when it comes to curbing demand for oil.

Meanwhile, the global energy puzzle is missing one large piece that existed when oil was last at these low levels: an emerging China that had an insatiable appetite for crude and other commodities and a willingness to acquire them at any price. Now China’s era of miracle growth is behind it, the country is teetering under a mountain of debt and there are outright fears of a downturn.

Canada’s dreams of being an energy superpower have been foiled, for now. But there’s nevertheless reason to be hopeful a rebalanced economy will power ahead.


 

Life at $20 a barrel: What the oil crash means for Canada

  1. left out of this analysis is the impact of a federal gov’t and provincial gov’ts in Alberta and elsewhere which are hostile to the oil industry. Factor that in and the outlook is very bleak.

    • That is probably because this is an actual analysis. If you are looking for the paranoid ramblings of a bunch of disgruntled conservatives, look elsewhere.

      • My goodness Gayle, you must be a civil servant. How else can you dismiss the concerns of the many unemployed in your own province. It isn’t paranoia, it is reality. Do you have no family members out of work?

        • Gayle,

          I have the same theory as you when it comes to Gayle. No one that deluded has to worry about their paycheque. I’m assuming gayle is some low level beaurocrat who has a “job for life” with little worry about ever being fired; or pushed too hard to produce anything of value.

          given how laissez faire she seems to be about the suffering or trouble of the unemployed, I’d say she’s been working in the same job for about 25 years.

        • I certainly don’t. Do you know why? Nobody in my family was stupid enough to accept a non union job.

          • Gofa Kyoursel wrote:

            “I certainly don’t. Do you know why? Nobody in my family was stupid enough to accept a non union job.”

            And folks…what he means by that is, “Nobody in the private sector was stupid enough to hire him or anyone in his family”

            It isn’t hard to spot the shiftless and underachievers when one is conducting job interviews. The private sector folks would see you for what you are and just chuck your resume in the garbage, whereas the union shops would see you as a kindred (lazy) spirit and snap you up on the spot.

            Not much to brag about really.

          • Gofa, surely there are some in your family who are young. Perhaps they have low seniority in the civil service or even worse, haven’t gotten a permanent position in a union job. In years 1990’s in the province of Alberta, even the unions gut jobs. Ralph Klein shut hospitals so nurses in unions were laid off and they bumped each other out of jobs in order of seniority. A union doesn’t assure you of a job. It means if you are the last hired, you are the first be let go and that lay offs go in an orderly fashion despite job performance or another other measure. So don’t be too sure that if the cuts end up deep that the unions won’t lay off people. They have and they will.

        • Sigh.

          Not blaming the governments that were just elected for the collapse in oil prices does not mean I am not concerned. It just means I am smart enough not to blame the government for the collapse in oil prices.

          It is not that hard.

    • Anne, the truth is that both the provincial and current federal governments are very naïve a gullible. It never occurred to them that the US denied Keystone, not because of climate change as Obama clamed but because they considered Canada a competitor in fosel fuels. How else would one explain Obamas repealing a 40 year ban on exporting US oil to international marks right after the Paris summit on climate change. How would one explain his fracking practices and his plans to drill for oil in the Arctic. We are talking about a supposed climate change leader and yet the only country he demands lowers its emissions is Canada (which is a very small emitter at 1.6 percent globally). Trudeau and Notley perhaps have not realized the Obama turned down keystone because he is a competitor in fossel fuels, not because he cares about climate change. He isn’t using president powers to restricting the emissions in his own country.

      • I enjoyed reading, ” It isn’t paranoia, it is reality” followed by that paranoid screed.
        I thought climate change was a socialist conspiracy to redistribute wealth. Now I find out it’s a conspiracy to stop Canada’s oil industry from competing with the U.S.’s.

        And I’m sorry, but claiming that, ” He isn’t using president powers to restricting the emissions in his own country” simply isn’t true.

        • And here again, we see evidence that Tresus lacks the capacity / complexity, to even consider that some coins have more than one side.

        • Tresus, has he actually shut down the coal mines? No. He is shipping record amounts to Beijing. So while he is doing what Canada already did which is get rid of coal powered electricity, he is selling like crazy to the Chinese and will help up their emissions. Our neighbouring province, BC is doing the same thing. Their premier is selling record amounts of coal to China out of the same port as Obama but she charges a carbon tax to her own people for emissions. Frankly, Tresus I expected from you. Macleans wrote an article a few years back on how Obama plays the game and you apparently missed or else you really have a thing for the guy and all this BS. What possible difference does it make if Obama burns the coal or Beijing does…..we don’t call it global climate change for no reason.

      • Obama is generally pretty articulate and he was on the pipeline issue: he said very clearly that increasing imports of Canadian bitumen would do nothing to improve US energy security … especially of the Keystone kind which would merely use US territory as an avenue for upgrading and exporting Canadian bitumen to foreign markets – in other words, although there is something of a business case for Canada there is none or even a negative one for the US
        (since it would tie up considerable US refining capacity). He could of course sugar coat his argument with justification since the carbon footprint and price of refined Canadian bitumen was to the high side of other available sources. The de minimus argument in favor of pollution would also justify my neighbor letting her yap dog crap on my lawn but possibly not her bull terrier – this is like a kid’s rebuttal of being asked to wash their hands.

        • Obama is a competitor of Alberta and Canada yet he acts as though he is superior in terms of actions taken on climate change and wags his finger at us. Even Notley now realizes he is a competitor. He made no promises to lower his carbon footprint in Paris because the GOP would never support them. He is shutting down coal fired electricity but Canada is way ahead of him on that. He is fracking. He is drilling. He is mining and selling to Beijing. He has his own tarsands. Now he is selling oil internationally. He is even planning to drill in the pristine Arctic and he has sucked Trudeau into making promises to leave oil in the ground. He is articulate alright. He just took Canadians to the cleaners and they are bowing and scrapping at his feet. At least BC’s premier and Alberta’s are trying to get a pipeline deal together even if means Alberta might have to promise some of the revenues and spill cleanup deal.

  2. Alberta oil companies cannot make any money at $20 oil. They may have to shut down temporarily, and then what would everyone do for everything we use oil for. I doubt if any oil company in the world can sell their oil for this price. Will things get better if we are all freezing in the dark?

    • Saudi oil is $3 a barrel to extract. Nobody cares about Albertan oil buddy.

      • The Saudi’s need $109.00 a barrel to break even. They only charge their people 10 percent of the cost of gas. Everyone there lives on welfare. No Saudi’s work. Saudi is bleeding money and they are already borrowing on bonds. They don’t do the work to take oil out of the ground, or care for their people in hospitals. Foreigners do it all. Where did you ever get the idea that they run the country on the cheap? Do you have any idea how many people are in the royal family living lavishly?

        • You’re talking about the budget of the Saudi government. We’re talking about the oil market.

          You see, such a government doesn’t need to balance its budget at all costs. They know they will recoup the losses on the long term if they’re able to throw competition out of the market. The question is how long will it take for other oil producers to fold their operations.

          • From what I read, it is projected the Saudi’s will be bankrupt in 5 years or less. Will Will Esso, Shell, Enron, Cenovus, Suncor, etc. all fold their operations? Alberta has been in the business since the 1950’s. They have weathered many downturns. Some have shut down projects and hired security to secure the sites where the equipment is. The oil isn’t going anywhere. They are reducing their costs down to as little as possible. Notley is working to make a deal with the premier from BC to build a pipeline to Burnaby and the two sticking points are that BC was a cut of the money and a spill clean up deal. 2 things I think Notley might agree to. Meanwhile Saudi is a country enmeshed in an expensive war with a population that is a drain on the economy. They aren’t balancing the budget. The country is already borrowing money. They are also getting into a conflict with Iran. There are a lot of producers out there. They aren’t going to get them all to fold. That is a pipe dream.

          • Saudis are aiming at a tight window. Shut down expensive oil extraction operations (and discourage future operations) before they have a domestic blowup. SA’s GDP fluctuates wildly and low cost oil means high employment. High unemployment (especially among young single males) in that part of the world is not a good situation to be in for the royal family. In response to Splussier, I don’t think the Saudis – financially speaking – have a long-term window here. It is kill or be killed in the medium term.

    • Lois, allow me to put on my “conspiracy theory” hat.

      Someone (or some groups) won’t put up for this for long. I suspect that the oil production in Saudi Arabia, or Iran may suddenly slow down after the two sides start bombing each other. that should put the price back up.

    • Here’s the problem: Alberta oil has absorbed a huge portion of investment capital disproportionately to revenue and GDP potential; this sunk capital has a substantial carrying cost and the physical plant itself has substantial operating costs even in a standby mode. Financially, revenue produced by selling at a price below cost of production still offsets a portion of carrying costs, thereby reducing losses.

  3. You know,

    The negative aspects of low costs for oil would be mitigated somewhat if the reduced price was reflected at the pumps, or in the reduced costs for transportation. (ie plane tickets)

    But as the price of gas SHOULD be about .53 cents / litre, but remains at $1.01 or thereabouts, is just more proof that there is collusion.

    I’m a big “free market” capitalist, but I suspect some regs may be required for fuel. The cost for a litre of gas/diesel, etc, should be tied to the price per barrel.

    Still…sucks to be losing this much revenue.

    • The drop in the dollar also has a huge affect on gasoline as price of oil is in US dollars. And of course there is always the baloney of refining costs, delivery etc. A $US 20 barrel of oil is $30 CDN.

    • The same thing happened during mad cow. The ranchers were getting nothing but the processors were doing real good business.

  4. Alberta’s oil production has always been a smoke and mirrors show. Tar sand oil is garbage, and nobody wants it.

    • New Brunswick Irving oil refinery wants it. Lets get that pipeline moving and have Canada use its own oil. We all win this way.

      • Few Canadians are that patriotic that they will pay a 50% premium on the price of gas just because it’s Made in Canada…

        • No one is asking Canadians to pay a 50 percent premium on the price of gas to buy in Canada. The National Energy Program that Pierre Trudeau wanted to establish did the opposite. It gave Canadians a cut on the price of gas because I was Canadian oil. Albertans don’t ask for a deal on a car out of Ontario. The point of the east west pipeline is that everyone wins. The oil supply is guaranteed within the country. It isn’t coming by tanker from South America, Africa or Saudi Arabia, countries which have horrific human rights records and let’s face it oil tankers are no more environmentally safe than a pipeline. Further, it means jobs for all Canadians. We are also told buy Canadian whether it be food, clothing, or any other product yet with fuel we don’t have the same attitude. Why is that? People may wish oil to perdition but they are okay with propping up Bombardier which builds jet planes and there is no way a jet plane is going to fly using electricity or batteries. We certainly should be investing in greener alternatives but in the meantime we have the resources and why are we embarrassed about that. Obama is not embarrassed about his resources. No other country is. The US has a tarsands. Why isn’t that publicized? The US fracs like crazy. Are they apologizing? They are cutting back on coal fired electricity but selling the coal to Beijing, the most polluted place on the planet. Is Obama apologizing for that? No.

    • You are a little clued out their Goya. Exactly what union job do you have?

  5. Alberta can now seriously consider diversifying its economy. Why not manufacture solar panels and wind mills. There is a great future in clean energy.

    • Yes, you are right Tornesch,

      the fleets of solar power transport trucks and train engines are doing yeoman’s duty moving millions of tonnes of goods from one side of the country to the other. Oh yeah…and heating the homes in Canada is now almost costless, since all the solar powered furnaces are running at full capacity.

      Oh..wait a minute…………..

    • Is this a serious comment or just greenie mantra? Do you think there’s some kind of magic diversification wand that Premier Rach can wave to make this happen? And, even if diversification is an end unto itself, notwithstanding it may actually leave the province in a worse overall economic position (I suspect windmill construction workers earn somewhat less in, say, China than they’d earn here), why on earth would one think Notley and her cabinet full of baristas, yoga instructors and union hacks to do it?

      • “why on earth would one think Notley and her cabinet full of baristas, yoga instructors and union hacks to do it?”

        Now, that’s a funny one!

    • Tornesch: Just look at how well the green energy is doing for Ontario? It’s hugely subsidized by taxpayers, their electricity rates are through the roof, the province is financially in the toilet. You call that creating a “great future”?

    • Because China can manufacture solar panels and wind turbines much cheaper.

      Ontario paid a Korean company $7 billion dollars to manufacture such products in Ontario, and its has produced jobs for imported Korean workers, and not much else. And then lost a WTO ruling that overturned the monopoly that Ontario wanted to give to that Korean company in Ontario.

      Gerald Butts, who is now the right hand man to Trudeau in Ottawa, was at McGuinty’s right hand when this deal was made.

      We are screwed.

      • Isolated data points don’t have much value. $7B is nothing compared to Alberta tar sands imports of steel and heavy equipment from Korea alone and much less than those from China. They could have shopped in Hamilton and London Ontario, but they didn’t (although they had the cheek to tout orders placed through sales offices in Toronto as made-in-Canada procurement).

    • Hahaha! Some provinces have put a moratorium on windmill farms. Bill Nye the science guy said we should be trying to invent a cheap way to desalinate ocean water as that is the future. We are going to need the ocean water for the big droughts that are coming and we need to do it in ways that have high energy costs. It will also be a way to deal with the ocean when it rises due to climate change. We take the water out and irrigate California and drought stricken farming communities with it before it rises and buries Vancouver island and Florida.

  6. Newsflash to Macleans – “tar sands” is incorrect, though it DOES fit your left-leaning narrative. Try using facts instead of political spin!

    • You forget history. It was called the Alberta Tar Sands for generations before tar became a dirty word
      and the the name was changed to oil sands to enhance the public perception, which said tar was bad but oil was good. It’s called marketing. And it wasn’t leftists that changed the name. Regardless, what’s mixed with the sand is tar, not oil. Call it what you want; Macleans was right.

    • Nothing wrong with the traditional and more accurate name for it. Bitumen is not crude oil and even after upgrading and refining it is still only somewhat similar. When crude oil comes out of the ground, there are many choices of refineries that can process it and it can provide all of the commercially viable hydrocarbon fractions. When bitumen comes out of the ground it can only be processed by a few specialized refineries and a more limited compliment of hydrocarbon fractions. Even when shipped, bitumen must be diluted to be capable of flowing through plumbing. Oil floats on water, bitumen does not. You can wash crude oil off a duck with dish detergent but not bitumen. The commonly accepted name for a sticky viscous substance is tar, the common name for a slippery fluid is oil. We also call wine wine not grape jelly.

  7. Lol $20? Try $10 buddy. Oil is dead and nobody outside of Alberta cares. Even then, nobody here but oilies care. Public sector people don’t give an F. We brought in the NDP! We win!

    • Gofa are you never going take a jet plane in the future? I am sorry to break it to you but oil won’t be dead for a few decades. Coal won’t even be deal for the foreseeable future. They are mining it in Europe. People care about climate change but

      • in the meantime, it was -17C where I was this morning and snowing. Get real.

  8. No doubt about it, it is a huge blow. But we shouldn’t despair. Cisco has opened a huge hub in Toronto, Google just opened one in Kitchener-Waterloo, Amazon is opening a data centre in Montreal, Toronto is getting the only North American currency exchange for the yuan, University of Toronto, Guelph and other centres are making leaps and bounds in biosciences and biotech including commercialization.

    • The Wynne Liberals which are really Trudeau Liberals paid Cisco $220 million dollars or $130K per promised job.

      • That’s peanuts, loose change. Don’t you read the papers or watch the news?
        Some guy in Tennessee just won a one third share in a lottery and it was over 500 million US!
        Get a grip.

  9. I find you can watch CNN 24 hours and never hear one seconds worth of concern from any side of the spectrum about the falling price of oil.
    In fact, it is their POLICY to drastically cut oil and gas prices at the pump, and natural gas as well.
    Stop whining Canada.

  10. It’s surprising how short memory can be: as the article points out, low oil prices are part of a not so distant past. As early as 2011, the WSJ ran articles suggesting that oil prices were out of sync with commodity markets in general with more serious warnings in 2013. This should not be any sort of a surprise. Some blame the Saudis who apparently abandoned their pattern of aggressive supply management in favor of cost competition; what might have been noted during the last decade of turmoil in the middle east was that Saudi Arabia was losing dominance in middle eastern affairs; also, restrictions on Iran and some others spurred the development of a very healthy and essentially uncontrolled black market. Now, in the present circumstances, one might hardly expect Saudi Arabia to exercise restraint with Iran soon to be unrestrained; control over ISIS bootleg oil seems even less likely.

    The conservatives constructed this oil super power theology which resulted in both disproportionately high capital investment and government spending in one sector, which despite all the crowing yielded disproportionately small yields in employment and GDP: while attracting over 1/4 of all private investment, the best return was under 11% of GDP all economic activity included and job gains in Alberta were a small fraction of job losses in the manufacturing sector in eastern Canada; federal government finances were also in a precarious position as at the peak the WTO estimated total benefit to the fossil fuel industry at $34B while CRA was reporting $22B in tax revenue. Curiously, the CPC is sticking to its guns, suggesting that increased production and building many more pipelines will fix the problem – that reminds me of an old joke ‘we lose money on everything we sell but we make up for it with volume’; they shot the wad and lost but they still won’t wear it.

  11. Why do many Canadians not believe that the oil price is the sole contributor to our faltering economy? The answer is simple, it’s because we are “again” being lied to.
    In the last couple of years, oil prices have dropped over 75%. In the same time, fuel at the pumps is down about 25%. Why is that?
    We are “told” it’s primarily because of the low Canadian dollar (partly true) and because the price of crude is only a small part of the price of fuel at the pump. Why is this only true now?
    When the price of crude oil was increasing, we could be sure of a fuel increase in harmony of about 1 cent at the pumps to 1 dollar at the well head, i.e. a directly relationship. Now that the tides have turned, this relationship for some reason no longer exists. Why is that?
    Hint: governments do not want to lose the huge tax revenue from fuel prices at the pumps and the “big guys” want to gouge us even further.
    So, are declining crude oil prices really driving down our dollar? Not a chance.
    Want to see an improving dollar? Simply raise interest rates to a respectable level (~4 or 5%). If we could pay interest at rates of 12 to 20 % in the past (high, I agree), we can definitely afford rates at half that amount in the present.
    Oh yes. If the government really wants to interfere (positively) on our behalf, then step in to stop the banks and various companies (some charging up to 30% or more) from gouging the customer with atrocious rates.
    One other thing… Inform exporters that they will be expected to compete on a level playing field…1 Canadian dollar to 1 U.S. dollar. The bogus situation created by and supported by big business and government needs to stop if ordinary working Canadians are to survive.
    We can do very well with a $20 a barrel oil price.

    • It’s true when they say Canada was living on a two track economy. There are hard working Canadians which see this situation as a relief. A lower loony means tourism, foreign investments and more competitivity for most of us. Personnally I like the fresh air of the actual situation and I hope Canada will be more balance in the future.

  12. There is really nothing revealing in this article. It is a survey simply of hope; hope that the devalued loonie will fix things, with time, by itself; hope that tourism will pick up the slack and remmediate a perceived petro-currency.

    Should we really aim to be the world’s tour guides in our own backyards? The lack of political vision and silence from our new government is frightening. At the current rate, we may just end up throwing pieces of the house into the fireplace to stay warm. I hear of no better plan from Justin. At some point with this tumbling loonie, we will be cashing in our homesteads which will seem like bargains to foreign capital hungrily seeking cheap exchange parity assets. A 25% increase in the price of Vancouver real estate although somewhat comforting, is hardly a salve against a loonie that has fallen by almost the same amount. And what about the rest of Canada that does not have our little microcosm of real estate euphoria? Shall we all migrate to newly discovered, globally warmed farmland in the Arctic Tundra and start growing made in Canada crops to insulate our food supply from our commodity based currency?

  13. Hi,
    Could someone please explain to me why Canada’s oil prices have dropped and what effect this has on the economy?
    From what I understand, Canada sells crude oil and then exports it to the US to be crushed, this is very costly and therefore our oil prices are high however countries in the Middle East sell their oil for much cheaper prices and many of the countries that buy oil from us have turned to them. This has caused a negative plunge in our economy since we relied on a great deal of the money we make to be from our oil sales, which later impacted the value of the loonie. This also forced us to lower our oil prices where we will not make much of a profit.
    Essentially I would like to understand what this article is trying to prove.

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