My Perspective - We need more baskets

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Published on Friday, December 12, 2014

By Kate Kackman-Atkinson

The Neepawa Banner

Over the last few years, Canadians have sat smugly at the world table.  We weathered the economic recession and came out relatively strongly; we are expecting a federal government surplus in next year’s budget.  Unlike other developed countries, we have had no rioting in the streets, no crippling austerity measures and no soul shattering unemployment. 

But the news this week indicates that we might not have been entirely spared.

The reason we experienced none of the crises faced by other developed countries in the last decade can be placed at the feet of our country’s natural resource sector; more specifically, oil and gas. Canada always had jobs and money flowing into government coffers thanks to the oil and gas flowing from beneath our land. 

But we got a shock this week, the taps might not stay open indefinitely.

After years of steadily rising oil prices, the trend has reversed.  On Monday, oil prices fell to a five year low, U.S. crude ended the day at $63.05 a barrel, a fall of $2.79 and the lowest it has been since July 2009. Prices have fallen by more than 40 per cent since June. All of this has happened at a time of year when we are accustomed to hearing about high oil prices due to strong demand for winter heating oil. 

These low prices are expected to stay. Kuwait’s national oil company is predicting that oil prices are likely to remain low, around $65 a barrel, for the next six to seven months. OPEC members recently met and have decided to keep production at current levels, instead of cutting supply to stabilize prices. After all, they are still making money on the oil they sell.  Analysts at Morgan Stanley appear to be the most bearish– they have warned that prices could drop as low as $43 a barrel next year.

The Canadian oil and gas sector has been built around high prices on the international markets. Sustained low prices will have a significant impact not just on that industry, but on the rest of the country.

This February, Scotiabank commodity expert Patricia Mohr analyzed the costs and break-even points of Canadian oil development. Her analysis showed that a West Texas Intermediate oil (one of the benchmark oil grades) price of $63 to $65 US per barrel is about the break even point of Canadian oil development. In the Fort McMurray region, the full cycle break-even costs are in the $60 to $65 per barrel range. 

If prices continue to fall, or stay low, we will not only see slower development in the oil and gas industry, but we could even see cutbacks as companies shutter or shelve unprofitable projects. This will have a huge impact on Canadians across the country. 

To a large extent, we have placed all of our eggs in one basket and we may soon see the folly in that. Not only do our governments rely on the tax revenue from the industry, both the corporations and their employees, but so do families.  Many families across the country rely on money generated in the oil industry getting sent home. I would expect that many farms within oil producing areas owe some income to the oil and gas industry, such as rental income or lease servicing.

While low oil prices are generally good for the Canadian consumer, we likely won’t see falling prices across the economy.  While gas pump prices have fallen, making drivers happy, diesel prices remain high. According to Natural Resources Canada, diesel prices have remained steady over the last four years. On Dec. 9, the average Canadian retail price for diesel was $1.258/litre, down from $1.40/litre earlier this year, but still far above retail gas prices. 

As a large and geographically dispersed country, high diesel prices really hurt us, we rely on diesel trucks and trains to move our goods, diesel equipment to harvest resources and crops and diesel equipment to build our homes and roads. 

For Canadians, it looks like our smugness won’t last, but only time will tell for how long.