On 8th December 2016, the Economics Society of Northern Alberta hosted their annual 2017 economic Outlook conference. The Association pulled together a list of eminent economists, a political scientist, and keynote speaker the environmentalist Avi Lewis. This post will summarize presentations of some speakers with a subsequent post covering the remaining speakers.
The first speaker was Dr. Avery Shenfeld, chief Economist of CIBC who provided a global outlook. Shenfeld observed that the “new normal” growth rate for western industrial economy is now 2% rather than 3%. In Europe he noted that the Greek crisis is not over and that there uncertainty concerning the restructuring of Italian banks. With respect to Brexit he acknowledged that UK- Europe trade is very significant and felt that the outcome would reflect the interdependence of those economies. In the case of China the expected rotation from capital spending (which has been an enormous) over to consumer spending is not happening yet. Therefore commodity prices have fallen as the Chinese growth rate slows and capital investment fall.
Turning to the oil markets, the CIBC economist commented that there were two significant headwinds. Firstly the large oil and storage (equivalent to about one year’s growth in demand) would be a negative on oil prices. Secondly, shale oil and gas can come on stream very quickly and well before any oil sands projects get online. This could mean that as oil prices move to the $60 a barrel range, $60 could then become a bit of a ceiling given additional supply from the shale oil.
In the case of the US economy Shenfeld e sees underlying strength in the retail and employment sectors and some rise in the wage levels. The housing the sector is expected to add to GDP growth since over the last number of years the number of housing starts has not met the demand for housing. With respect the financial markets he felt that the Federal Reserve would move very slowly to raise interest rates. He also noted that with the election of Donald Trump, trade protectionism is something to watch and this would be a problem for retailing and companies operating in different jurisdictions. The question of whether the US government’s deficit will rise significantly is an open one as Trump may face opposition in Congress on increasing deficits. One of the serious implications on Canada is the prospect of financial industry and energy industry deregulation which may make American companies more competitive (i.e. they would face lower compliance costs). This may draw investment into those sectors from Canada.
In the case of Canada, energy investment declines have put a significant dent in GDP growth over the last 2 years. The household sector is not expected to be an engine of growth as the huge contributions to housing from the BC and Ontario markets are unlikely to persist. Export growth remains weak due to loss of manufacturing capacity in the 2010 -13 period when the Canadian dollar is very high. At that time market share was lost to the United States and Mexico. The CIBC economist also observed that the posture of the Bank of Canada is to keep the Canadian dollar closed at around $1.35 range to encourage investment in Canada and to draw more investment to Canada.
The next speaker was Catherine Rothrock who is the Chief Economist for the Government of Alberta. Her slide presentation highlighted that the depth and the length of the oil price decline in 2014 to 2016 was similar to that experienced in the 1980s. Falling incomes have impacted negatively nominal GDP and over $60 billion have been taken out of the economy in terms of oil profits, government revenue and personal incomes. The Ministry see oil sands investment wrapping up in the next couple of years. With the completion of large commercial office properties in Calgary and Edmonton this year, commercial construction is likely to be weak over the next few years. That said, over half a million barrels of oil production from the oil sands will be coming on stream in the near term.
Market access via pipelines remains important for the long-term health of the Alberta economy according to Rothrock. She sees Alberta’s economic activity becoming more stable although the climate is still generally negative. They are seeing some pickup in business output. She posted some interesting slides with respect to unemployment levels of Alberta versus the national rate and the interprovincial migration rates. Interprovincial migration, while negative, has not gone negative nearly as much as believed would be the case. International migration has been strong.
On the housing front, the market remains sluggish. Return to GDP growth is expected to come from increased production the rebuild of Fort McMurray in 2017. Rothrock observed that despite the decline in Alberta’s economic output, nominal GDP per capita remains the highest in the country.
In the question-and-answer period that followed Shenfeld noted that there will be a competitive challenge to Canada if the Trump Administration lowers corporate taxes.
The next speaker was Antoine Halff from Columbia University who is an expert in global oil markets. He was rather bearish on the recent OPEC agreement to cut production. While there are some signs of rebalancing in the market, and there is a sense of optimism, that optimism may be misplaced. In assessing the OPEC agreement, he stated that Libya and Nigeria were exempt. With respect to Iran the numbers just don’t add up- it appears like a cut of 180,000 barrels a day but really it turns out to be an increase of 90,000, based on information from reliable secondary sources. In the case of the total output of the cartel, the members boosted production in the last few months to have a start a higher starting point before the cuts take effect. One other concern is that if Russia reneges, this will allow OPEC to abandon the agreement.
Halff also made some interesting comments about shale producers becoming the swing producer now in the global oil markets. The shale producers can turn on production fairly readily to take advantage of higher oil prices. He concluded by saying that OPEC faces an existential crisis. Firstly there is the supply revolution with the employment of new technologies and processes to exploit new finds. Secondly, has demand peaked with electric cars, tighter emission standards driven by climate change policies. Thirdly, the fragility of Petro States including Syria, Yemen, and Libya where there is open conflict. Other states such as Nigeria, Angola, Algeria and Venezuela are on the brink of conflict. States in these situations are problematic because it’s unclear how decisions are made and who makes those decisions. Another point identified was the growing opposition to fossil fuels illustrated by protests against both energy companies and pipelines. The bottom line is he does not see a strong price recovery until 2020 to 2022.
Kevin Birn from IHS Energy sees a slower pace of growth. His first point was that price recovery was to be gradual. Secondly, oil sands growth will continue but at a moderate pace. Thirdly, ultimately the future depends on their ability to compete with other oil producing region. He agreed with the previous speaker that compliance with OPEC was uncertain. Birn acknowledged that the oil sands were about 19 per cent more carbon intensive than the US average but operators were improving the performance. The call in operations at the oil sands plants have fallen by 8% in the past two years. For SAGD, operating costs have fallen by 40% while operating costs for mining facilities have fallen by 25% and the capital investment costs falling by 8% all relative to 2014. He also stressed that the takeaway capacity by pipelines was a key uncertainty for investment. Announcements today from CNRL and Cenovus showed some confidence in oil sands production.
In the question period the question of how to respond to a Donald Trump’s presidency was raised. Mr. Halff responded by saying that any decision should be assessed through the lens of “what is good for the U.S. economy and jobs.” Another interesting point was the large demand for storage that’s occurring since OPEC. does not have any more spare capacity. The growth in storage capacity is occurring mainly in Asia specifically China, Singapore, and Malaysia.
All in all a cautiously optimistic assessment of the Alberta economy. Particularly worrisome is the uncertainty created by the Trump presidency whose future actions on trade, de-regulation of the oil and gas and financial industries, lowering corporate tax rates, and environmental policy will have a huge impact on Alberta industries.