Canadian economy hard hit by plummeting oil prices

The economy of the world’s second-largest country is to a large extent dependent on its oil sands. But the rapid decline in oil prices is now forcing oil companies to cut back on costs. Workers are being laid off and the Canadian dollar is steadily weakening. John Dyer reports from Boston.

Fort McMurray, ground zero for Canada's tar sands industry, has been hard hit by sinking oil prices, with oil workers being laid off by the hundreds. (Photo credit: Kris Krüg, flickr)

Fort McMurray, ground zero for Canada’s tar sands industry, has been hard hit by sinking oil prices, with oil workers being laid off by the hundreds. (Photo credit: Kris Krüg, flickr)

Royal Dutch Shell has just laid off 200 workers, or 10 per cent of its Canadian workforce. Oil giant Canadian Natural Resources Limited is slashing its capital budget from USD 8.6 billion to USD 6.2 billion. Civeo, a Texas company that manages accommodations for oil workers, recently closed two camps near Fort McMurray, a hardscrabble oil and mining town in northern Alberta in the tar sands region that is at the heart of Canada’s oil industry.

Oil towns are feeling the pinch

“It’s like the place has gone dead,” said Debbie March, owner of Mr.s B’s, a popular restaurant for oil workers on Franklin Avenue in downtown Fort McMurray. “The past couple of weeks, I’ve never seen it this bad here at the restaurant.”

Further layoffs are expected in the months to come.

Like Russia, Venezuela and other oil-rich countries, Canada is suffering as the price of oil has dropped precipitously since June — the lowest in nearly six years.

As the Canadian oil industry adjusts to lower prices, Fort McMurray and other northern Canadian towns are feeling the pinch. Fewer charter flights are landing and taking off at Fort McMurray’s airport and customers are purchasing less, from cigarettes to lottery tickets.

Tar sands cheaper than fracking

Ian Robb is taking the current situation more in stride. The president of a labour union in Fort McMurray says: “I have confidence the industry will pick up again. We look at it this way: yep, another hiccup in the Fort McMurray drama.”

He’s not the only one to hold onto his optimism. Unlike Russia, few Canadian businesspeople or economic experts foresee a new recession, with the Bank of Canada even predicting overall growth in sales over the next 12 months.

One reason for this guarded optimism is that tar sands in Canada are already drilled. Fracking, to the contrary, is expensive because drillers must constantly drill new wells to extract oil from the ground. When oil drops below around USD 50 a barrel, fracking stops being profitable, at least for small drillers. The booming North Dakota fracking industry in the United States is already facing a potential bubble burst.

Pricing in decades, not months

The tar sand pits can earn a profit for years after the initial investment into them so long as price of oil hovers around USD35. The biggest oil sands producer, Suncor, expects to increase capital spending by CAD7.2 billion next year with output predicted to grow by 11 percent. Other companies like Canadian Natural, Syncrude Canada and US-based Exxon are also forecasting more production even as oil prices fall.

“Price volatility is a fact of life in our industry,” said Suncor Energy Chief Executive Officer Steve Williams, who said his company could handle low prices for the foreseeable future. “In evaluating any investment, Suncor takes a much longer-term view than days or months. We are able to take the perspective of pricing in decades.”

Political wrangling over the Keystone pipeline

Canada’s proximity to the US is one reason its future is dimmer, but not dismal. Canada exported more than 3 million barrels of oil a day to the US last year, according to the U.S. Energy Information Administration. Those exports aren’t expected to change much. But the Canadian dollar – which is tied to the price of oil – is dropping. While this is bad for the oil industry, it’s good news for exports from other industries, such as manufacturing.

Canada’s oil producers are looking south with new hope since the U.S. elections last November. The new Republican majority in the U.S. House of Representatives recently passed legislation to permit the Keystone XL pipeline, a conduit that would ship Canadian crude to American refineries on the Gulf of Mexico. Republicans who control the U.S. Senate are expected to pass the bill, too, which would mean more expansion opportunities for Canada’s oil industry.

Canada’s Conservative government is strongly pro-pipeline. Prime Minister Stephen Harper himself comes from Alberta. And the Canadian government is doing all that it can to make the Keystone XL pipeline a reality.

But there is one, very big obstacle in its way: President Barack Obama, who continues to remain mum on whether he will veto the legislation. He’s not alone. Many of his Democrat colleagues and supporters – which includes environmental organisations – vocally oppose the pipeline. And they have plenty of support north of the border, too.

 

Photo credit: Kris Krüg, flickr/Creative Commons

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