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How OPEC Has Papered The Oil Market Cracks

OPEC’s oil production agreement took…

Resource Dependence Could Prove Fatal For Canadian Economy

Resource Dependence Could Prove Fatal For Canadian Economy

Low oil prices are threatening the health of Canada’s oil and gas sector, which in turn, is causing turmoil in Canada’s economy as a whole.

The fall in oil prices are forcing billions of dollars in spending reductions for Canada’s oil and gas industry. In February, Royal Dutch Shell shelved plans for a tar sands project in Alberta that would have produced 200,000 barrels per day. Last year, Petronas put off plans to build a massive LNG export terminal on Canada’s west coast. Moody’s recently predicted that very few of the 18 proposed LNG projects in Canada will be constructed. Most will be cancelled. The oil industry is expected to lose 37 percent of its revenues in 2015, or a fall of CAD$43 billion.

That is bad news for Canada’s oil and gas sector. But even worse, Canada’s overdependence on oil and gas will threaten its broader economy now that the sector has gone bust. The severe drop in oil prices has made the Canadian dollar one of the worst performing currencies in the world over the past year. The loonie used to trade at parity to the U.S. dollar, and even appreciated to a stronger level a few years ago, but now a Canadian dollar only gets you less than 80 U.S. cents. Related: Top 12 Media Myths On Oil Prices

While a weaker currency has complicating effects on the economy (it will also boost exports, for example), on balance low oil prices have been an unmitigated disaster for Canada’s economy.

Canada’s GDP “fell off a cliff” in January of this year, according to a report from Capital Economics, a consultancy. Canada’s economy could be shrinking by 1 percent on an annualized basis. For the full year, Capital Economics predicts growth of 1.5 percent, followed by a weak 1 percent expansion in 2016. “Overall, unless oil prices rebound soon, the economy is likely to struggle much longer than the consensus view implies, even as the improving US economy supports stronger non-energy exports,” Capital Economics concluded. Other economic analysts agree.

Nomura Securities worries about “contagion,” as the collapse in oil prices lead to less drilling, declining demand for supporting services, falling housing prices, a sinking stock market, and weakness in other sectors like construction and engineering. The pain could be concentrated in Alberta in particular, where household debt averages CAD$124,838, compared to just CAD$76,150 for the rest of Canada. Now with the rug pulled out beneath the economy, there could be a day of reckoning. Related: How Much Longer Can OPEC Hold Out?

Much of Canada’s oil production comes from high-cost tar sands. When they are up and running, tar sands operations can produce relatively more stable outputs than shale, which suffers from rapid decline rates. But, nevertheless, tar sands are extremely costly, with breakeven prices at $60-$80 per barrel for steam-assisted extraction and a whopping $90-$100 per barrel for tar sands mining.

Even worse, Canada’s heavy oil trades at a discount to WTI, which makes it all the more painful when oil prices are low. The discount is nearly $12 per barrel below WTI right now. Some of that discount is the result of inadequate pipeline capacity, trapping some tar sands in Canada. The stalled Keystone XL pipeline is the most controversial, but not the only pipeline that has been blocked. The head of Canada’s Scotiabank recently warned that the inability to build enough energy infrastructure, plus Canada’s near total dependence on the U.S. market, puts Canada’s economy at risk. Related: The Real Cost Of Cheap Oil

The Bank of Canada surveyed the top executives at Canada’s 100 largest businesses found that two-thirds of them think it is critical to diversify the economy away from oil. With such a dependence on commodities, the oil bust has rippled through the economy, forcing layoffs and increasing unemployment. Consumer confidence is low, and hiring is at its lowest level since 2009, during the immediate aftermath of the global financial crisis.

Of course, diversification can only be achieved over the longer-term. In the near-term Canada’s fate is tied to the price of oil.

By Nick Cunningham of Oilprice.com

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  • Ross on April 13 2015 said:
    Folks,

    I believe this is a load of negative propoganda.
    It is a proven fact that the Oilsands operators can function and survive $50 dollar oil. Profits are affected and expansion may be hampered, but plants currently operating can survive if they operate intelligently.
    It is only $90-100 for NEW plants. Mr Cunningham, get your facts straight.

    As for the Shell project, there were other hurdles that were affecting that project.

    As for the contraction in the Canadian economy, that can largely be blamed on American politics. USA is guilty in trying to drive down world oil prices because you are still a great importer. Lower oil prices means hundreds of millions of dollars a day stay in American coffers.

    Keep hoping that the Canadian economy will fall. But be careful of what you wish for as most of these oil sands giants are either partly or majority American owned. You are shooting your own large corporations in the foot. Also a Canadian collapse could be seen as part of a greater world-wise malaise that will eventually lead to a WORLD-WIDE depression that will even affect the USA.

    Also, your fracking is just as unhealthy to the planet and is a great destroyer of the earth's substructure and water supplies. how about your earthquake levels in certain fracking areas? How do they compare to pre-fracking days? Maybe you should research that.

    "...God keep our land, glorious and free..." We bank on that here. And I beleive He will see us through the hard times, even when we are being subtely suppressed by those who are supposed to be our neighbors (and we are supposed to love our neighbors).
  • Shilo on April 13 2015 said:
    I believe the author is falling victim to the doom and gloom in the Canadian media. Is Canada feeling the impact of low oil prices? Absolutely. I live in Alberta and am seeing the lay offs and impacts first hand.

    However, a little bit of research would go a long way. Oil extraction makes up a very small portion of the entire Canadian economy. A simple Google search will demonstrate that manufacturing (which has been decimated by the previously high Canadian dollar) is a much larger industry for us than oil, and manufacturing benefits from the low dollar. Ontario (where most of Canada lives) has been desperately hoping for the dollar to drop to make their primary industry (manufacturing) more competitive.

    In 2009, net oil exports accounted for just 3% of the Canadian GDP. While Alberta is definitely feeling the pain (and there is certainly a ripple effect - a slow down in the oil sands leads to a slow down in the support sector & in cities like Calgary where head offices are located, which leads to a slow down in the housing sector, etc), we are just one province in Canada. Only SK and AB are heavily dependent on oil & gas, and we are a drop in the bucket compared to the province of Quebec and Ontario, where most of Canada resides.

    Furthermore, the author fails to elaborate on the differences between traditional oil extraction & the Alberta oil sands. Due to the complex nature of extracting our oil, projects require a huge upfront investment, and then go on to produce oil for 10-20+ years. As such, Canadian companies (more than any other in the industry) feel the impact less of temporary low prices, as their projects are priced out on 10-20 years of operation. A temporary 6-12 month fall in prices is more than survivable. In addition, a majority of the costs associated with extraction here are already paid for - so yes, while the average cost when you take these upfront costs into account are high, but the day to day operating break even point is much lower. Over 10-20 years oil prices will need to average $60-$90 to make these massive projects viable, but due to the long term nature of these projects and the huge upfront investment it typically makes financial sense to keep producing even at these prices.

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