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Energy Watch: Why low oil prices won’t cripple Alberta

Tags: Alberta, Oil

ANALYSIS: Alberta has been flying so high for so long, one of the province’s most noted economists argues it can afford to fall.

As the price of crude oil has effectively collapsed and analysts have gradually acknowledged it could be a while before prices climb back up, many red flags have been raised in recent weeks over the viability of Alberta’s oil sands, which has among the highest production costs in the world. The common expert opinion goes if oil prices stay this low for a long time (read: years), then the billions of dollars that will need to be invested and the tens of thousands of skilled labourers who would need to be hired to grow production may no longer happen.

Most recently, a report from a Norwegian consulting firm published late Thursday said future projects in Alberta’s oil sands were “most unlikely” to go ahead amid the ongoing price volatility.

As a result, the alarmists argue Alberta’s government will lose out on billions of dollars in potential royalty revenue and the provincial economy will stall. Todd Hirsch counters that not only will the slowdown not be as dramatic as some fear, it could also be just what Alberta needs.

“I don’t think there is any way to sugarcoat this,” the chief economist of ATB Financial told BNN in a telephone interview. “If these oil prices do not recover we are going to see some job losses or at least hiring at a far slower rate… but we are starting from such a position of real strength, we are not going into a downturn already enfeebled.”

Unemployment could reach 6 percent from 4.5 percent a year from now if oil prices remain at or below current levels, Hirsch estimates. He was in the oil sands boomtown of Fort McMurray earlier this week, where he heard anecdotally that some pink slips had already been handed out and busloads of labourers had already been sent back to Edmonton.

“It is already starting to happen a little bit,” Hirsch said, “it is showing up in those business services, those drilling contractors and those other peripheral groups that aren’t oil and gas producers themselves but are contracted out by them. But remember 6 percent unemployment is really not all that bad, it is still better than Ontario and it is almost a worst case scenario.”

“And even in the worst case scenario I still see Alberta’s economy outperforming the rest of the country,” Hirsch said.

He argues Alberta’s forestry sector, which is enjoying its most lucrative market in a decade thanks to the low Canadian dollar and the increase in housing construction in the United States, will happily pick up any recently unemployed energy workers.

“The forestry industry loves it when there is an oil and gas downturn because they compete for workers and they cannot keep up with paycheques in the oil patch when oil is at $107 per barrel, they just cannot,” Hirsch said, “we can brace ourselves for some layoffs and slower growth in the energy patch but their loss is often other sectors’ gain.”

Those new jobs will definitely be paying lower wages than their former oil patch positions, Hirsch notes, “and the province will see some effect that way.”

“We might see the luxury retailers, the Lamborghini dealerships might be selling one or two fewer vehicles in 2015,” Hirsch said.

Low oil prices might actually improve the economics around some of the higher-cost oil sands projects, he argues. That is because one of the main drivers of cost inflation in oil sands projects over the past several years has come from the increasingly high wages employers have needed to offer to attract and retain its ever-expanding workforce.

Paying those sky-high wages meant producers needed $95 oil prices to make their projects work, Hirsch argues, but as growth slows and companies no longer have to get into bidding wars with each other to attract top talent, he believes “those costs are going to gradually start to ratchet down.”

“Faster is not always better, sometimes just a moderation or a bit of a pause keeps everybody’s head clear and it brings all kinds of markets like the labour market and the housing market and the rental market, everything comes into a healthier balance,” Hirsch said. “Even if it feels unpleasant at the time, it is kind of a necessary evil.”

Jameson Berkow is BNN's western bureau chief based out of Calgary. Every weekday morning he researches the top stories affecting commodities and the oil patch, and sends his analysis to the BNN newsroom in Toronto. You can follow him on twitter @crudereporter

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