Black gold; oil; the cause of wars, peace and anarchy. What do we do when we have too much of it? The P4Capital team speculates on the future of the economy when oil prices are bottoming out.
Amanda: The world runs on oil. Until it doesn’t. For the first time in a long while, the world’s demand for oil is less than what we can produce. What happens to the global economy when we have too much oil? The P4Capital team investigates in this weeks round table discussion.
Jim: Today’s topic is about the falling oil prices in Canada, and how that will affect our economy.
Shaheerah: Oil prices were really high since 2010, and that was because of all the demand from China. But then these high prices made the US and Canadian companies search for new to hard to extract crude oil. And now oil demand is actually falling because of all the weakening economies such as the ones in Europe. And so by late 2014, there was an over-supply of oil and the price started to fall. And then at the OPEC meeting, Saudi Arabia refused to cut production, and so that made the price drop even more.
Jeremy: David Rosenburg from the financial post wrote an interesting article, outlining different predictions initially at $100 per barrel, which we were looking at the beginning of the year, compared to $50 per barrel, which is roughly the current price. At $100 a barrel, stocks on the TSX, their earnings per share were forecasted 15% growth, whereas at $50 a barrel we’re actually looking at a projected 10% decline at earnings per share. The effects to your portfolio are probably going to be seen.
Jim: Just a bit of clarity Jeremy, are you saying on the overall basket of TSX stocks, or does it pertain to each individual stock holding.
Jeremy: Well, no I think that would be projected across the basket of holdings in the TSX index. And welcome back Jim.
Jim: Thank you, it’s great to be here.
Archana: Oil, in my opinion is obviously the biggest driving force behind all financial markets, and just like Shaheerah pointed out first, it was an oversupply situation – supply greater than demand. And now it’s the global slowing down of economies that we’re currently facing, as well as the uncertainy in Europe and the unrest in the middle east as well, which is all adding to the decline in oil prices.
Amanda: It’s interesting to me, over the last few years in Canada, Alberta has always been in the news for having a thriving economy because of their oil sands. I wonder how the decline in oil prices, and as Jeremy said the overabundance of oil supply in the world is going to affect the Alberta oil sands. Any comments?
Shaheerah: Yeah, so let’s talk about how this is going to effect the Canadian economy. So the oil and gas sector makes up 11% of Canada’s GDP, and the oil price per barrel dipped to below 50 bucks in January, and this is the lowest level it’s been since April 2009. And now that oil prices are dropping, Canada’s energy sector is cutting back. Now CIBC bank is actually giving a warning that Alberta, which is Canada’s biggest oil and gas exporter, is going to face a mild and temporary recession. And similarly to that, JP Morgans were that the oil collapse means there will be blood. Alberta’s economy is going to shrink by 0.3% and as well unemployment is going to be going up 6.8% according to the chief economist Avery Shenfeld. And this is not because of the production cut backs, but rather it’s because of all the Canadian oil companies that have been cutting back on their budgets and laying off all of their workers.
Jeremy: Yeah, to further on Shahherah’s point, the process of extracting gas from the oil sands is a pretty costly production. It only works at a certain price level. So at the prices where oil is at these days, you’re not going to find many new projects being greenlighted, so the existing ones are going to run their course, but there’s not going to be new ones underway which is going to affect the whole economy, specifically the banking sector which provides the funding on a lot of these new digs.
Archana: The situation in Alberta might actually be a go do thing for us here in Toronto, which traditionally has been a manufacturing hub. Activity might actually pick up here in Toronto; the contribution of the manufacturing sector to the overall economy might actually go up in the coming times.
Jim: The consumer price index is going to be very interesting to watch as the year goes on, because as cost per litre at the gas station has fallen so dramatically it’s actually putting hard dollars; green dollars back into the consumer market place. Those green dollars, one of two things is going to happen to them: either A Canadian’s will pay down more debt or B they will buy more things along the way. So for the hardships that Alberta is going to be facing, specifically the ones that are wildcatting, looking for new opportunities in the oil and gas sector, they’re going to be hit very hard. The existing production facilities, it’s more a function of the keystone pipeline going to be approved, yes or no? But it’s the CPI and the non-prairie provinces that I’m going to be very very interested in seeing.
Amanda: What do you mean by Wildcatting?
Jim: Wildcatting is exploring.
Jeremy: Probably not a great time to be selling your house in Alberta right now, especially in the Fort McMurray area.
Amanda: It might be a good time to buy a house though.
Jeremy: If you can afford it with oil at these prices.
Archana: Just like Jeremy had pointed out, oil extraction, the process itself, is quite expensive. Companies are obviously looking at other alternate products right from national gas to propane, and shale production in the US is also topping numerous lists. And overall, we’ve in fact seen a reduction in US oil dependence. From 2007, there’s been about 41% reduction in imports in the US.
Jim: That will probably lead to our next topic in our upcoming Podcast. “Is the overall global economy requiring less oil for its manufacturing and auto engines. It’s quite interesting to put your eyes into the crystal ball and say “Hmm, that in fact could be a game changer.”
That was the P4Capital team discussing the decline of oil and what it means for the Canadian economy. How much oil is too much? Want to know more? Check out our website and previous posts about Bitcoin at http://www.planet4it.com or follow us @p4capital. Thanks and see you next time.