Between feast and famine, finding a third way to pay
How the energy industry could hedge against boom-and-bust cycles by focusing instead on longterm economic sustainability
THE PLUNGE IN COMMODITY PRICES HAS
rocked oil-dependent economies around the globe. And Alberta is no exception. Crime and suicide rates are up. Food bank shelves are empty, and animal shelters are full of pets strayed by owners who could no longer take care of them. As anyone living in a cyclical, resource-based economy knows, when the economic wheel turns, the spinoff is either a windfall or a face full of mud. There is little in between. But while resource industries can’t always control the trajectory of their commodity prices, there are levers and buffers at their disposal to control the speed and proximity at which they follow them. All of which is to say that the degree to which many companies – and yes, many governments – are getting hammered right now by low oil prices is a direct indicator of how seriously they heeded the lessons of previous boomand-bust cycles. But what if the industry could hedge against those cycles altogether – not just by taking a position in the oil futures market, but by orienting itself towards long-term corporate sustainability?
In an industry like energy, where the bulk of day-to-day operating costs are spent on labor, employees at all points along the production, refining, distribution and finance chain can command very healthy paychecks and bonuses for loyalty to a company when times are good. But their necks are first on the chopping block when the cycle turns again. The number of unemployed Albertans on government assistance rose to 61,300 in November 2015, more than twice the number of recipients just 12 months earlier, according to Statistics Canada. The province, and its financial fate’s attachment to the falling oil price, accounted for fully two-thirds of the national increase in new Employment Insurance claims last year. Alberta leads the nation in levels of household debt, and the $16-billion dollar hole in the province’s coffers that RBC is projecting over the next two years, dwarfs the red ink projected for the other provinces, and even surpasses Canada’s total federal debt projections over the same time period. That’s all due to the falling price of crude. And it comes after years of growth in an oil market in which the prevailing narrative was one of resource scarcity and limitless demand from emerging economies. Today, that narrative has been flipped on its head, giving way to anxiety over oil’s abundance. If anything, the new era of abundance has led to more volatility in the market, not less.
“Are companies really going to say, ‘No, we’re only going to pay our engineer $80,000,’ when the guy across the street is going to pay them $100,000?”
– TODD HIRSCH, CHIEF ECONOMIST FOR ATB FINANCIAL
Todd Hirsch, chief economist for ATB Financial, says a better way is possible. But, smoothing out those feast-to-famine curves comes with a catch: Companies have to co-operate. “Are companies really going to say, ‘No, we’re only going to pay our engineer $80,000,’ when the guy across the street is going to pay them $100,000?” Hirsch says. “No, they’re going to lose them all. It would only work if all of the companies agreed to do it, and you’re just not going to get that level of agreement.” Trying to teach discipline and moderation to a global commodities market populated by competing interests is, of course, impossible. Likewise, preaching those same virtues to any industry predicated on that market. But chasing corporate longevity over simple growth-for-growth’s-sake could be the proverbial bird-in-hand for those companies now finding themselves overextended and out of reach of the bush. “It’s hard to do if you’re the only one, but energy companies should discipline themselves,” Hirsch says.