How can businesses cope with falling oil prices?
As of January 5, 2015 the price of oil fell below $50 a barrel, a five-and-a-half year low. While the average consumer may be happy paying less for gas, what does the falling price of oil mean for Canada, and more specifically Alberta? Furthermore, what do falling oil prices mean for businesses that are reliant on the commodity?
As the oil and gas industry in Canada represented 8.1% of Canada’s gross domestic product (GDP) in 2013, the largest percentage for goods-producing industries, Canada and Alberta are feeling a hit from the drop in oil prices. Originally, Finance Minister Joe Oliver was projecting a federal surplus of $1.9 billion for 2015 in addition to a $3 billion contingency fund; however, the volatility of oil prices may cut into this surplus by as much as $5 billion.
Similarly on the provincial level, since the economy at present is intrinsically linked to oil production and as oil and gas represented 26.5% of Alberta’s GDP in 2013, the provincial coffers are feeling strain. As of December 15, 2014 Alberta’s Premier, Jim Prentice, announced a hiring freeze in the public sector and spending cuts to discretionary items including travel and training. Additionally, he announced that Alberta could see as much as a $7 billion drop in resource revenue this year.
Private expenditures are also dropping in the oil and gas sector. Since the drop in oil prices, there has been a corresponding decrease in capital spending in by oil companies, although companies continue to stress that they are flexible and can revise plans when necessary.
Can a different perspective on falling commodity prices be taken by businesses?
As the Canadian dollar continues to fall with oil prices, Canadian goods look more and more attractive on the global scene. Businesses can take advantage of the low dollar and look into new strategies for exporting products to the US and other countries such as MINT or BRIC countries. The Chief Economist with Export Development Canada, Peter Hall says “A lower Canadian dollar and a surging U.S. economy could even boost export growth beyond Export Development Canada’s forecast [of 10% this year]”.
Local businesses may also get a boost from American spending as the falling dollar may make Canadian goods look more attractive as the U.S. dollar “buys more” in Canada. Additionally, lower oil prices translate into lower prices at the pump with can have positive effects for Canadians and Canadian businesses by freeing up money for additional spending or saving as transportation costs are reduced.
Falling oil prices can also be seen as a prime opportunity for diversification for companies that have a large oil and gas customer base. Other sectors that could be explored for new revenue opportunities are agriculture, transportation and health. Furthermore, new efficiencies can be sought out in the oil and gas sector. Additionally, in Edmonton with the announcement of the new arena and capital project spending estimated up to $4.8 billion in the area, many opportunities exist in Edmonton that allow for diversification of businesses primarily relying on the oil and gas sector.
How is your business responding to the drop in oil prices? Would you like to export or diversify? Contact firstname.lastname@example.org for more information on how Enterprise Edmonton can help your business.