Into the oil-prices storm, like buffalo
The current fall in oil prices has engendered a predictable storm of economic and political commentary, some of it bordering on the hysterical. Until prices stabilize, there are two analogies, familiar to many Albertans but perhaps not to others, which might at least help to stabilize both the discussion of oil price movements and our reactions to them.
The first was used by my father when he was premier of Alberta to teach younger people like myself the most basic aspect of oil price swings. "Do the following four things," he would say, "First, find a tall building with an elevator; second, stand in front of the elevator for three minutes; third, observe that when the elevator goes up, it also comes down; fourth, observe that when the elevator goes down, it also comes up."
This, he maintained, was the inherent nature of oil prices, rooted in the complex interplay between supply and demand, which needed to be fully appreciated. He would then go on to offer two cautions: (1) Let us not become euphoric when prices are high and commit to plans, projects and investments that will be unsustainable when prices fall, and (2) Let us not panic or become despondent when prices are low, because "This, too, shall pass."
These cautions are even more relevant today than they were in the early days of the oil patch, when the magnitude of oil price fluctuations was much more modest. In the euphoria induced by $100-a-barrel oil, Alberta has become committed to per capita levels of spending on everything from health and education to infrastructure that simply cannot be sustained. A painful but necessary correction is in order. On the other hand, the prospect of $45-a-barrel oil should not be allowed to lead to panic and doom-and-gloom prophecies that only undermine investor, worker and consumer confidence, and delay the economic rebound.
The Canadian Association of Petroleum Producers, in a newly released industry review, predicts that "capital investment in Western Canada, including oil sands, will total $46-billion in 2015, down 33 per cent from $69-billion invested in 2014." A significant drop, but still a large number. The review also forecasts total Western Canadian oil production to be about 150,000 barrels a day higher than the total 2014 production of about 3.5 million barrels per day, with a similar rate of growth expected in 2016. In other words, production is still expected to grow.
And so, avoiding the extremes of euphoria and depression, what perspective, for both public and private sectors, is most conducive to weathering the storm of falling oil prices?
For this question, strange as it may seem, there is merit in looking to the buffalo - one of the original inhabitants of the Canadian plains - and the contrast between how they and range cattle react to a storm.
Range cattle turn their backs to the wind and run before the storm; buffalo face the storm and move through it. The consequence for range cattle is that they frequently get lost and prolong their time in the storm. The consequence for buffalo is higher initial stress as they head into the storm, but a keener appreciation of where it may be breaking and a quicker emergence from it.
Running ahead of the storm of falling oil prices involves turning our backs and trying to avoid its immediate consequences. Heading into the storm involves intelligent and decisive cost-cutting by both governments and businesses, a greater dedication to productivity and capitalizing on the opportunities that lower energy costs offer to consumers.