There may be light at the bottom of the barrel

Here’s what you do know: The low price of oil has taken Alberta’s roller-coaster economy on a downward spiral.

What you may not know is how did we get here and what happens going forward.

For some answers, here’s Todd Hirsch, chief economist at ATB Financial.

“The story of how we got here has been told repeatedly,” says Hirsch.

“The problem in 2014 and 2015 has been far too much global supply. OPEC has just finally said, ‘We’re not going to be the guardians of high prices anymore, we are no longer going to curtail our production in an attempt to keep oil prices high. We’re just going to turn on the spigots and produce as much as we can,’ and that of course has resulted in a global glut of oil accompanied with some weak demand globally.”

It could be worse, oil was $33 a barrel in 2009.

So, where do we go from here, Todd?

“The general consensus I’m hearing is that probably by summer (or) early fall, we’ll start to see OPEC’s grip on oil production start to weaken, only because Saudi Arabia is a very low-cost producer. It’s costing their government a lot of money, but in terms of cost of production, you can pretty much stick a pipe in the sand in Saudi Arabia and gasoline comes out,” says Hirsch.

“The problem for Saudi Arabia is the other 11 countries in OPEC are not all low-cost producers. Venezuala, Nigeria and Libya are very high-cost producing countries and the general consensus is, at some point, these countries start to tap out.

“When we start to see some of these OPEC countries backing off their production, then I think investors will realize that maybe OPEC’s grip on oil production is not as strong as we thought and maybe oil at $45 is way undersold (and) maybe we need to buy back a little bit of oil, and then we’ll see that oil price sort of drifting closer to maybe around 60 or 65 dollars by the end of 2015 (or) maybe a year from now.”

In the Alberta Economic Outlook Q2 2015 report from ATB, released earlier this week, Hirsch presented three Goldilocks-type oil-price scenerios, one on the low end, one in the middle and one on the high end.

“The second scenario is most probable,” he says.

“That is, West Texas Intermediate (crude) prices will average within a range of $US50 to $60 per barrel. Oil prices could fall further in the second quarter of the year and the current price volatility suggests that the bottom of the market has not yet been tested.

“However, prices should stabilize by the summer or early autumn with some gradual price improvement towards the end of the year.”

Regardless, there are some bright lights in the Alberta economy.

“Despite the severe challenges in the energy sector, many other industries in the province face much brighter prospects in 2015,” says Hirsch.

“Agriculture, forestry and tourism all benefit from lower fuel prices. The lower Canadian dollar will also help commodity exporters and tourism operators.”

– Calgary Sun.

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