Opinion: Urgent action needed to cushion Alberta’s economy

As the price of oil slides rapidly below $60 per barrel there are those who suggest this is a short term phenomenon and prices would recover to the $70-$80 a barrel level in late 2015 or early 2016.

While overproduction by OPEC in an attempt to drive out shale-oil producers (fracking) in Texas and North Dakota has been cited as the primary reason for the current price slide, a realistic assessment of the fundamental change in the industry brought about by the advent of shale oil production technology has been missing.

According to the Economist Magazine, fracking, in which a mixture of water, sand and chemicals is injected into shale formations to release oil, is a relatively young technology, and it is still making big gains in efficiency.

The Economist quotes IHS, a research firm, which reckons the cost of a typical fracking project has fallen from $70 per-barrel-produced to $57 in the past year, as oilmen have learned how to drill wells faster and to extract more oil from each one. The firms that weather the current storm (the overproduction by OPEC) will have masses more shale to exploit. The Economist points out shale oil is not a uniquely American phenomenon: there is similar geology all around the world, from China to the Czech Republic.

Although no other country has quite the same combination of eager investors, experienced oilmen and pliable bureaucrats, the riches on offer must eventually induce shale-oil exploration elsewhere.

All this means there has been a fundamental shift in the supply-demand equation for crude oil. This must be recognized and addressed. The price for oil may temporarily rise to the $70 to $80 level but could slide back into much lower levels over the medium to long term.

Currently there is great momentum in the Alberta economy and it would be some time before the serious consequences of the price drop following the shift in supply/demand for oil are fully realized by the average citizen. In the meantime it is important to make policy changes now rather than wait for the economy to tank.

The Alberta government presently has policies in place including royalty credits to encourage the petrochemical industry. However, these policies are insufficient to stimulate rapid transition to value addition through investment in integrated refining and petrochemical facilities that can produce the feedstock for the plastics manufacture and consumer products industries. The other side of the coin to the current slide in oil prices is that it puts more money into the hands of consumers which in turn may increase demand for plastics and consumer products.

The massive build in the north-south electricity transmission lines mandated by previous Governments in anticipation of oilsands growth could potentially be underutilized unless used for significant firm electricity exports as another value added product.

Before the current momentum in the economy is lost, potentially resulting in net out-migration of population from Alberta, urgent action is required.

In addition, the policies must reflect environmental responsibility; the existing environmental policies at the federal level may have caused delays in access to key export markets (Keystone Excel) for bitumen.

However, the pipeline issue may now be academic given the glut of oil production in the U.S. The emphasis must now shift from market access for bitumen to restructuring of the industry in Alberta through significantly increased value addition through refining and petrochemical production, increased access to export markets for power produced in Alberta and providing incentives for investment in renewable energy production in Alberta in keeping with global trends.

Raj Retnanandan is a Calgary consultant in the utility/energy business

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