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Alberta May Actually Benefit From the Cooling Off of the Oil Industry

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Alberta Oil Economy Upside

Oil prices saw a small uptick this week, something that caused many Albertans to breathe a very short sigh of relief. Alberta has relied heavily on oil for decades, so much so that one of our major hockey teams is even called the Oilers. This means that the low price of oil has hit Alberta particularly hard. Analysts across the province have agreed that it could be a while before prices rise again, raising red flags over the viability of the oil sands, one of Alberta's flagship projects. Alberta’s oil sands have some of the highest production costs in the world, prompting experts to conclude that if oil prices stay this low for too long then the billions of dollars needed to invest in infrastructure and the tens of thousands of skilled labourers needed may no longer happen.

This news has alarmists arguing that the government of Alberta may lose out on billions of dollars in royalty revenue and the provincial economy will stall. However, chief Economist at ATB Financial Todd Hirsch believes that not only will the economic slowdown be less dramatic than predicted but the cooling off of the oil industry may be exactly what Alberta needs.

Hirsch concedes that if oil prices do not recover the province will see slower hiring rates or even job losses. However, Alberta still occupies a position of strength that will help it weather the downturn. He does believe that employment rates could go as high as 6 per cent next year (significantly higher than the current 4.5 per cent), with rumors flying around oil boomtown Fort McMurray of pink slips and busloads of workers being returned to Edmonton jobless.

This shows that the low price of oil is not only affecting people directly employed in the field of oil and gas production but also those in periphery businesses such as drilling contractors. These periphery industries receive most, if not all, of their business from the oil and gas sector, so reduced oil production has hit them hard too. However, even a worst-case-scenario of 6 per cent is not a terrible unemployment rate, still ahead of Ontario which currently sits at 7.1 per cent. That means that even if Alberta encounters this worst-case-scenario we will still be outperforming the rest of the country.

The reason Alberta is equipped to weather the storm relatively unscathed is thanks to our often overlooked forestry industry. Alberta’s forestry industry is currently enjoying the most lucrative market it has seen in decades thanks to the low Canadian dollar and the increase in housing construction in both Canada and the United States. This puts them in the position to pick up recently unemployed energy workers, creating a win-win situation. A downturn in oil and gas is good news for the forestry industry because they no longer have to compete with oil and gas for skilled workers and don’t have to try and keep up with the high paycheques traditionally associated with oil and gas work. Though the new jobs in the forestry sector will be lower paying than the jobs they are replacing this will still help keep Alberta’s unemployment rate down and keep food on Alberta tables.

In fact, Hirsch argues, low oil prices may actually improve the economics around some of the higher-cost oil sands projects because one of the main drivers of cost inflation in the project has come from the increasingly high wages that employers needed to offer in order to attract and retain their ever-expanding workforces. Sky high wages meant that producers needed to sell oil at at least $95 per barrel in order to fund the projects, but as growth slows companies will no longer need to enter bidding wars with each other in order to attract top talent.

"Faster is not always better, sometimes just a moderation or a bit of a pause keeps everybody’s head clear and it brings all kinds of markets like the labour market and the housing market and the rental market… into a healthier balance," Hirsch said. "Even if it feels unpleasant at the time, it is kind of a necessary evil."

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