CALGARY, Nov. 19, 2015 /CNW/ - With layoffs and cutbacks in the oilpatch and the ripple effects spreading out through Canada's economy, it may seem as though the latest drop in oil prices could stall the economic engine in Alberta for a long time. The current oil rout is unlike the other three major ones (when the price of oil dropped more than 60 per cent) experienced in the last 30 years. The factors affecting the current oil price drop and its potential for rebound differ significantly.
A report released today by The School of Public Policy and author Robert Skinner provides a timely analysis of lessons from previous oil routs and examines the very different circumstances surrounding the current price picture. The report also delivers a key message for companies, and for governments of oil-producing provinces in Canada.
According to the report, the routs of 2008 and 1997 were mostly demand-driven, triggered by credit crises in key markets. Both 2014 and 1985 started as demand-driven, too, but significantly, they changed to supply-driven crashes. There, however, the similarities end between today and 30 years ago. According to Skinner, "Critical differences include the global economy, spare productive capacity, the 'elastic' shale oil industry and its access to capital, record crude oil inventories and the energy policy context. Money is critical; today's shale oil industry is sustained by cheap external financing. In the North Sea 30 years ago with much higher prime rates, firms largely self-financed. These and other structural factors prolonged the crash. But we are in a supply crash and we have to look to the supply side to get us out of it."
The effects in Canada of the current rout are not Alberta's alone to suffer. Unlike 30 years ago, the oil sands industry is far more enmeshed with a broad spectrum of ancillary industries and activities across the country. Back then, the oil sands made up just 17 per cent of Canada's total production of crude oil; today, that figure is over 62 per cent. The impacts of the price drop on oil sands investment are pan-Canadian.
Is there a silver lining? Possibly. The pendulum could swing sharply back by decade's end. Natural production declines in old fields and investment cutbacks and cancellations around the world will eventually register in market balances once record inventories are drawn down. However we are likely to see a bumpy rise in prices rather than a steady and quick recovery such as after 2009.
The paper can be downloaded at http://www.policyschool.ucalgary.ca/?q=research
SOURCE The School of Public Policy - University of Calgary
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