We all know the world still needs oil. There has yet been no catch-all alternative energy solution developed that will soon make fossil fuels an anachronism from the heady days of the 20th century.
In fact, despite any forward progress that has been made, the world still largely turns on non-renewable energy consumption, and that trend doesn’t look to be changing anytime soon.
Unfortunately, that also means the price volatility of oil won’t be changing anytime soon.
Currently with Alberta’s mono-economy based largely on oil and gas revenues, with oil prices plunging drastically in the last half of 2014 there are likely to be hard times ahead for the province.
And almost no one is predicting it to be a short-lived price anomaly.
On Monday, oil prices slipped to $50 per barrel in trading on world markets for the first time since the 2009 recession, and if the alarm bells weren’t ringing in the fall of 2014, they will be clanging loud and clear in early 2015 in the board rooms of many of the world’s primary oil producers. Benchmark oil prices, such as the Brent and West Texas Intermediate, saw a 45 per cent drop between June and December 2014.
In Alberta, resource companies have been violently slashing projected capital spending for 2015 as the international fire sale of oil continues, an ominous warning sign that significant layoffs are probably looming for the resource sector in the province.
If you don’t live in Alberta, low oil prices aren’t always considered to be a doomsday prophecy, a role they often seem to take on here when riding low in the double digits. Low oil means lower gas prices, which generally means increased purchasing power for all. It also corresponds to benefits in the manufacturing industry, as well as pushing our dollar lower, considered a positive economic indicator in an export heavy economy like Canada. While these factors will impact Alberta, the negatives for a major oil producing province will probably outweigh most positives.
Geo-politically, the full impact on another mono-economy based on oil and gas revenues has yet to be seen. Low oil has sent the Russian economy into a negative tailspin, collapsing the Russian ruble and potentially destabilizing President Vladimir Putin’s uneasy relationship with Russia’s kleptocratic billionaire elite, upon whose support the controversial leader depends for much of his power. As the country’s fiscal house of cards crashes around it, speculation is rising that Putin might consider a radical military solution to his nation’s economic problems.
There doesn’t appear to be any immediate light at the end of the market tunnel. A massive oil glut on world markets, coupled with increased production by most of the major national players, will probably see oil continue to tumble for the time being. At the same time, global demand has now reached a five-year low. There are a few solitary optimists predicting a dramatic rebound throughout 2015, based on anticipated sanctions for Iran, an escalation of political and military problems in Libya, and Saudi Arabia and other Gulf allies scaling back oil production — but these optimists are few and far between.
Low oil prices continually beg the age-old question of economic diversity in Alberta, a refrain that has been heard from government mouthpieces almost since the discovery of oil in 1947. The need to push Alberta — albeit kicking and screaming — away from a mono-economy based on oil and gas revenues is anathema to a conceptualized reality that sees blissful oil-fueled prosperity leading the way into a blindingly bright future.
The fundamental problem with that idea — and one that many Albertans either ignore or won’t acknowledge — is that things don’t always work out that way. Given the cyclical and volatile nature of non-renewable resource revenues, it should come as little surprise there are periodic corrections in the market. In the end, however, it always seems to come as a profound shock to the tens of thousands that work in the oil and gas industry that the magic carpet of inflated oil prices has disappeared from under their feet, leaving many in a financial free-fall as dramatic as the decline in oil.
Although the idea of increased economic diversity is considered by many to be a tired refrain, it is only during times of economic difficulty — translation low oil and gas prices — that Albertans appear ready to listen to anything that might cast doubt on the bright, starry, oil-driven future of Alberta. It’s important that we do and make appropriate changes, because someday — and it might be sooner than we all might like to think — the last of Alberta’s non-renewable resource bounty will be gone.