Wage War

Be­tween feast and famine, find­ing a third way to pay

Alberta Oil - - CONTENTS - BY TODD COYNE

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.

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