Low oil prices take their toll on Canada. Are oil sands in trouble?
Canada鈥檚 economy, lately driven in large part by oil, is a classic example of the old see-saw axiom: Downward pressure in one place creates upward pressure in another.
In this case, the bad news of low oil prices for the provinces of Alberta, Newfoundland and Saskatchewan, which until recently were enjoying an oil boom, becomes good news for Manitoba, Ontario and Quebec.
Alberta is a good model for what鈥檚 begun to go wrong in Canada. Already,听: Shell of Britain at Pierre River, Statoil of Norway at the Corner oil field and France鈥檚 Total at the Joslyn mine. And more cancellations are expected as what feels like a non-stop drop in oil prices drives even more energy companies to postpone or even cancel projects. ()
The reason is that Alberta, Newfoundland and Saskatchewan have been experiencing a boom not in oil, but in oil sands, sandstone impregnated with crude oil. While shale oil is expensive to extract, oil sands are expensive to clean. And at the current average price of crude, which is now just above $50 per barrel, both forms of oil are becoming less and less profitable.
All this means hard times ahead for Alberta, and it鈥檚 becoming a recurring nightmare. Oil prices dropped fairly precipitously in the 1980s, but the province鈥檚 premier at the time, Don Getty,听听in hopes that oil would recover. Instead, energy revenues fell by $3 billion, creating a provincial deficit of $3.4 billion.
Getty鈥檚 successor, Ralph Klein, began his term attacking the deficit,听听on such programs as the arts and medical care, and even sold off Alberta鈥檚 public telephone company, AGT, to private owners.
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. When a region goes from boom to bust, it also loses jobs in the field and in company offices, which today are housed in modern skyscrapers that define Calgary鈥檚 dramatic skyline.
The bad news for Alberta, though, can be very good news for other provinces whose economies aren鈥檛 driven by oil. For these provinces, such as Ontario, declining fuel prices mean lower production costs and even more jobs. ()
鈥淓ventually, as we move through 2015, assuming the oil price stays low, it will start contributing to some weakness showing up in Alberta and Saskatchewan,鈥� Paul Ferley, assistant chief economist at RBC Economics Research,听. 鈥淭his should also result in a pickup in manufacturing in Ontario, as well as provide a lift in Manitoba and Quebec.鈥�
Still, Canada鈥檚 overall economy relies enough on oil that its lower price can鈥檛 help but hurt, if only a little. On Nov. 12, the country鈥檚 finance minister, Joe Oliver, said the price drop could cut federal revenues by up to $2.5 billion each year from 2015 through 2019. And that was based on the average price of oil in mid-November 鈥� $70 per barrel 鈥� nearly $20 higher than it is today.
That can鈥檛 be good for Canada鈥檚 gross domestic product, and by extension it isn鈥檛 good for the country鈥檚 employment status. Still, Ferley said, his firm is 鈥渘ot expecting a big hit to GDP, so on net, nationally, we鈥檙e not expecting a big hit on the overall [employment] numbers.鈥�
By Andy Tully of Oilprice.com
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