Alberta over a barrel? Hicks on Biz, originally published in Edmonton Sun, Aug. 25, 2012
By Graham Hicks
Hopefully this is a Chicken Little column, harking back to that little piece of poultry, who, certain the world was coming to an end, ran around crying, “The sky is falling, the sky is falling!”
Chicken Little was wrong, of course.
But something doesn’t feel right about the soothing words we are hearing from Alberta’s economic forecasters, that good times will roll along in Alberta for the foreseeable future, i.e. at least for another 12 months.
It is, surprise, surprise, all about the price of oil.
About 2.5 million barrels a day are sucked out of Alberta ground and exported at a price ranging between $70 to $100 a barrel, creating $200 to $300 million in new wealth every day.
No other industry employs as many people, no other industry pays half as well, no other industry earns as much revenue for government, no other industry has anywhere near oil’s impact on our standard of living.
Our energy wealth continues to shower goodness upon us, despite the fact the once-mighty natural gas industry is on its knees due to a production glut.
Right now, there’s a touch of uncertainty in the oil patch — primarily about the pipelines, or lack thereof, needed to expand our exports to the U.S., and to reach new markets in Asia.
That caution has led to a subtle slowdown in the oil sands.
But this, our forecasters say, is a good thing. The economy is currently not too hot, not too cold. It’s just right.
Everybody’s working, but there’s no frenzy. The metal fabricators in town are busy, but not overwhelmed.
The province held its breath scant weeks ago over what turned out to be a temporarily dip in oil prices. There was huge relief as that price stabilized, then turned back up. No drop in anticipated government revenues, no need for yet another lay-off bloodbath in the civil service, health and education sectors.
“I’m not concerned about the next 12 months,” says City of Edmonton Chief Economist John Rose. “It’s the 12 to 24 months after (i.e. 2014 and beyond) that are uncertain.”
So why am I nervous?
Because I’m simple-minded. Despite the myriads of factors influencing the price Alberta receives for its oil, that price is ultimately about the relationship of the global supply of the stuff to global demand.
Thanks to new discoveries, new recovery technology and world-wide investment in ships and pipelines and refineries, the supply keeps growing.
But demand is barely holding its own. The world outside this oasis known as Alberta is an economic desert. Most national economies are shrinking or stagnant. Even the always-hot Chinese economy has slowed from 11% to 12% growth per year to 7%. Europe is bad. The Americans can’t spend much because they are buried under a mountain of debt.
Energy conservation decreases the need for oil. Alternative energy — heavily subsidized — nibbles into the demand for oil.
Meanwhile, our oil sands production keeps growing by double digits every year. “Tight” oil is being discovered and extracted in places outside of the oilsands, in amounts not dreamed of a few years ago. The Americans, now importing 9.67 million barrels of oil a day, could be self-sufficient (with Canada’s help) by 2020.
I just keep thinking that one day, without warning, the tipping point will happen, as it did when the price of oil came crashing down in the late ’70s and early ’80s, in the late ’80s, and in the early ’90s.
Every time, nobody expected a huge oil price drop.
I’m surprised the experts don’t reflect on the recent history of natural gas prices.
Natural gas was doing great, at $8 a gigajoule. Then along came massive, unexpected new supplies of natural gas in North America and around the world. A new drilling technique called fracking opened up this previously un-reachable gas.
This week’s North American natural gas price has hovered around $2.85 a gigajoule.The entire industry is in the ditch. If Alberta wasn’t so lucky as to have massive amounts of oil as well as gas, we’d be in the same floundering economic boat as the rest of the world.
Our forecast economists, like City of Edmonton Chief Economist John Rose and the Edmonton Chamber of Commerce’s Rick Hersack, say Edmonton/Northern Alberta is sitting in a sweet spot, that energy price uncertainty slightly moderates the pace of oil production growth to a level that’s good overall. Not too hot, not too cold ...
“I really wouldn’t get worried,” says Hersack of the near future, “not unless there’s a complete collapse of the global economy.”
“In the long term, 24 to 60 months out, we’re concerned about oil sand investment levelling off dramatically,” says Rose. “But we just don’t see the price of oil dropping significantly in the near-term.”
Which does remind me of the forecasters from New York City who spoke at Edmonton Economic Development Authority luncheons five or six years ago, assuring us that good times were here forever, thanks to India and China’s insatiable demand for energy …
“Years ago there was an experiment,” relates a financial advisor who has learned over the years that anything can happen at any time, and usually when it’s the least unexpected.
“Grains of sand were piled in exactly the same manner, time after time. The pile would grow, become unstable, and eventually one grain too many would cause an avalanche. Sometimes it was the 10 millionth grain of sand, sometimes it was the 15 millionth grain. Sometimes the avalanche started on one side of the sand hill, sometimes on the other. The point is that nobody knew exactly which grain of sand would be the tipping point. Every time, it was different.”
When that tipping point happens in the oil world, woe is Alberta.
My gut feeling is the global price of oil can’t avoid the global recession forever. Unless conflict in the Middle East chokes supply, a big downward price correction is going to happen – as in the mid-’80s, early ‘90s and as recently as the temporary dip of 2009.
And it’ll be sooner rather than later.