Why falling oil prices might actually be good for the Alberta oil sands
As oil prices continue to fall, the media is abuzz with reports of Alberta spiralling into a downward tailspin of death and destruction. Actually, things aren't nearly that bad in the oil patch. History tells us that downturns are actually a healthy part of any economic cycle. In fact, some might argue that pullbacks are necessary in order for industries to thrive and not just survive. Here are 10 reasons why we think falling oil prices are actually good for Alberta and the oil sands industry:
REASON 1: The labour market will finally loosen up.
Make no mistake, smaller companies and the service industry will hurt. Drillers, contractors, engineering firms and consultants will be first on the hit list. Then it’ll trickle down the food chain - fewer pick-up trucks sold, fewer fancy dinners for the team, less lavish Stampede parties, lower sales at the malls. But Alberta’s labour market was way too tight, making skilled employees hard to hire and retain. That's bad for oil companies and especially bad for small businesses trying to stay afloat. As the labour market loosens up, job-hopping and attrition rates will decline. Companies can stop worrying about employee turnover and instead focus on the job at hand.
REASON 2: Ontario can finally stop complaining about the high loonie.
How many reports have you read on the Canadian “Dutch Disease”? Allegedly, the strength of Alberta’s oil industry has driven up the value of the Canadian dollar and is single-handedly responsible for the death of manufacturing in Ontario. Well, the price of oil is now falling and the Canadian dollar will likely drop below 80 cents in the next few months. Now we can all sit back, relax and watch Ontario’s manufacturing sector take-off and set their economy soaring! Then again, maybe not. At the very least, the endless lamenting will die down a bit.
REASON 3: Low oil prices will spur improvements in oil sands extraction technology.
At high energy prices, companies are focused on cranking production and little else. Lower oil prices means companies will actually have to make an effort to lower operating costs and improve operating efficiencies. Expect improvements in technology and innovation to help bring operating costs back down to earth. The last serious downturn brought us low temperature bitumen extraction, hydrotransport pipelines and truck and shovel mining - innovations that most likely saved the oil sands from extinction during the last downturn.
REASON 4: Right-sizing by oil companies will improve productivity.
It’s no secret that the oil sands industry is horribly unproductive. Productivity rates in the oil sands are some of the lowest in the developed world and have dragged down Canada’s overall productivity figures. Companies have hired too many people, knowing many will only stick around for a few years, quitting for a higher paying job or greener pastures at that firm across the street. Attrition rates are notoriously high, especially in Fort McMurray, where some plants can see up to 50% turnover in one year. As the labour market loosens up, the craziness will stop or at least slow down.
REASON 5: Price escalation in construction and operating costs will slow down.
Barely 10 years ago, cost of production was only $15 per barrel for mined oil sands. In less than a decade, that number has jumped to $40, an increase of 10% per year, far beyond the rate of inflation. Prices need to come back down to earth in order for the industry to survive. High capital costs have scared away investors and killed off many projects in the oil sands. Keep in mind, both Shell’s Muskeg River Mine and Syncrude’s Aurora Mine were built when oil prices were hovering near $10 per barrel. Both were very successful projects, and both were built for a very reasonable price. Proof positive that low oil prices don't necessarily mean the end of growth in the oil sands.
REASON 6: Calgary, Edmonton and Fort McMurray will get a chance to slow down and catch their breath.
Over 100,0000 people moved to Alberta last year, most landing in Calgary or Edmonton. The cost of living has skyrocketed in those cities as municipalities struggle to build schools, hospitals and neighbourhoods at a breakneck pace. Average home prices have gone through the roof throughout the province. Although Calgary and Edmonton are great cities, land is plentiful in the prairies and homes should never have gotten that expensive. That sort of growth is unsustainable and will thankfully slow down in the next few years. Housing costs will hopefully decline as well, which benefits everyone, especially first time homeowners.
REASON 7: Albertans will learn why its important to save your money for a rainy day.
We’ve all heard the stories . . . the young couple in their early 20s with the $800,000 mortgage and a pair of brand new tricked-out F150s parked in the driveway (his and hers, of course). Sure, people get paid well and jobs are plentiful, but many Albertans have been lulled into a false sense of security and have accumulated incredibly high debt-loads. The average household debt in Alberta is a whopping $125,000, 65% higher than the national average. The truth is good times don’t last forever and no job is indispensable. Hopefully, this will be the wake-up call many young people need to start saving and at least attempt to live within their means.
REASON 8: The anti-Alberta rhetoric will hopefully lessen.
It’s no secret: the anti-pipeline protests held across the country is partially expressing an anti-Alberta sentiment. People across the country are tired of hearing how everyone in Alberta has a job, pays low taxes and actually has money left over for discretionary spending (imagine that!). They see the pipelines as benefiting Alberta, not benefiting Canadians, and Albertans don’t need a hand-up. The media outside of Alberta has been almost celebrating the death of the oil sands, noting that housing prices in Alberta will collapse, the province will plunge into recession, add a PST and everyone will move back to BC/Ontario/Quebec/Maritimes (fill in your province here). On behalf of all Albertans to the other have-not provinces: we’re sorry taxes are so high in your province, we’re sorry you can’t find a decent-paying job, we’re sorry your province chooses not to exploit its natural resources, we’re sorry your government invested heavily in the automotive industry and all those jobs went to Mexico despite the billions you gave them and we’re sorry in general for everything that’s not going well in your province. Now that we’re suffering too, can you please stop trying to throw us under the bus?
REASON 9: The true impact of Canada’s oil industry on the Canadian economy will be more apparent.
Over 30% of Canada’s exports are made up of oil and gas. Throw in other commodities and that number rises to 50%. StatsCan data shows that more than 80% of all jobs created in the past few years have been in Alberta. Despite the facts, many news agencies and left-wing think-tanks have been working hard to disprove the notion that Canada’s economy hinges on its natural resources. I’ve lost count of how many “studies” have estimated the oil sands at less than 2% of Canada’s economy. Remember this news story: “Green energy provides more jobs than the oil sands” . . . really? Most of the big banks, including RBC and Bank of Montreal are predicting that the Canadian economy will actually improve due to lower oil prices. If this turns out to be true, then lower oil prices will help diversify the Canadian economy and boost the prospects of lagging provinces. If they’re wrong, then falling commodity prices will drag Canada into a recession and the next few years will be bleak. Either way, the true impact of the energy sector on the Canadian economy will soon be revealed. As Warren Buffet famously noted, you only find out who’s swimming naked when the tide goes out.
REASON 10: Fewer celebrity anti-oil sands activists touring the oil patch.
Leonardo DiCaprio was hopefully the last in a long line of celebrity activists and anti-oil sands crusaders. DiCaprio took time out of his busy schedule of hosting World Cup festivities in a $700 million yacht (borrowed from a Saudi billionaire, no less) to visit the oil sands last year. The actor recently became a major investor in Tesla and is taking on Big Oil who “drill, extract and make trillions of dollars”. DiCaprio is warning that burning fossil fuels will spell the end of humanity and the oil sands are best left in the ground and never extracted. I guess that yacht runs on solar power and fairy dust . . .
So long Leo. And good riddance.