Tuesday, December 9, 2014

Sinking Oil

Noted Canadian historian Harold Innis spoke of the long legacy of Canadians as the hewers of wood and drawers of water; dependent upon the staple economies. In the centuries after European settlement began it is remarkable how little that has changed. Despite industrialization and the development of the knowledge economy it still seems like Canada is a county built upon its natural resources.

In the last decade or so the strength of the Canadian economy has been built upon fossil fuels. The tar sands boom, the Hibernia fields off of Newfoundland and the growth in Saskatchewan are all tied to the opportunity tied to the high-cost energy market. As many of you may have noted the price of oil (and therefore gasoline) has declined lately. While consumers might cheer the relief on their pocket books it comes at a price.

Several Canadian provinces are dependent upon the energy economy, especially their governments who use it as a major source of revenue. Royalties from resource extraction will be down and there have been reports of the multi-billion dollar shortfall Alberta is expecting. Here in the Northwest Territories it means there will be a decline in development given the high costs and lower price.

It is important to note that the world’s energy economy has adapted to the $80+/barrel economy. While Canada will struggle the impact on other countries could be dramatic and dangerous. Discovery’s Test Tube channel recently discussed the impact here: 

In developing and fragile economies unrest and instability is entirely possible.

From my brief research it seems that increased production in the Middle East and North Africa and declining demand in Europe and Asia the price for oil has tipped lower. Canadian oil is generally expensive and cannot compete well below $70/barrel.

Despite critics of Canada’s petro-economy the simple fact is that it forms the current backbone. As wise and necessary as it is to move on and diversity our economy we’re not there yet and nothing competes with its profitability. The interesting this is that this price dive has shown how big a part of our economy the fossil fuel industry is. Its decline has caused sharp dives in the Toronto Stock Exchange.

A strange part of this is that it reveals we have more in common with other petro-nations than we might like. As a result I hope it proves to government officials the need to move away from the boom and bust oil economy and find something more sustainable for the nation’s economy. Relying on the golden goose is marvelous as long as it’s fat, happy and laying eggs, but we cannot control when it will ultimately stop, and it will inevitably stop. 

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