Alberta Economy And The Price of Crude Oil

         Alberta is a province in western Canada that is known for its oil and gas industry.  Alberta's neighboring provinces Saskatchewan to the east and British Columbia to the west has oil and gas as well.  These neighboring provinces do not have nearly the quantity of oil has Alberta.  Alberta has has the oil sands located in the Fort McMurray area.  Alberta is said to have the 3rd largest amount of crude oil in the world, behind only Saudi Arabia and Venezuela.  The east coast of Canada currently imports about $12 billion worth of oil for Saudi Arabia on a yearly basis.

        A couple of months back, the Alberta finance minister released the budget for the upcoming fiscal year.  Finance minister Joe Ceci based his predictions on oil being $55 a barrel.  Why is this important to know?  Alberta does not have a sales tax, unlike all other provinces have a sales tax separate from the federal GST (Good and Services Tax) or a harmonized sales tax (HST).  The HST is a combined tax of the GST and provincial sales tax. Alberta gets tax money from royalities from the oil and gas industry on top of corporate taxes and personal income tax.  A few years back, Alberta was known for the Alberta Advantage due to its strong economy and low taxes.  The price of oil started to decline around Sept 2014 when it was trading at around $92 dollars. Since then we have seen government changes at the provincial and federal level.

     There are lots of Albertans who are out of work and are losing their homes.  The jobs they had in the oil and gas sector are not easily replaceable in terms of skill and wages.  People who work directly in the oil patch or with companies that involve workers going to rigs to do fracking, cementing, wireline operations etc. have cut back their staff by huge amounts of the last 3 years.  We have some pundits believing that Alberta is coming out of the recession.  I totally disagree as the recent optimism has subsided with oil fallen well below $50 a barrel. Currently, WTI crude oil is trading at $43.44 per barrel as of the time of this writing. Alberta is known has a high cost producer, unlike Saudi Arabia is a low cost producer. 

     The provincial government is going to be running a bigger deficit than they originally thought as oil patch activity is way down when oil prices at these levels.  Lots of people have moved out of Alberta, while some oil patch workers are hesitant to re-enter the oil and gas industry after the fallout due to the recession. There is still a net migration of people in Alberta despite the low oil prices.

     The scary part of the Alberta recession is that the stock markets are flirting with all time highs for Canada and the United States.  History has shown that recessions happen ever 8 to 10 years. These recessions affect the entire country or countries around the world.. Major recessions also cause crude oil to be low.

      Currently, there is an oversupply of crude oil and plus the surgence of renewable energy companies affecting the price of crude oil. Some countries are members of OPEC (Organization of Petroleum Exporting Companies) can sway the price of oil when OPEC member companies get together.  Canada unfortunately is not a member of OPEC. 

     Cities and towns in Alberta have been hugely affected by the low oil prices.  Calgary is said to have an office space vacancy nearing 35%.  Calgary is where a lot of oil and gas companies have their corporate headquarters.  Lots of small communities spread throughout Alberta are feeling the pinch as well as they get a lot of oil patch workers stopping in their communities for some food or lodging.

Conclusion:

    The recession in Alberta affects the entire country has a whole.  Besides the workers inside its own border, people from all across the country come to work in Alberta.  These out of province workers spend money in their home regions which increases tax revenue for their respecting provincial governments.

     Personally, I do not believe the recession is even close to being over.  Every week, we hear in the business news that we have an oversupply of crude oil. Canadian companies are hesitant to drill when the prices are this low as their chance of not being profitable are too high.  Just a few months ago, I recall a person on Business News Network saying that a company in Alberta used to hire oil patch workers at $40 per hour and now hired some people back at only $15 per house. I believe oil will dip down to around $40 per barrel before he hit $45 per barrel again. 

     Often is says the one rig creates approximately 135 jobs both directly and indirectly.

      I do believe Alberta will have to institute  a sales tax within the next couple of years if this recession caries on. 

   What are your current thoughts on crude oil and the effects on the economy?

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.