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The Energy Sector: The ripple effect of cheap oil


June 3, 2015  


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The news story of last year, and likely 2015, just might be, the price of oil — or, to be more specific, about what effect low prices, currently less than half of what they were approximately one year ago, are and will have on the Canadian economy. The reported repercussions for not just Alberta, but the country as a whole, are daunting, to say the least.

In 2012, oil and gas contributed approximately $18 billion to the Canadian economy — or approximately seven per cent of the federal government’s total revenue through income tax, royalties and related payments. In that same year, the oilsands sector alone contributed $91 billion, or five per cent of Canada’s overall GDP. In fact, the oilsands sector outpaced more than six of 10 province’s total GDP.

Producing this revenue requires people. In 2012, the oilsands contributed nearly half a million direct, indirect and induced jobs to the national economy. Every direct job created in the oil industry led to approximately one indirect and 1.5 induced jobs elsewhere in the country. Yet the ripple effect works both ways – good when times are good and bad when times are bad.

The closest comparison we have to the present situation was the recession in 2008/09 when oil dropped to $35 US per barrel and resulted in a one-third reduction in oil and gas spending. Considering the inflationary pressures of the rebound in the past five years, it is reasonable to assume that in a worse-case scenario, this could take place again.

To get an idea of break-even prices for the major plays and development areas in Western Canada, Scotiabank Equity Research and Scotiabank Economics indicate that Saudi Arabia light at $10 to $25 per barrel still have some room to move before they are at rock bottom. Though shown as $60 per barrel, the estimated price range for SAGD bitumen is $40 to $80 per barrel — though, as we gain experience the price is continuing to decline.

The present exchange rate with the U.S. dollar will help “level out” the price differential somewhat. It will also help other sectors of the Canadian economy — notably manufacturing, agriculture and forestry — improve their profitability when selling on the global market, particularly in the U.S. The American economy is expected to grow by 3.3 per cent this year, the highest rate since 2005, partially driven by low hydrocarbon prices that increase consumer confidence/ spending as well as the competitiveness of other industries.

Like Canada, the U.S. hydrocarbon production industry is expected to see cuts. But because it is a smaller part of the overall U.S. GDP — and the U.S. is still a net importer of oil — the net benefit to their economy — as well as the economies of China the Eurozone, India and Japan — will remain positive. Moving forward, it will be hard to predict how low the price of oil will decline — some suggest it will level out around $45 per barrel.

The bigger questions are how long will we stay in this low-price market, and how long will companies ride out the calm? The current consensus is it will take at least as long to recover from a dip as it did to enter it, and that these prices will likely continue through the summer and until temperatures start dropping again in the fall. However, unlike the last recession, most companies this time around will likely try to retain their technically skilled workforce — especially those who are younger — because the demographics have not changed and the industry will be seeing large-scale retirements in the next five to 10 years.

What might happen, at least in the operating companies, is older workers will spend this time to transfer or institutionalize their knowledge by preparing corporate standards or developing/ conducting internal training and workshops. Younger employees in the same situation will take this time to upgrade their skills through training or working with the senior staff so they are ready to go when prices return to normal.

There will, of course, also be regional differences depending on resource; oil versus gas; location (Edmonton, for example, tends to be more stable than Calgary for employee mobility); and engineering firm, services, pipeline, operator, or construction. One thing we do know for certain is members of the hydrocarbon industry in Western Canada are a resilient bunch and will come through this test stronger than when it began.

Ian Verhappen is a professional engineer, ISA Fellow, certified automation professional, and a recognized authority on industrial communications and process analyzer technologies. Verhappen leads global consultancy Industrial Automation Networks Inc. specializing in industrial communications, process analytics and heavy oil/oilsands automation. Email iverhappen@gmail.com