The Syncrude oil sands site, north of Fort McMurray, Alta. The oil production business, in its entirety, is losing money. The question is, for how long will it do so?Ian Willms/The Globe and Mail
A grainy TV news item from a previous economic bust in Alberta found new life on social media this week. it's worth a look, and not just for the hairstyles.
The CBC report from the 1980s showed Calgary business leaders kicking off a campaign to try to lift the city out of its economic funk with a toe-tapping jingle, and a slogan: "Yes We Can!" (This predated U.S. President Barack Obama's first campaign slogan by a quarter-century.)
The idea behind the campaign was to try to reverse the negative mindset that came along with falling oil prices, runaway inflation and the stagnant local economy. The climax of the report showed former mayor Ralph Klein talking about improving the "mental climate" before climbing into a front-end loader and driving it right through a "barricade of negativity" fashioned out of two-by-fours.
Watching it during a downturn more than three decades later, one wishes such a quaint gimmick would work – that all it would take was a little positivity to pull the economy out of its doldrums.
Today, Calgary and Alberta as a whole are still largely at the mercy of global oil markets, even if the provincial government has started a new push to diversify the economy.
That means that all the warm thoughts the province can muster are not going to convince the leaders of the Organization of Petroleum Exporting Countries (OPEC) to retreat in their price war that has pushed West Texas intermediate oil down to $30 (U.S.) a barrel.
That puts benchmark Western Canada Select heavy oil blend at less than $15.50 a barrel, given the current discount, and implies a price for raw bitumen from the oil sands of about $10. The oil production business, in its entirety, is losing money. The question is, for how long will it do so?
Some of the most respected oil price forecasters told an audience at a Conference Board of Canada event on Tuesday to expect no recovery in the first part of this year. There is still too much crude in the market, and demand, especially in all-important China, is shaky at best.
Meanwhile, Saudi Arabia has given every indication that it will keep protecting market share rather than price. The kingdom's recent disclosure of plans to sell part of its state oil colossus to investors shows how it is digging in. Meanwhile, the coming end of international sanctions against Iran will mean even more crude sloshing around the world.
"It's hard to be optimistic over the short term when you have as much inventory being put into storage as we see happening right now and when Iran is going to put a significant amount of oil in the market," said veteran forecaster Edward Morse, global head of commodities at Citigroup.
Adding to uncertainty: The timing and magnitude of Iran's return to the oil market is not known.
"This will have a disruptive impact on flows because it will take market share away from somebody somewhere, and that oil will have to find another home. So there could be significant ripple effects that we haven't thought about," Mr. Morse said.
In North America, the price collapse has forced energy companies to slash spending on drilling and hydraulic fracturing or fracking, adjustments that had been expected to help cure the oversupply. Yet output, especially from U.S. shale plays, is stubbornly slow to decline.
Michael Wittner, global head of oil research for Société Générale, said the recent multiyear low in prices comes after markets "fundamentally overshot to the downside." He sees some recovery in the second half of this year, and supply and demand becoming more balanced in 2017. That could see international benchmark Brent averaging $55 a barrel next year, edging up to $75 in 2020.
Such a price would make oil sands development, along with deep water drilling, financially feasible again, he said.
Until then, expect industry consolidation to pick up as it becomes tougher for companies without deep pockets to survive. That might give the current generation reason to build their own wall of negativity, but history shows busts don't last forever.
"I remember giving a talk in Alberta in 1985-86, when the mood was fairly pessimistic, and it didn't take very long for that mood to switch, because markets tend to balance more quickly than you think they're going to do in the middle of the worst part of the market," Citigroup's Mr. Morse said.
"The market is going to turn, probably this year. At the end of the year, the price is probably going to be significantly higher."
Jeffrey Jones