Recession in Tar-Sands Rich Alberta?

The Canadian Province hit hard by low oil prices.

By Andy Tully,

The week ending Jan. 17 was a bad one for Alberta, the Canadian province that once was enjoying an oil boom.

Schlumberger, the oil services giant in Canada’s west, cut spending dramatically, postponed projects in the region and announced 9,000 layoffs for its worldwide operations. Suncor Energy announced it will cut 1,000 jobs and reduce its budget by $1 billion, and uncertainty in oil markets will delay Canada’s federal budget until at least April. Even Target and Sony were closing stores in Canada.

The effect on the country’s financial sector also was profound. The Toronto Stock exchange plunged, and the Canadian dollar dropped to a six-year low against its US counterpart. As a result, Alberta’s premier, Jim Prentice, conceded that the plunge in oil prices will cut provincial revenues by $7 billion in 2015, meaning his government will be operating at a deficit.

In fact Glen Hodgson, the chief economist of the Conference Board of Canada, warned that Alberta may face a recession this year.

“[The] wave of bad news … was enough to shake the faith of even the most ardent optimist, especially so in Canada,” said Doug Porter, the chief economist at BMO Capital Markets, the investment banking subsidiary of the Bank of Montreal.

In the midst of this, though, Canadian Finance Minister Joe Oliver promised renewed prosperity for Alberta – eventually. “Demand for oil will rise in the intermediate and longer term,” he told a meeting of oil executives at the Calgary Chamber of Commerce. “For Albertans and their energy sector, that has meant – and will mean – prosperity at home.”

Oliver said the low oil prices will correct themselves. “They reduce production from high-cost producers, and therefore constrain supply, and they stimulate economic growth and therefore ultimately drive up global demand,” he said. In other words, prosperity won’t return until the most efficient oil companies survive a Darwinian culling of the producers saddled with high costs.

But he stressed that the process will take time to work. In fact oil analysts don’t see any improvement any time soon. One is Anthony Yuen, a strategist with Citi Research. “The market is still trying to find a balance,” he told The Globe and Mail. “And at this point, if you look at both supply and demand balance, you are still looking at an oversupply environment.”

Related: The Age Of Cheap Oil Is Over

But the Alberta oil sands by their very nature are expensive because the oil must be freed from the pores of sandstone, and the cost of cleaning it can only go so low. And Canadians’ closest competitors – in geography and in price – are the US producers of shale oil, who have been working hard to keep their product competitively priced and profitable.

And because OPEC refuses to support the price of oil by cutting production, the fight for global market share is becoming more fiercely competitive as demand abates. The Paris-based International Energy Agency, in its January report on oil demand issued Jan. 16, put it this way:

“It is clear that the market is undergoing a historic shift. … While there might be light at the end of the tunnel for producers as far as prices are concerned, the next few years could nevertheless prove a period of reckoning for a market and an industry that, through the course of their 150-year history, have had to periodically reinvent themselves.” By Andy Tully,

Oil drillers around the globe react to high oil prices. Read…  Oil Drillers Abandon High-Cost Areas

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