The old adage of not placing all of one’s eggs in one basket has increased significance in Canada’s richest province, where the collapse in oil prices will likely result in a recession, according to one economic forecaster.
A report released by the Conference Board of Canada last week indicates the recent price plunge that has left oil below US$50 a barrel could see a significant drop in investment, jobs and housing for the province of Alberta if prices fail to recover soon, or worse, continue to drop.
“The latest job and housing numbers have yet to show any hit from the drop in oil prices, with both remaining steady and in line with seasonal patterns. But oil is Alberta’s main export. And going forward, the province is certain to suffer, especially on the employment front, from the drop in oil prices—and it is likely to slip into recession,” states the report.
The board notes that the previous recession saw investment in the province nosedive by $18 billion, 30,000 oilsands jobs disappear and a 75 per cent fall in housing starts.
Alberta Premier Jim Prentice went on record this month projecting a $500 million deficit for the province this year, contrary to the original estimate of a $1.5 billion surplus.
Still, the premier said he disagrees with the Conference Board report, telling media last week that he intends to make “measured, balanced fiscal choices,” though acknowledging prices would stay low for several years.
As long as prices don’t continue to drop, Prentice’s calculations see the province bouncing back out of deficit by 2018.
In the meantime, Prentice said, the government will have to refocus on diversifying its revenue streams.
Suncor announces $1 billion cuts
The Alberta government is not the only party concerned with tumbling revenues. With the benchmark for crude hovering at around $47 a barrel – less than half the price it was six months ago – oil companies could be facing cutbacks and project delays to save their bottom lines.
Among those is Suncor, which announced last week that it will be cutting its 2015 budget by $1 billion in capital spending in response to low crude prices. Further reductions amounting to $1.4 billion will be phased in over two years to offset inflation and growth, and 1,000 employees will be laid off.
“Cost management has been an ongoing focus, with successful efforts to reduce both capital and operating costs well underway before the decline in oil prices. However, in today’s low crude price environment, it’s essential we accelerate this work,” Suncor’s chief executive officer Steve Williams announced last Tuesday. “Today’s spending reductions are consistent with our commitment to spend within our means and maintain a strong balance sheet. We will monitor the pricing environment and take further action as required.”
Board expects prices to rise in late 2015
The economic upside of the report is that the Conference Board does not foresee “bottom of the barrel” oil prices lasting beyond 2015.
“There won’t be much movement in the first half of 2015, and $100 per barrel oil isn’t coming back anytime soon. But we expect world oil prices to rise above $60 by the end of this year,” forecasts Kip Beckman, a board research associate.
The board also notes a boost in “consumer confidence” as Canadians benefit from lower prices at the pump, with “a big jump” in the number of respondents surveyed in December indicating that their financial situation has improved over the last six months.