Hicks on Biz: Price of oil is falling, but the sky isn't BY GRAHAM HICKS, EDMONTON SUN FIRST POSTED: THURSDAY, DECEMBER 18, 2014
Yes, Matilda, there still is a Santa Claus.
His gift this year might be not quite as extravagant as in 2011, 2012 and 2013.
But it’ll be no lump of coal as in 2009, or those wretched recessionary years of the early ‘80s, or when Ralph Klein boosted the Edmonton unemployment rate to recession levels by slashing the provincial civil service in the ‘90s.
Yes, the price of oil – our life blood, our golden goose, that from which all our blessings flow – has utterly tanked to US $55, after sitting on either side of $100 a barrel for five years.
But, as this column will explain, this oil price drop is in a very different context for northern Alberta than sudden price plunges of the past.
There won’t be lay-offs. New hirings may slow, but few, if any, metropolitan Edmontonians will lose their jobs.
John Rose, chief economist for the City of Edmonton, says in his cautious projections for 2015 that Edmonton will grow by 3% with 20,000 new arrivals – compared to 4.2% growth and 30,000 new arrivals in 2014. (Remember, Rose speaks for the artificial City of Edmonton, population 800,000, not for the real economy of metropolitan Edmonton, population 1.2 million. Metro numbers are almost always stronger than Edmonton proper. )
Three per cent growth?
Twenty thousand new arrivals?
A 5.3% unemployment rate for 2015?
A stable housing market?
The numbers may be a tad smaller than in 2014, a true boom year, but any other city in North America would be thrilled to have such growth indicators for the coming year.
Here’s why the oil price drop doesn’t impact Edmonton as much as one might think.
Two words: oil sands.
Oil sands mining operations are giant beasts – years of planning, years of building. Once they start up, they run continuously (outside of maintenance shut-downs or major equipment failure) for 40 to 50 years. Closing an oil-sands mine would take a year unto itself.
Steam-Assisted Gravity Drainage (SAG-D) underground oil sand extraction now accounts for half of oil-sands operations and continues to grow. While smaller and more numerous than the big oil-sand mines, once SAG-D operations start, they too won’t stop until the oil supply is exhausted.
The big boys – CNRL, Shell, Imperial Oil, the Syncrude owners – think long-term. Imperial Oil, for instance, has an oil-sands game plan stretching out to 2050. Former Imperial boss Bruce March once said Imperial doesn't get excited when oil is at $30, and the company doesn't get excited when it’s at $100.
Oil-sand projects are deferred years in advance of any actual ordering of materials or hiring of skilled labour. The two big deferrals announced in 2014 simply meant the oil-sand construction and labour market would stay heated, rather than white hot.
Compare that scenario to conventional oil which used to rule the Alberta roost. Once the well is drilled in “conventional” production, up is pumped the oil. With a drop in price, the oil producers could stop production within hours, turn off the pumps, send the rig pigs home, and wait things out. New well drilling could be cancelled within weeks. The economic impact was swift and immediate.
Today, with the oil sands replacing conventional oil, Edmonton is not nearly so directly affected.
The biggest fear Edmonton would have is of mass lay-offs of provincial employees as Premier Jim Prentice and his new Wildrose pals deal with a shortfall of oil royalty revenue in the fourth quarter of the current 2013/14 budget, and an anticipated $6 to $7 billion drop in oil royalty revenue when planning the 2015/16 provincial budget.
Too many Edmontonians still remember when then premier Ralph Klein laid off thousands of provincial employees in the late ‘90s as he whittled a $23 billion accumulated deficit down to zero in 10 years.
Mass lay-offs aren’t going to happen. Prentice has to slow spending, not kill it. It’s a game of shaving a point or two off current spending, not 10% to 20%.
Hiring may dwindle, early retirement packages will make the rounds, but the provincial government is not going to dismiss thousands of employees – mostly impacting in Edmonton – in 2015.
So relax, enjoy 81 cents a litre gas. If you’re a good, hard-working employee in this town, you won’t lose your job. Civil servants, hospital workers and teachers current jobs are reasonably secure. House prices may plateau, but they won’t spike downward. Car dealers will keep selling cars, minus a few baubles.
It’s still all about oil. And while oil-sands expansion may slow, current production will never stop.
You and your neighbours will still have your jobs. You can make a nice donation to Adopt-A-Teen.
City of Edmonton projections for 2015:
3% economic growth
20,000 population growth
Stable housing market.
Headline in Financial Post, July 23, 2014: “In Canada’s economy, there’s Alberta, and there’s everywhere else.”
How Alberta has prospered: The growth in real GDP (Gross Domestic Product, a standard measurement of regional wealth) in Canada, from 1975 to 2000. (Statistics Canada, 2000)
All of Canada, 108.2% growth
Alberta, 187.8% growth
British Columbia, 100.5% growth
Ontario, 97.1% growth
Alberta’s year-over-year GDP growth (derived from Statistics Canada yearly figures)
2003 to 09: Average 2.7% growth per year
2010 to 2013: Average 4.6% growth per year