Skip to main content

An oil pumpjack sits idle north of Edmonton. The oil price plunge could see Alberta run a $7-billion deficit this year.

JASON FRANSON/The Globe and Mail

The hits just keep on coming for Alberta. Falling oil prices could now send the province into a recession this year, according to the latest forecast from the Conference Board of Canada. Despite the protestations of Premier Jim Prentice, other similar predictions are sure to follow given the spate of bad news for Alberta that includes layoffs, spending cutbacks and an emerging government budget deficit. What's less clear is the potential severity of a pending recession. Alberta has weathered cyclical oil busts before, but the current downturn might just be something different.

As alarmed as Albertans are about oil prices, few want to even consider the possibility that the current price decline may be less of a temporary blip and more like a canary in the coal mine.

Burdened with one of the highest cost structures anywhere in the world, Alberta's oil patch is especially vulnerable to the current market dynamics. Indeed, high-cost producers everywhere now face the same dilemma. The very triple-digit oil prices that made their operations profitable in recent years are the same prices that also stunt economic growth and, in turn, staunch the demand for expensive oil. Not long ago the idea of a "super cycle" was popular in the commodities world, but you don't hear much about it anymore. Rather than a "super cycle," the oil market looks instead to be going through a series of outsized gyrations in price.

Story continues below advertisement

Oil markets have always moved to cyclical rhythms, but not since the days of the OPEC oil shocks in the 1970s have they moved like they are right now. In less than a decade, we've seen a pair of growth crippling price spikes, each of which were followed by swift declines that were no less spectacular.

The takeaway, which seems to be clear to the investors who are bailing out of oil sands stocks, must surely be apparent to oil company executives as well. The triple-digit prices that encourage multibillion-dollar investments into mega-projects to extract unconventional crude aren't sustainable. And no area of the world was slated to receive more such investment than Alberta's vast oil sands, a region where production was expected to more than double in the next decade or so.

No doubt that some industry executives will still count on a big rebound in global fuel demand as plunging oil prices work their way through to the gas pump. Such thinking, however, neglects to account for a fundamental shift that's occurred in global energy markets. How often North American SUV drivers fill up at the pump is no longer the big driver of world oil demand growth.

In the next decade, half of the expected increase in global oil demand will come from China, according to the International Energy Agency. It's worth asking, however, whether those forecasts will hold up. We've heard similar projections about China's role in the global coal industry. To the great chagrin of coal producers, however, growth in Chinese coal demand came to a grinding halt last year, as the country's economy slowed and new environmental policies were enacted that shuttered carbon-spewing coal-fired power plants around its major urban centres.

Can those same smog-choked cities handle another 300 million cars on the road or will China be forced to clamp down on what's coming out of its tailpipes as well as its smokestacks? Added to which, China's ability to maintain the same type of economic growth that's pushed a big run-up in domestic vehicle sales in the last decade is becoming less and less certain.

Elsewhere, the demand for oil looks to not only have peaked, but also entered a secular decline. European oil demand has been falling for well over a decade. Even in the U.S., where drivers reign supreme, oil consumption is running two million barrels a day lower than pre-recession levels.

Perhaps even more significant for the future of crude demand and the fate of the oil industry will be the inevitable global response to the climb in atmospheric carbon that's getting ever closer to critical levels for the both the world's climate and its ocean levels. Just as the world's two largest emitters, China and the U.S., have recently taken unprecedented steps to curb emissions from coal, it's only a matter of time before they're compelled to put the brakes on the carbon footprint that comes from oil as well.

Story continues below advertisement

All of this should leave Albertans wondering whether the current collapse in oil prices is the end of a cycle or if it's actually the end of an era.

Report an error Editorial code of conduct
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter