Falling petro prices could end the boom. What can we do?
by Gregory Beatty
Oil busts like the one we’re experiencing, where prices have plummeted from $115 a barrel in June to the $45 range now, have happened before.
What makes this one different is how much more invested our provincial government — and federally, the Harper Conservatives — are in oil as a pillar of prosperity.
“It’s been the oil economy, or the resource economy, to the neglect of everything else,” says Simon Enoch, Saskatchewan director for the Canadian Centre for Policy Alternatives.
As a result, the pain we’re feeling, both provincially and nationally, is especially acute.
How bad will it get? That’s still to be determined. Oil prices will surely bounce back, at least somewhat. But for a variety of reasons on the supply and demand side, many forecasters predict it may not happen for awhile.
“I was driving to P.A. the other day and I saw this wagon train of Haliburton oil service trucks leaving on the Yellowhead going back to Alberta,” says Enoch. “It took me 30 minutes to pass them, and I thought, ‘Oh boy, this doesn’t look good.’”
In the past decade, the North American oil industry has boomed. But most of that growth is due to enhanced oil recovery that is capital intensive. Saudi Arabia and a few other countries with vast oil fields can still profitably produce at $45 a barrel. Not us, though.
“When oil fell below $55, extracting it through fracking was no longer breaking even,” says Saskatchewan Environmental Society policy director Peter Prebble. “And in the oil sands, once prices fell below $60 a barrel, that’s outside the break-even range even for existing production.”
In its 2014-15 budget, the Brad Wall government estimated oil prices at $95/barrel in 2014 and $92/barrel in 2015. The price has been below that since October, so government revenues are taking a big hit. It’s the same at the federal level. Previously, the Conservatives had planned to unveil a surplus budget in March to set the stage for an October election. Now, they’ve postponed the budget until at least April.
The Conservatives are still promising to deliver tax cuts and a balanced budget, but with a stud moneymaker on the limp and prices for most other commodities and resources weak too, that might be impossible.
“Tying ourselves to oil really hurt manufacturing,” says Enoch. “I know [Stephen Harper and Brad Wall] don’t believe in ‘Dutch disease’ but I find it very telling that virtually every economist says that as the dollar falls along with the price of oil it will help eastern manufacturers.
“So I think there was a Dutch disease — they just didn’t want to admit it.”
Theoretically, the falling dollar and low energy prices should rev-up manufacturing and international exports. Enoch wonders, though, if after a decade of “neglect and decimation”, the industry is up to the challenge.
“It seems like the federal government is starting to pivot and turn their attention to manufacturing, perhaps for crass political reasons because they recognize that there’s still seats to be won in Ontario whereas they’ve won all of Alberta. But it seems a little late to be all of a sudden concerned with manufacturing.”
Saskatchewan voters are also going to the polls — likely in May 2016. Until now, says Enoch, the Saskatchewan Party hasn’t had to make tough choices. That’s about to change.
“The coffers were full; they could spend more and cut taxes,” says Enoch. “Now they’re going to be forced to prioritize. That’s where we’ll see their ideology really come into effect, when they determine whether they want to maintain those tax cuts or cut services.
“I think we all know what will take priority.”
“Their conservatism will be on display and we’ll see exactly what the Sask. Party is made of,” Enoch says. “We could reverse some of the high income tax cuts, we could revisit royalties. But they believe the tax and royalty regime created the boom, and they believe it will bring it back — all evidence to the contrary.
“Whether Saskatchewan voters will like that or not will be up to them to decide.”
From an environmental perspective, says Prebble, the price drop is a mixed blessing. On one hand, it’s shuttered most of the carbon intensive North American oil industry. Fugitive gases that are either flared or vented (which in Saskatchewan account for 20 per cent of our 75 million tonne a year greenhouse gas emissions) will diminish. Rail transport of oil will also decline, and most pipeline projects will be shelved indefinitely.
“The disadvantage is that now there’s less of an incentive to conserve energy so the wrong price signal is being sent on the urgency of reducing oil consumption and addressing climate change,” says Prebble. “There’s also less incentive to purchase smaller vehicles and go with passenger cars instead of trucks and large vans.”
If fuel prices remain low, says Prebble, Canadian motorists will save around $12 billion in 2015. That’s why he thinks now is the perfect time to introduce a carbon tax.
“We urgently need [it] in North America and this would be an opportune time,” says Prebble. “The B.C. tax is the model to follow. It’s revenue neutral, so there’s no increase in overall taxes for consumers.
“B.C.’s tax [around $30 a tonne] hasn’t negatively impacted the economy at all, and it’s resulted in a modest reduction in greenhouse gases. Without it there would’ve almost certainly been a significant increase. So it’s been a positive tool in curbing emissions.”
No Oil? No Problem
Rather than tie our economic fortunes to a dying industry, Prebble suggests Saskatchewan capitalize on other natural advantages it enjoys related to sun, wind and bio-mass.
“As we’re reducing [oil] production, we should be increasing royalties and investing them in developing a renewable energy economy,” says Prebble.
“In Saskatchewan we haven’t invested in green energy jobs,” he says. “But in Canada, for the first time, those jobs have actually surpassed jobs in the oil sands. Most [around 23,000 versus 22,000 in the oil sands] have been in Ontario, Quebec and B.C.
“What’s happening with oil prices is a real warning that we need to focus on diversifying the economy and investing in opportunities around green energy.