How will low oil prices affect Saskatchewan's economy?

CBC New, January 18, 2016 - With oil prices currently mired below $30 U.S. a barrel, many people in Saskatchewan are worried about what that will mean for the province's economy.

Saskatoon Morning host Leisha Grebinski talked to Rose Olfert, a professor with the Johnson Shoyama Graduate School of Public Policy at the University of Saskatchewan, to see what the effects of fewer jobs and less government revenue will mean for Saskatchewan.

How much lower could oil prices possibly go? 

I don't think anybody knows the answer to that question. There was a Conference Board of Canada meeting on this, and they were talking about lows of $20, and even $10 for a short period of time. I don't think anybody thinks it would stay there for long, but there's technically no limit.

What impacts are these low prices having on Saskatchewan right now? 

Lower prices means that there's going to be less new investment in the oil industry, and fewer service jobs related to the industry. I don't think production is being cut as such, but a lot of the jobs that characterize the boom are jobs related to construction and servicing the industry. So, that expansion has certainly slowed down. Maybe it will stay low for a long time. When that industry is in slowdown or in a decline, then other jobs are going to be affected as fewer people come into the provinces, fewer people are around for housing and the whole range of services. So, it can have a broad effect on the economy. In addition, provincial government revenues are somewhat dependent on oil sources. Of course, the biggest source of government revenues are taxation. Oil and gas may make up eight to ten per cent of provincial government revenues. So, if there's a 50 per cent fall in the price, that's potentially a three to five per cent decrease in government revenues. So, we'll probably see the impact in that in the next provincial government budget.

How worried should the people of Saskatchewan be? Alberta seems to be dealing with terrible job losses. How worried should we be here?

Both Alberta and Saskatchewan, in terms of provincial government revenue, they have about 20 per cent coming from non-renewable resources. That sector includes mining, oil and gas. In Saskatchewan, while we're very dependent on non-renewable resources, we have a little bit more diversification in that industry. We also have potash and uranium in there, whereas Alberta is primarily oil and gas. So, in that sense, our non-renewable resources sector is a little bit more diversified that Alberta's is. We have a little bit more insulation, then. A little bigger lag in response to it. But we will see a lot of the things we're seeing in Alberta. In fact, we already are. There are going to be layoffs. There are going to be slowdowns, even though as a percentage of our economy, oil and gas is going to be smaller than it is in Alberta. We have a lower risk of that size of impact.

Why is the price of oil dropping so much, and why now? 

There are many factors, and this has been going on since the fall of 2014. Part of it is the basics of demand and supply. We have a number of sources of increased supply. In the United States, we have seen the fracking industry take hold and expand production considerably. At the same time, the previously tightly controlled supply by OPEC, the Organization of Petroleum Exporting Countries, broke down a long time ago. They no longer seem to have an interest in limiting their output. So, they're pumping and pumping and pumping. On the demand side, we've seen a weakness in China's economy, although the economy in the U.S. is improving quite a lot and seems to be growing well, the rest of the world is still not growing very quickly, even in the countries where there is some growth. So, we have a slowdown in demand and an increase in supply.

Who benefits when the price drops like that? 

In Saskatchewan, we think about oil as a product, as an output that we have an interest in seeing a higher price for that output. For most of the world, and for most of the production that happens in any economy, oil is an input. So, if a cost of production is falling, then a lot of your production becomes more efficient and lower cost. So, all of those industries that are using oil now have lower cost outputs, that makes their products more attractive in the market. That makes consumers happy, because there are lower prices for those products.

What industries are you talking about?

Well, primarily manufacturing. The manufacturing sector in Saskatchewan is not very large, never has been, but centres in Ontario and Quebec could benefit from a lower price of oil. It just takes a while for those firms to gear up and begin increases of production, although we have seen some of that. In Canada, the big difference is always that industries are always distributed unevenly across the country. The west benefits when oil prices are high, central Canada benefits when prices are low.

The above portions have been edited for clarity and length. 

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