As gas prices at the pumps decline across the country this holiday season, Canadian consumers are enjoying the jingle of a few extra toonies and loonies in their pockets. But there are two sides to every coin.
This quarter’s C-Suite survey shows an almost 50/50 split between business leaders who say low oil prices will have a negative impact on their bottom lines and those who say it’s not likely to affect them in a significant way.
In Canada’s western provinces, declining oil prices are likely to be felt the most. Oil and gas royalties account for a good portion of Alberta’s provincial revenue and according to the Alberta government, every $1 drop in oil prices produces a corresponding $215-million reduction in provincial revenue over a 12-month period.
Oil and gas producers will be hit as well, with most looking for ways to rein in their capital costs and re-work their budgets to account for the lost revenue. We are seeing reductions in capital spending and a slow-down in the construction of new projects with companies looking to streamline operations and find ways to divest themselves of cost-intensive or non-producing assets. Producers will be pressing suppliers to cut costs as well. Assuming oil will stabilize at the $70 to $80 a barrel range, we could see capital spending down 20 per cent or more in 2015. This could mean substantially less money being injected into the Canadian economy.
Despite the fact that we are one of the world’s most oil-rich countries, our voice in the international marketplace is weak. The world sees Canada as an expensive place to build infrastructure and produce oil and gas. We don’t have the same flexibility as Saudi Arabia or other OPEC members to adjust production volumes and in turn, affect price. So, the price we receive for our oil is beholden to the agendas of others.
While it may sound like a grim scenario, it is far from catastrophic. Yes, the impacts of low energy prices will be felt across the Canadian economy. But, where there is fluctuation, there is opportunity. The oil business is unquestionably cyclical, and Canada’s oil producers aren’t anywhere they haven’t been before. The energy industry has seen massive swings in the price of oil in the past 20 years. We should remember that large amounts of oil can be produced profitably at $60 to $70 a barrel. With low oil prices, costs will come down for energy-intensive industries such as transportation. Airlines and trucking companies will enjoy lower costs to operate, which will bolster their bottom lines. With companies looking to divest non-core assets, now is a good time to buy.
The industry is resilient. It can weather the low prices and come out the other side with leaner operations, lower costs and wider margins. In the end, a healthy oil and gas sector is good for Canada, and good for all Canadians.
Michael McKerracher is national industry leader for energy and natural resources at KPMG.
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