2015 Will Be a Terrible Year for Alberta Oil

Less investment, less drilling, and possibly a recession: I'm no financial expert, but based on several reports from Canada's leading oil-industry stakeholders, there's no good news coming for Alberta's economy in 2015.

As you've probably heard, global oil prices are coasting just under $50 per barrel—about half the average price over the previous three years. Alberta's oil industry, which is centred on high-cost, low-payoff tar sands extraction, has a lot of money and jobs riding on the assumption that oil prices will bounce back.

But on Thursday, Alberta's premier said a bounce-back is not going to happen anytime soon. The Bank of Canada, the Canadian Association of Petroleum Producers (CAPP), and the Conference Board of Canada have all released economic forecasts this week—and right now, the outlook from all of them is pretty bleak.

For instance, a short-term review by CAPP predicts that oil companies' investment in western Canada will drop by a third in 2015. Energy-related investment, including investment in the tar sands, "will total $46 billion in 2015, down 33 percent from $69 billion invested in 2014."

CAPP, which is basically Canada's oil industry cheerleader, predicted slightly better investment numbers for producers involved solely in the tar sands: $25 billion in 2015, down from $33 billion in 2014. We've already learned tar sands mining and drilling won't suffer quite as much as fracking, because it's only economically viable with prices above $65 per barrel and the industry is largely made up of small, over-extended companies.

If oil prices remain low, the number of wells drilled in 2015 will also drop by 30 percent, according to the CAPP review. Production growth will be slower than in previous CAPP forecasts—about 65,000 fewer barrels per day in 2015 and 120,000 fewer barrels each day of 2016.

That means less work on the rigs, of course. Just last week Suncor announced it would cut 1,000 jobs, mostly short-term contract workers. Shell Canada announced 300 layoffs this month, and Canadian Natural Resources pledged it would slash $2.4 billion of its anticipated spending in 2015. The Canadian Association of Oil Drilling Contractors said net job losses in 2015 could be as high as 23,000.

Meanwhile, the Conference Board of Canada says the oil slump will translate to a loss of $4.5 billion in royalty revenues. That'll make budget gaps for Saskatchewan and Newfoundland governments, as well as Alberta and the feds. The Alberta government may even end up considering charging sales tax to make up for the shortfall.

It's the Conference Board report, titled "Regional Shakeup: The Impact of Low Oil Prices on Canada's Economy," that says Alberta will likely slip into recession in 2015. The think tank predicts that oil prices will bounce back just above $60 per barrel by the end of 2015—still a 40 percent decline over June last year. As a result, economic growth will slow by 0.4 percent across Canada as a whole.

At the same time of this brewing oil meltdown, the Bank of Canada has lowered its lending rate below one percent, hoping to encourage more borrowing and spending. Now set at an unexpectedly low 0.75 percent, the bank's prime interest rate cut may prevent a real estate crash in Alberta or at least help out businesses outside the tar sands. But one Canadian bank is refusing to drop its lending rates in step with the feds, and others may follow.

The Bank of Canada has said Canada's economy won't fully recover from the oil price shock until the end of 2016.

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