Mon 10 Mar 2008
Optimists Forecast Good Prices Despite A Slowing U.S. Economy
Alberta Business Economic Financial News , Alberta Jobs and Labour NewsOil & Gas Outlook
By Mike Byfield
Ominous clouds loom on the energy sector’s horizon: recession in the United States, anti-trade rhetoric from American presidential contenders, tightening environmental legislation across North America and the like. Even so, some petroleum managers and analysts remain optimistic about the future. “The drilling downturn in Alberta, low storage inventories and a tight international market for LNG [liquid natural gas] will generate a significant rally in natural gas prices beginning as early as this summer,” predicts Len Kerkovius, a senior research analyst with McLean & Partners Wealth Management Ltd. Bob Keiller, CEO of Production Services Network (PSN), is even more confident about the longer-term outlook. “Western Canada represents a fantastic international source for growth in the oil and gas sector,” says the Scottish oilman (shown below), whose global company is now establishing an engineering hub in Calgary.
“The fundamental factor is the price of oil,” comments Jerry Taylor, a senior fellow with the Cato Institute. The Washington-based scholar notes that crude values surged in a major way on six occasions over the past century, often prompting speculation that world supplies were at the point of permanently diminishing. “Of course, that concern proved groundless. But there is a difference this time. In the past, oil price increases were always triggered by supply shortages or disruptions. The dramatic jumps that we’ve experienced in recent years have been driven by demand - we’ve just experienced the longest period of prosperity in history - and that’s new,” Taylor says.
The American boom appears to be over at last. “We believe the U.S. has already entered a recessionary period,” says Anil Tahiliani, research director at McLean & Partners. For many economists, a recession is defined as two or more consecutive quarters of negative growth in GDP (Gross Domestic Product). Although the Americans have not yet recorded even one monthly decline, economic growth below the 49th parallel has all but disappeared. That slowdown raises basic questions: Do high oil prices trigger recession in consuming countries? Will oil demand slacken in a recessionary U.S. and possibly elsewhere? And if oil demand does weaken, will crude prices drop in response?
“Our research into the last few recessions indicates that crude demand in the U.S. and globally did not decline much,” Tahiliani says. In fact, oil consumption is strikingly unresponsive to higher prices. Even though American gasoline rocketed from $1 per gallon to about $3 within the past few years, drivers there are pumping as much fuel as ever into their tanks. So Tahiliani doubts that crude over $100 per barrel is the prime culprit in the current slowdown.
After OPEC engineered a four-fold jump in crude prices during the 1970s, North America went into a recession that persisted into the early ’80s. Cato’s Taylor is not convinced that a repeat of that debacle will occur now. “First, it’s not certain that higher oil prices were in fact responsible for that recession,” he cautions. “Also, federally imposed wage and price controls were in place at the time, which impeded the economy’s capacity to adjust promptly to higher energy prices. That’s not the situation now. And interest rates rose to crippling heights in the late 1970s. Today interest rates are coming down, not going up.”
“The million-dollar question is the global impact of a slowdown in the U.S.,” Tahiliani suggests. The United States has powered much of the world’s recent prosperity through heavy, debt-financed imports. Its net trade imbalance reached $838 billion in 2006. But the country’s capacity to continue buying with borrowed funds has been hobbled by record public and private debt - the national credit card may be maxed out. Fortunately, however, China and India may be less dependent on exporting to the U.S. than previously. “An increasing percentage of Asia’s economic activity occurs within the region,” Tahiliani says. “Asian oil demand may bear up despite a recession in the U.S.”
Americans are scheduled to elect a new president on November 4. In hard times, U.S. voters typically shift leftward, expecting their federal government to cushion the blow for the most vulnerable as well as jump-start the economy again. The leading Democratic candidates, Hillary Clinton and Barack Obama, are liberal senators who advocate a larger spending role for government in health care, education and elsewhere. And both presidential contenders have played heavily on fears that the North American Free Trade Agreement (NAFTA) with Mexico and Canada has caused job losses in the U.S.
George Eynon, vice-president of the Canadian Energy Research Institute (CERI), acknowledges some concern over this issue. “The Americans have a dynamic political process and you can never completely rule out the possibility of major policy changes,” he says. But NAFTA also has formidable strengths. The Cato Institute, among many others, insists that free trade has generated a net employment gain for the country, with the creation of well-paid jobs more than making up for the loss of less skilled work. Furthermore, Eynon notes that Canada provides 15% of American oil and natural gas supply along with a big chunk of its electricity. “The trade treaty is an important component of American energy security and that’s not going to change for the foreseeable future,” he says.
CERI, which tracks international energy trends, does not see the political hostility of Venezuelan President Hugo Chavez (shown here) toward neighbouring Colombia as a large economic concern, nor does he believe that Chavez is likely to make good on his threats to choke exports to the U.S. “Venezuela is not a really big piece of the global oil market to start with,” Eynon observes. The Latin American nation, whose economy is already fragile, cannot afford to shut in much crude production. If Chavez diverts his oil to customers in Asia or Europe, the overall international supply-demand balance will not be affected and the U.S. will buy elsewhere. Nor do other customers have the refining capacity to process the heavy, sulphur-laden crude exported by Venezuela.
Environmental policies in the U.S. and Canada do concern Eynon. “Regulatory interventions designed to minimize climate change are not necessarily bad for petroleum producers but the industry must maintain an ongoing dialogue with those jurisdictions,” he says. The U.S. Energy Security Act already places restrictions on federal use of fuels derived from high-carbon sources like oilsands bitumen. A California-led alliance of states and provinces (British Columbia and Manitoba) has adopted regulations designed to restrict future consumption of high-carbon fuels. Beginning July 1, B.C. will start phasing in a direct consumer tax on carbon fuels. And the federal government just announced stringent carbon sequestration standards for Canadian bitumen projects coming on stream in 2012 or later.
Natural gas prices, which sagged badly last fall, are a crucial factor for conventional producers in the gas-prone Western Sedimentary Basin. Although prices have recovered recently, Kerkovius notes that further softening may occur later this spring. By mid-summer, though, the McLean analyst expects to see longer-term price gains. Gas storage inventories coming out of the winter season are lower than they’ve been for the past three years. Despite aggressive drilling in the U.S., production is not rising. Canadian gas output has declined due to lower drilling activity. Nor does Kerkovius think North American demand will draw in a flood of cheap LNG. “Liquefaction facilities are not coming on stream overseas as quickly as the market requires,” he forecasts. And the gas price recovery would become a spike if next winter is unusually cold or a hurricane ravages the U.S. Gulf Coast.
Alistair Green, business development director for Production Services Network, says Alberta’s recent squabbling over royalty rates will soon pass. PSN is an engineering and service contractor based in Scotland with a world-wide payroll of 8,000. The company just acquired Calgary’s Tartan Engineering, which will act as its expansion platform for Western Canada. “We have both NOCs [state-owned national oil companies] and IOCs [non-government international oil companies] as clients. At this point, IOCs have access to just 16%-18% of the world’s oil,” Green (shown here) says. “For those producers, the oilsands in particular have a powerful appeal. Thanks to its energy resources and political stability, this region has a tremendous future.”
Source: DOB Magazine
Related Alberta Jobs:
- Will U.S. Credit Crisis Hurt Alberta’s Economy?
- USA Perspective On Alberta Oilsands Development
- Economic and Construction Outlooks for Canada in 2008
- Canadian jobless rate falls to 33-year low of 5.8 per cent in January
- Trades contest boon for Calgary employers
Leave a Reply
You must be logged in to post a comment.
