Wikinvest Wire

A boomtown interrupted

Monday, December 29, 2008

After visiting Alberta a few times in recent years, "Canada's Texas" as some refer to it, and having heard local news stories about the goings-on at Fort McMurray, a story in today's Globe & Mail comes as no surprise given the recent plunge in oil prices.

It seems that the Canadian oil sands (also known as "tar sands" for obvious reasons) make a lot more sense (and money) when crude oil prices are closer to $100 a barrel than $40 a barrel. Why? As shown below, while this source of non-conventional oil does indeed yield very usable petroleum products, it's not like sticking a straw into the ground.
IMAGE These added production costs, at a time when no one is quite sure whether crude oil is headed to $25 a barrel or $125 a barrel, have cut dramatically short the job listings at Fort MacMurray, perhaps ending the days (at least temporarily) when a new high school graduate could earn $90,000 a year simply by going north to drive a dump truck.

The Globe & Mail has all the particulars in this report:

Hungry young tradesmen like Evan Brewer used to be as plentiful on the ground in Fort McMurray as chips at the Boomtown Casino. They'd get off the plane from Atlantic Canada and score big money in the oil sands.

Now Mr. Brewer feels like one of the last of an endangered species. “I just got in under the wire,” says the 23-year-old journeyman welder from Fredericton, as he lines up for the 5 a.m. breakfast of cereal, doughnuts and croissants at the Ace Inn, a favoured downtown hostelry for young men in work boots and hard hats.

With a base pay of $40 an hour and living allowances, Mr. Brewer is pulling down better than $3,000 a week, much more than he ever dreamed of back in New Brunswick, where he was living in his parents' basement.

But since he signed up at Suncor Energy Inc. in June, the floor has collapsed under the great oil sands bonanza.

Project after future project has been shelved or slowed down until, according to the companies, plunging oil prices stabilize and financing starts to loosen up.

Fort McMurray will not become a ghost town. You can still see the signs everywhere of an overheated economy. Highway 63 is a parking lot during rush hour as the workers stream out of the city toward the big oil sands projects. The slots at the Boomtown are busy even on a Monday night, and you can hardly find a hotel room with less than a week's notice.

But the mood is decidedly less bullish in the work camps and motels around Fort Mac, where the shadow population, the temporary workers flown in from everywhere, are insecure about the future.
There's lots more to this story which is well worth reading in its entirety.

So far, only temporary workers have been affected, however, that could change depending upon how long energy prices remain low. Home prices are still at astronomical levels (an average sale price of CAD$690,000), but this could change even faster.

Also of interest is the impact that the northern Alberta economy has had, and continues to have, on surrounding areas.This has been one heckuva boomtown over the last few years and it will likely be so again at some point, the big question is when.


Anonymous said...

At current price of about $40/b every producer in the world is in trouble.

Tar sands included. (To be precise, current tar sands production of about 3mb/day is OK but only slightly profitable at $40/b. What's in trouble is the new investment money (about $30B) committed into new production and planned to come online starting 2010. About half of this money won't make sense anymore.)

While producing more oil is extremely difficult, producing less is a cinch. OPEC is turning off the tab by 3mb/d by Jan 1 2009, and likely to cut another 3mb/d by March. With this much cut, price will rise again for sure. Most OPEC producer countries need $60-70/b price in order not to go into national deficit, so one can safely assume they will just keep cutting productions until price reaches at least $80-90/b. They'd love to stabilize it as $100/b.

This is why Alberta is just sitting tight, knowing the low price will last only half a year. And you know what, Alberta needs a cooling period anyway. Boom of recent years create too much economic nonsense which need to be flushed out.

  © Blogger template Newspaper by 2008

Back to TOP