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Plunging oil prices to have spillover effects onto rest of Canada

CALGARY – The effects of plunging oil prices on Alberta’s once red hot economy will stretch well beyond the oil laden province’s boundaries, touching everything from Ontario steel pipe producers to federal government coffers.

Crude prices settled below US$50 a barrel on the New York Mercantile Exchange for the first time in three years last week. That is only a third of its all-time high of $147 reached less than five months ago.

The languishing crude prices, combined an increasingly uncertain financial picture, have caused many oilsands producers in Alberta to scale back or delay their multibillion-dollar projects.

Economic growth in Alberta is expected to ebb to levels not seen in more than two decades. Job growth will level off after years of four or five per cent growth and housing prices in a once overheated market are tumbling.

“It will spill over on the national picture,” Scotiabank commodities specialist Patricia Mohr said.

Legal and accounting firms in downtown Toronto’s financial hub will be less busy in the coming years, as their Western Canadian clients take a breather.

“I’m sure there are many equipment manufacturers in Ontario who will be impacted also,” Mohr added.

Oilsands projects require an enormous amount of steel, much of which is manufactured in Ontario. Steel prices globally are expected to be lower – not just because of curbed activity in the oilsands, but because of a worldwide economic slowdown in general, Mohr added.

ShawFlex, a division of Toronto-based energy services company ShawCor Ltd.(TSX:SCL.A), provides electrical cables to many oil and gas companies, said sales representative Mark Sparano.

“Because the projects are typically six months to a year out, we’re seeing a minor slowdown, but nothing too major,” he said.

“We’re seeing a little bit of hesitation with some of the final purchase orders being placed, however our prospects are still looking fairly well.”

Finning International Inc. (TSX:FTT), a Vancouver-headquartered company that provides heavy equipment to the oilsands, will be busy in the Fort McMurray, Alta., area next year, said Tom Merinsky, vice-president of investor relations.

Established oilsands projects will keep pressing ahead, and new projects like Canadian Natural Resources Ltd.’s (TSX:CNQ) Horizon mine and Royal Dutch Shell’s Jackpine site are close to completion.

“They have equipment on order with us for their existing operations. We’ll continue to deliver that. We’ll continue to service that equipment,” Merinsky said.

As for the series of project delays that have been announced in recent weeks, Finning won’t feel the effects for a long time.

“Those won’t be business for us until they get much closer to getting into production. So that’s not current business for us. The equipment we would be selling them could be two years out before delivery is required,” Merinsky said.

Scotiabank’s Mohr said government revenues will be “hugely impacted” by slower energy development in Alberta, as Ottawa garners less in income taxes and corporate taxes.

Lower corporate taxes are a big part of why the federal government is expected to post a deficit of $3.9 billion in the 2009-2010 fiscal year starting next April 1, according to estimates from Parliament’s chief budget officer.

When oil prices started climbing in the past few years, it sparked a frenzy of construction activity in the oilsands. Energy companies scrambled to get enough workers to push their massive projects ahead.

Exhausting the Alberta market, companies brought in labourers from other parts of Canada and abroad.

“The boom that we’ve been experiencing here in Alberta isn’t really an energy boom, it’s a construction boom. So when the construction projects dry up, the work will dry up as well, not just in Fort McMurray, but across the province,” said Gil McGowan, president of the Alberta Federation of Labour.

“Without those construction jobs, it’s inevitable that we’ll see a huge drop in people coming from other parts of the country to find work here.”

The job situation will probably begin to deteriorate in Alberta in about six months time if the global market situation does not improve, McGowan said.

“When the current batch of projects are completed over the next six to 18 months, there won’t be a new batch of projects to replace them and provide employment for these thousands of construction workers.”

Even though workers from places like Newfoundland and Labrador stop flooding into Fort McMurray at the same rate, McGowan said he is not expecting a massive out-migration from the province.

“But only because there’s no better place to be,” he said.

Hamilton Spectator, Sunday, November 23, 2008