Low oil and gas prices may be benefitting consumers in the short-term, but small victories at the pump come with some grave long-term effects for Canada’s economy.
With oil prices 40 per cent lower than they were last year, the Conference Board of Canada predicts that national economic growth will be just 1.9 per cent in 2015, down from 2.4 per cent in 2014.
While global oil prices rose by a modest amount this week, economists say that the oversupply of oil could force prices down to as low as 20$ a barrel, meaning major slowdowns for resource-based provincial economies, especially in Alberta and Newfoundland and Labrador.
I spoke with Alberta Federation of Labour president Gil McGowan about how plummeting oil prices will impact the Albertan labour market. McGowan provided a good backgrounder for anyone unfamiliar with the Alberta oil industry. He also makes a strong case for public-ownership of oil refineries and up-graders. This interview has been edited and condensed.
The oil industry is the bread and butter of Canada’s economy as a whole right now but that’s especially true for Albertans. What do you think the long- and short-term effects of dropping oil prices will be on workers?
Literally thousands of jobs are in the process of disappearing. That’s especially true in the drilling and oil fields service sector, which traditionally is the portion of the energy sector that is hit first when oil prices drop. Other portions of the energy sector only start to feel the impact if prices remain low for long periods of time. So specifically we are talking about employment in energy-related construction and in what we describe as the downstream energy sector — most notably upgraders and refineries and energy-related manufacturing like petrochemicals. Those jobs tend to ride out recessions better than jobs that are closer to the wellhead.
I think it’s important to point out that the energy sector is not monolithic It’s a cluster of industries and each of those industries responds differently to declines in oil prices. A lot of the jobs that people think of as energy jobs in Alberta are actually construction jobs related to the development of new oil sands project. We have tradespeople flying in from across the country and indeed the world to participate in the construction of big oil sands projects, mega projects. We haven’t seen a big drop in oil sands related construction yet. Mostly because the big projects that are currently under construction had their financing approved before the price of oil dropped. So money had already been earmarked for these projects, spending had already commenced. In the short-term there haven’t been major layoffs in oil sands related construction, but the big question is will projects planned for 2016 and 2017 be mothballed, or will they proceed? f the price of oil remains low for the rest of the year there’s a good chance that those projects will not be started.
Can you say more about ‘downstreaming energy sector’? How’s that going to be affected by the low oil prices?
That’s where we add value. As opposed to just putting in a pipe and shipping it out of the province, there’s upgrading and refineries. An upgrader is unique to the oil sands sector. You don’t need an upgrader for conventional oil. It is designed to transform bitumen, which is a thick tarry substance, into something resembling traditional light sweet crude oil like they might pump out of the ground in someplace like Saudi Arabia.
In terms of employment, that’s actually the most stable section of the energy sector. And we’ve seen this over and over again in periods low oil prices and recessions; employment in the drilling sector and the oil service sector will often collapse. Employment in oil sands related construction will often also take a big hit. But during those periods employment in the downstream, including upgraders, refineries, and petrochemicals usually remains almost unchanged. It’s the one portion of the energy sector here in Alberta that’s historically been able to ride out recessions.
And ironically, they actually make more money during periods of low oil prices than they do when prices are high. That may seem counterintuitive but it’s important for discussing perhaps how Alberta should deal with this period.
What do you mean?
It makes sense if you think about it: if you’ve got a refinery and your product is gas, diesel, or jet fuel, what you’re most concerned about is what you get for that product when you put it on the market. But you’re also concerned about your inputs. And if the price of that is low, as it is right now — they call it feedstock, it’s what you put in to produce a higher-value product — feedstock is actually cheap now, so even though the price of gas has gone down, the price of bitumen has gone down even more. Refiners in Alberta are actually making more money now than they were last year. So in terms of how we deal with this crisis, that leads us to one of the points that we are trying to make with government right now.
We are convinced that we are witnessing a profound and long-term restructuring of the global energy market, a restructuring which will likely mean that oil prices remain low for a very long period of time.
Right now oil prices are low because there’s a glut of oil. Production has been exceeding demand for the last few years. That’s going to continue as more and more countries get on the shale oil band wagon. So that’s why we are saying that prices are going to remain low for a very long time.
Our position as a Federation is that the government, as the steward of this resource on behalf of Albertans who actually own the oil, more than ever we think that the future of Alberta’s energy sector lies in upgrading and refining rather than simply ripping and shipping our resources, which has been the preferred approach by oil companies operating in Alberta in the last decade. It has the virtue of creating more jobs here in Alberta, but not more jobs but better jobs, more stable jobs, jobs that are less likely to be lost as a result of volatile swings in the price of oil.
What would it take to get from the current model in the energy sector to what you’re proposing?
Honestly, we have very little confidence that this transition to a higher value energy economy will be accomplished by allowing oil companies to call the shots, as has been the case here in Alberta for the past 60 to 70 years. There’s an opportunity for us here to strengthen Alberta’s energy economy by moving up the value ladder. But that opportunity is only going to be realized if the government, as the steward of the resource on behalf of Albertans takes a much more aggressive role in the market place both in terms of demanding more from energy companies but also in terms of acting directly as an investor and a developer.
If you’re wondering if by that I’m talking about public ownership of upgraders and refineries, that’s exactly what I’m talking about.
OK, that was my next question so you answered it.
In October we released a study about the economic viability of refining in Alberta and that was before the price of oil collapsed. And we hired an international energy economist who used to work for Mobil oil. He came to the conclusion that Alberta would be crazy not to build oil upgraders. Now that the price of oil has dropped, that means that the margins for upgrading are even healthier than they were back in October. There are essentially no major refining hubs in the world that have been developed without major government involvement. So this idea that government shouldn’t be in the business of business is pretty wrong, especially when it comes to the energy sector and especially in recognition of the fact that the resource we are developing is actually owned by the public.
Ella Bedard is rabble.ca’s labour intern and an associate editor at GUTS Canadian Feminist Magazine. She has written about labour issues for Dominion.ca and the Halifax Media Co-op and is the co-producer of the radio documentary The Amelie: Canadian Refugee Policy and the Story of the 1987 Boat People.