The hits just keep on coming for Alberta. Falling oil prices could now send the province into a recession this year, according to the latest forecast from the Conference Board of Canada. Despite the protestations of Premier Jim Prentice, other similar predictions are sure to follow given the spate of bad news for Alberta that includes layoffs, spending cutbacks, and an emerging government budget deficit. What’s less clear is the potential severity of a pending recession. Alberta has weathered cyclical oil busts before, but the current downturn might just be something different.

As alarmed as Albertans are about oil prices, few want to even consider the possibility that the current price decline may be less of a temporary blip and more like a canary in the coal mine.

Burdened with one of the highest cost structures anywhere in the world, Alberta’s oil patch is especially vulnerable to the current market dynamics. Indeed, high-cost producers everywhere now face the same dilemma. The very triple-digit oil prices that made their operations profitable in recent years are the same prices that also stunt economic growth and, in turn, staunch the demand for expensive oil. Not long ago the idea of a “super cycle” was popular in the commodities world, but you don’t hear much about it anymore. Rather than a “super-cycle”, the oil market looks instead to be going through a series of out-sized gyrations in price.

Oil markets have always moved to cyclical rhythms, but not since the days of the OPEC oil shocks in the 1970s have they moved like they are right now. In less than a decade, we’ve seen a pair of growth crippling price spikes, each of which were followed by swift declines that were no less spectacular.

The takeaway, which seems to be clear to the investors who are bailing out of oil sands stocks, must surely be apparent to oil company executives as well. The triple digit prices that encourage multi-billion dollar investments into mega-projects to extract unconventional crude aren’t sustainable. And no area of the world was slated to receive more such investment than Alberta’s vast oil sands, a region where production was expected to more than double in the next decade or so.

No doubt that some industry executives will still count on a big rebound in global fuel demand as plunging oil prices work their way through to the gas pump. Such thinking, however, neglects to account for a fundamental shift that’s occurred in global energy markets. How often North American SUV drivers fill up at the pump is no longer the big driver of world oil demand growth.

In the next decade, half of the expected increase in global oil demand will come from China, according to the International Energy Agency. It’s worth asking, however, whether those forecasts will hold up. We’ve heard similar projections about China’s role in the global coal industry. To the great chagrin of coal producers, however, growth in Chinese coal demand came to a grinding halt last year, as the country’s economy slowed and new environmental policies were enacted that shuttered carbon-spewing coal-fired power plants around its major urban centres.

Can those same smog-choked cities handle another 300 million cars on the road or will China be forced to clamp down on what’s coming out of its tailpipes as well as its smokestacks? Added to which, China’s ability to maintain the same type of economic growth that’s pushed a big run up in domestic vehicle sales in the last decade is becoming less and less certain.

Elsewhere, the demand for oil looks to not only have peaked, but also entered a secular decline. European oil demand has been falling for well over a decade. Even in the U.S., where drivers reign supreme, oil consumption is running two million barrels a day lower than pre-recession levels.

Perhaps even more significant for the future of crude demand and the fate of the oil industry will be the inevitable global response to the climb in atmospheric carbon that’s getting ever closer to critical levels for the both the world’s climate and its ocean levels. Just as the world’s two largest emitters, China and the U.S., have recently taken unprecedented steps to curb emissions from coal, it’s only a matter of time before they’re compelled to put the brakes on the carbon footprint that comes from oil as well.

All of this should leave Albertans wondering whether the current collapse in oil prices is the end of a cycle or if it’s actually the end of an era.

  • Reality Checker

    Jeff, as an Albertan, the only thing that i am left wondering about is when will your predictions ever be somewhat correct. For now, I will add this blog entry to my beleaguered “Rubin Memorabilia Scrapbook of Missed Boats” and blow the dust off the latter in a year or so for some light, humorous reading.

  • scissorpaws

    This could be Alberta’s silver lining. Leave the muck in the ground, leave the rivers uncontaminated, all in time to have one of the last great remaining wildernesses in the world. Might want to stop hunting the grizzlies and wolves and invest in eco-tourism. End logging and set aside lots of land for forests and buffalo. No environmental issues, and it’s only going to be more valuable as we progress into an ever more human populated world.

  • Steve

    The end of the carbon era, which is what we are really talking about, will be felt well beyond the borders of Alberta. Wonderful podcast on the site Peak Prosperity discusses this in greater detail and why we might just be witnessing the beginning of the end for oil production on a global scale:

  • Charles McNair

    The game is rigged and we’re headed for a reset but first we have a war and the victor gets to write about what happened and teach it to their children .

  • Alex Grey

    A simple way of looking (and in fact perhaps painfully obvious) at things is that the burst commodities bubble (not only oil but iron ore, coal and potentially others) is likely to have the same scale of effect on the Canadian economy as the burst high-tech bubble did in the U.S. in 2001 which is recession. These are the classic investment boom/bust cycles that characterised the world Keynes wrote about. In some ways the effect could be larger in Canada given the importance of commodities to the Canadian economy relative to the importance of the high-tech sector to the U.S. However there are three important differences from the US experience in 2001 all of which are on the negative side. First, because of the low interest-rate environment and the pressure on firms to engineer higher earnings per share growth, my guess is that a lot more debt has been involved in financing the commodities boom in Canada than was in in the U.S. high-tech boom (proportionately-speaking). In the U.S. high tech boom, equity markets were the major source of capital. Second is that in 2001 the Federal Reserve cut interest rates dramatically (something which was probably an important factor contributing to the subsequent U.S. housing boom/bubble). Third, the U.S. housing sector had been in a boom since the mid-1990s but the boom/bubble still had 4-5 years to run in 2001. The BOC has very limited scope for manoeuver given the low interest rates; ii) Canada is in a very late stage of a housing boom (I would argue bubble) but even if one assumes housing boom, there are significant risks that a recession will knock over the housing market given the high level of leverage that have been associated with the boom. If a major housing slump were added to a commodities bust-induced recession, this spells deep recession. So no wonder the BOC is acting decisively cutting interest rates (to get a normal (if the interest rate environment can at all be described of as normal) upward-sloping yield curve; and probably preparing for possible QE. Given the options open to them they are pursuing the best course of action open to them. That is why the foreign exchange market reacted so strongly to the BOC action. However the plunging five-year government bond rates are another strong market sign of recession, to which the foreign exchange markets have been reacting. I have always thought that in this ongoing global economic crisis commodity-producing countries will fare very badly, if history is any guide. Perhaps we are seeing the first sign of the descent of the formerly high-flying (at least in relative terms) Canadian economy.

  • JIm

    I think you need to write a new book; The End of Growth Revisited? Everybody is getting worked up about what has happened since the Recession but nobody is referencing your Book. People need to come to terms with what you wrote, get used to it and get on with it.

  • jim patterson

    this is just the normal 10 year or so of oil cycles. In 10 years time folks will come out again and say we are running out of oil again price will go up, the frackers will start up again and price will go down again

  • Doug

    My thoughts exactly. Oil is cyclical just like other industries, and ultimately everything goes full circle. Why is that ridiculously simple idea so hard for so many people to understand? I’ll sign off low and buy more XEG-T and USO-NY during these month late Boxing Day sales.

  • Gary

    How can a province that was pumping record amounts of oil for the last 10 years suddenly be in deficit after six months of price declines? Only a petro state with inept management could manage this. Charging far less for royalties and basically giving away their oil, no sales tax, showering oil companies with subsidies… This is the end of an era and Alberta will finally be forced to change, despite the many chances it has had. Maybe the north won’t be a total toxic dump if the province finally diversifies. Bring on $30 a barrel!

  • doug r

    Solar power installations go up by about 150% a year and it’s already over 1%. GM and Tesla are promising $35,000 electric cars with over 300km per charge by 2017. I don’t think oil is ever going to be quite as important ever again, at least not as fuel.

  • Doug

    With all this worrying about the future of oil, I figured I needed a vacation so I took a vacation to Thailand with a side trip to Cambodia. What did I see here? I flew from Toronto to Bangkok on a plane that burns JET FUEL. Once there I rode many taxis, tuk tuks, motorbikes, mini buses and a speed boat that run on GASOLINE. I also rode a few large buses, the Thailand State Railway, and a ferry to and from Koh Tao that are powered by DIESEL ENGINES. Tomorrow I plan to ride back to Bangkok on that Thailand State Railway which, as I said before, has DIESEL locomotives. Nowhere have I seen any of those modes of transportation powered by solar cells. I saw some e-bikes for rent here in Siem Reap, Cambodia but the are powered by, you guessed it, fossil fuel burning power generation. Any of you out there worrying about the future of oil should follow my example and also take vacation. Yes, in the long run oil use will go down, but not in the foreseeable future.

  • CanadaSlim

    Hilarious that this guy made millions of off The End of Growth, largely predicated on a sustained high oil price. For an economist, he’s a lousy student of economic data.

  • CanadaSlim

    By seeing every federal tax dollar its citizens pay flee to every other corner of the country.

  • Gary

    No, by corruption and inept management

  • Gary

    It is not a simple idea, we have had a structural change in the way oil is produced with tracking and we have had declining global growth. The game has changed.