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What lower oil prices mean for the Canadian economy

The reality that lower oil prices may be in place for more than a year—perhaps two, as opposed to months—is only now beginning to settle in


 
 THE CANADIAN PRESS/Jason Franson

THE CANADIAN PRESS/Jason Franson

It’s been almost one year since the oil price collapse began in September 2014. OPEC’s subsequent decision not to cut production at their Nov. 27, 2014, meeting sent prices spiralling even lower. And now a further decline is at hand. What is the impact?

The cutbacks in investment ensure that oil prices will eventually return to higher levels, but this will take time. For now, there is simply too much oil on the market and global production has yet to slow. In fact, it has been just the opposite. Since the OPEC decision in November, three countries—Saudi Arabia, Iraq and the United States (led by its shale oil producers)—have added two million barrels per day of supply to the world market. IHS expects demand, by contrast, to increase by 1.3 million barrels per day. High inventory levels need to be worked off. The unprecedented growth in U.S. supply is only now beginning to show some signs of flattening out, and perhaps declining. Creating additional headwinds, OPEC production is now at some of its highest levels in recent years. The Iranian nuclear deal suggests the pending arrival of even more crude, as sanctioned Iranian oil is permitted back into the market late this year or sometime early in 2016.

The reality that lower oil prices may be in place for more than a year, perhaps two, as opposed to months, is beginning to settle in. But the full extent of the impact on the Alberta and Canadian economy has not yet been fully realized.

Oil projects that take longer to plan, construct, and bring online, such as in the oil sands, have softened the impact of the drop in oil price on investment and the economy. At the beginning of 2015 IHS estimated there was nearly one million barrels per day of oil sands capacity under construction. Even in the weak price environment this year, the most prudent action for the owners of these projects is to complete these projects and bring revenue online as quickly as possible.

However, with new oil sands projects requiring WTI prices from US$65 per barrel and up to break even, and oil prices averaging about US$53 per barrel so far this year, decisions on new projects are being deferred. Oil companies will soon move into the fall budget cycle for 2016. Companies that have not yet made cuts will, and those that did so early this year may have to cut more.

As we move through this weak price period—which IHS has dubbed “the Great Oil Price Deflation”—without new projects coming forward, supply growth from the completion of projects that were started before the downturn, and the economic cushion it provides Alberta and Canada, will erode. By the end of 2015 IHS expects the inventory of oil sands capacity under construction to be cut by half, and then halved again by the end of 2016.

As these projects are completed new capital investment will fall and workers, without the next project to migrate to, may struggle to find new work. The service sector in Alberta—the largest source of direct employment in the oil and gas industry—will be left with fewer contracts to support its employees and subcontractors. Additional job cuts will inevitably follow.

Oil sands investments are built to weather the ups and downs of a volatile and even fickle world market. But Alberta and the modern oil sands industry have never undergone a price correction of this nature.

The duration of this price collapse has already outlasted the significant—but short-lived—2008-09 crash caused by the financial crisis, and is on track to exceed the less severe but more protracted price drop in 1997-98. The last comparable downturn may be more than 30 years ago, long before the commercial development of steam-assisted gravity drainage (SAGD), a technology that now accounts for half of oil sands production. In the 1980s, OPEC moved to defend its market share against the rise of non-OPEC oil production that was stimulated by higher oil prices. Oil prices did recover and eventually surpassed previous highs, but it took years for this to occur.

These impacts are not isolated to Alberta. Recently the value of the Canadian dollar against the U.S. dollar reached the lowest point in more than a decade and could fall further as the year progresses. According to the Canadian Association of Petroleum Producers, there are more than 2,000 businesses that provide goods and services to the oil sands industry alone (not to mention oil and gas in general) from other Canadian provinces. And a significant share of the oil sands workforce originates from beyond Alberta’s borders. The last census that was conducted in 2012 found that of the nearly 40,000 workers residing in work camps, nearly half were from out of province.

The oil market is cyclical and oil prices will recover. The imperative to replace global production declines will eventually take hold and higher prices will be required to incentivize those higher cost sources of supply in the world that will be needed to balance oil markets over the longer term. This includes supply from deepwater, ultra-deepwater, non-North American tight oil, and yes, the oil sands. However this period will be an uncertain and unsettling time for Alberta and Canada as the reality of the new price environment takes hold.

Kevin Birn, is a director at IHS Energy based in Calgary where he researches North American crude oil markets and leads the IHS Canadian Oil Sands Dialogue 


 

What lower oil prices mean for the Canadian economy

    • Our oil patch appears to have a hearing problem

  1. The collapse in the oil price for a significant period of time will reduce the economic means of Alberta, Saskatchewan, and Newfoundland, and thus, likely shift Ontario from a “have-not” province receiving equalization to a “have” province NOT receiving equalization, which will blow Kathleen Wynne’s economic fantasies into smithereens.

    Oil pays not only Alberta’s bills, but it pays for everyone elses too.

    • Oil has never paid for any of it, and Ontario isn’t ‘have not’……lying is just part of your Con principles

      • Ontario is receiving equalization. It is a “have-not” province.

        Who “contributes” to and who receives equalization is based on the economic capacity of each province. The oil-producing provinces, if oil prices remain low for an extended period of time, will have much reduced economic capacity, and thus may push Ontario back into being a “have” province, where it will lose the billions it currently receives in federal equalization.

        • No, it gets a rebate. A tiny discount. It still pays massive equiilization.

          Ont wants to end equilization payments….it costs us far too much

          It’s been explained to you many times…..you just keep losing it

          • Provinces don’t pay into equalisation. It is paid out of federal revenue. Ontario has been receiving equalisation since 2009 (over and above the regular federal transfers that all provinces get), and receives $2.363 billion in equalisation in fiscal 2015-16. The only three provinces not recieving equalisation are BC, AB and SK. Here’s the link:

            http://www.fin.gc.ca/fedprov/mtp-eng.asp#Ontario

            Now do yourself a favour and try to learn how the federation works, instead of embarrassing yourself by spouting ill-informed nonsense.

          • Goat, the info has been printed on here many times. No need to repeat it. Wheatabix simply doesn’t comprehend no matter how you explain it.

          • The info is on the link I gave you. Learn it and quit making a fool out of yourself. Here’s the Ontario budget, which shows that 18.4% of Ontario’s own budget is financed by direct federal transfers.

            Http:/www.fin.gov.on.ca/en/rates/index.html

            I feel like a bully picking on such an uneducated hick, but anyone with such strong opinions should at least attempt a modicum of accuracy. Your fictional reverse- transfer scheme (where provinces transfer money to the Feds and not the other way around) might go over well at the annual trailer park picnic, but does not bear any resemblance to reality.

            Now take this opportunity to learn something, as we have so generously afforded you, and stop making a fool of yourself. Clearly you have not had many educational opportunities in your life, and that’s probably not your fault. But you can’t compensate for that with forceful opinions. That just doesn’t work. Hopefully you are young enough that there is still time to make up the education gap.

          • Sorry goat…..you apparently are unaware of what the conversation is even about! LOL

            I work in economics you dummy

            See, that’s what happens when you confuse a serious topic with a hockey game.

          • If you worked in economics you would not misunderstand something as basic as which direction federal transfers flow. I’ve given you the links, both federal and provincial, and you don’t even need to use numbers (never your strong point), you can just look at the nice pie chart at the bottom of the Ontario budget page where it shows federal transfers account for 18.4% of Ontario’s revenue, on par with HST revenue. Now go learn something.

            By the way, volunteering as secretary treasurer of your bowling league doesn’t qualify as “working in economics”.

          • Economic development actually.

            Sorry goat…..how you got this all involved in going backwards, and mixing transfer payments with equalization….I don’t knnw. Cons are strange creatures, totally baffled by life

            I don’t play games goat…….I leave that to your clown car group

          • Not a numbers person eh? I’ll get the puppets. The Finance Canada page I linked to clearly differentiates between the Health Transfer, the Social Transfer, and Equalisation. All three are lumped under “Federal transfers” on the Ontario budget pie chart, but you can see a breakdown of the three types of transfers along with all other Ontario revenue if you click the link directly above the pie chart. Still not clear enough? Wallow in ignorance then. For you, that isn’t a choice.

          • GD, yer dumb.

            I didn”t look at your urls. I was responding to what you said….rubbish as usual, and not even the right argument.

            Take your macho and disappear

          • Thanks for the link Jeff. Explains it pretty well, though the stats are outdated now.

            And Emily, I admire your bravado. Like I said, ignorance is not an option for you, it’s a certainty. Since you are incapable of even trying to enhance your understanding (or indeed of understanding why you should try) your best bet is bluster and an aggressive, defiant stance. You almost pull it off sometimes – hiding your lack of education and life experience that is.

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