Alberta’s oil sector has the pain with no gain

By Medicine Hat News Opinon on November 15, 2018.

Such is the state of the Alberta oil patch that this week a major industry player has called on the provincial government to mandate lower production levels.

The goal, to stabilize prices earned in the face of a transportation glut that discounts prices, seems straightforward enough, though entirely contradictory to how many view the industry.

It’s an issue of economics multiplied by politics, making a solution to Alberta’s structural problems with pipeline, export and the general economy much, much more complex and difficult to solve.

A good first step would be for Albertans to decide exactly what role the government should have in regulating and benefitting from the oilpatch.

For decades Alberta governments have been criticized, both in turn or in the same breath, for being too restrictive, too active, in the oil and gas economy or too lax.

This week Cenovus has announced it will scale back some production to lessen its exposure to gaping price discounts it receives compared to world and U.S. markets.

Without other export markets, Alberta’s crude is currently fetching $15 per barrel, about equal to a pack of cigarettes, compared to a U.S. benchmark of about $60.

Other major industry players have, as well, scaled back production to avoid losses. But leaving it entirely to market forces, one player dropping production acts to only firm up prices for those who keep production up.

Basically, smaller players would continue to get walloped, perhaps out of existence.

To accomplish such a production drop without government action would require unprecedented agreement, bordering on collusion, from market actors.

There’s also the question of whether a government of Rachel Notley could accomplish such a move.

At this point, despite general agreement with much of NDP policy from oilpatch, that’s not the public perception.

More tinkering, let alone direct market interference, would no doubt hurt the premier.

Similarly, Justin Trudeau’s standing in local polls is still hurt by the prime minister’s father attempting to tame the industry in the early 1980s.

The powerful business sector has long and loud argued it should be left to its own devices to shape and participate in markets.

Even today, free market economists see a cap production as something akin to swallowing a spider to catch the fly. They don’t like where this could be headed in terms of further intervention or trade implications, let alone investment chill.

Albertans in general have a knee-jerk reaction against government stepping in, but also get teary-eyed when recalling Peter Lougheed enacted such production caps to battle the National Energy Program.

As premier, Earnest Manning also managed production, limiting gas shipments east to reserve volumes for the needs of the expanding oilsands.

More recently, Albertans have shown support for limiting oil shipments to British Columbia, a punishment of sort for opposing the TransMountain Pipeline project.

That’s part of a general call from the public for government to ram home pipeline projects, despite murky options to do so.

On Wednesday, Alberta Trade Minister Deron Bilous announced a new billboard on Parliament Hill will have a running tally of revenue lost without greater export pipelines.

That’s worth $84 million per day, according to a ScotiaBank study, meaning about $6 billion has been lost already while the TransMountain approval process is redone.

There’s no easy short-term answers, however.

TransMountain construction could have started two years ago and still be two years from completion.

Alberta is close to announcing $2.5 billion in grants for refining and petrochemical diversification, but we’ll be in the 2020s before those projects are up and running.

There’s no escaping that Alberta is in the midst of a long, hard pivot for the sector.

If there’s going to be pain, shouldn’t Alberta gain?

(Collin Gallant is a News reporter. To comment on this and other editorials, go to https://www.medicinehatnews.com/opinions.)

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