Monday 16 March 2020

Oil Capitals Hunker Down

To Calgarians, the city is starting to feel like a punching bag. Its primary industry suffers one body blow after another. Oil prices crashed at the end of 2014 as surprising growth in U.S. shale production boosted supply while OPEC refused to cut its output. Major investment firms, finally recognizing climate change, have been turning away from oil one after another. Teck Resources decided earlier this year to abandon its proposed Frontier tar sands mine. And now a double blow: the COVID-19 bug has dramatically reduced oil demand while Russia and OPEC end their production alliance and engage in a price war. One punch in the face after another leaves the oil capital of Canada reeling.

The degree of the assault is a surprise but the assault itself shouldn't have been. What is more surprising is that North America's other oil capital—Houston—is also taking a beating. After all, Texas is the home of the Permian Basin, a major producer of shale oil, the very product that has largely undone tar sands oil while doubling U.S. production in under a decade and making that country the world's largest producer. But of course the drop in prices brought on by that surge in supply has hit shale oil as well. And now the climate change and  COVID-19 effects and the Russia-OPEC price war are further hammering the shale oil business. And hammering Houston. The oil industry drives a third of the city’s GDP and directly employs a quarter-million workers. Shale oil producers, like tar sands producers, can't make money when crude sells at $31 per barrel.

Bobby Tudor, chairman of the Greater Houston Partnership, warned recently “The oil and gas business is not likely to be the same engine for Houston’s growth over the next 25 years that it’s been in the past 25 years,” and went on to add how climate change has put  the oil industry “out of favor at the moment, in most every corner of the investing and political world.” Familiar words to Calgarians.

Oil and gas aren’t going away overnight, but the handwriting is on the wall. Ninety-five percent of new capacity being added to the Texas grid is solar, wind or storage.

Both capitals ponder their futures as they struggle with their finances. Both talk about diversification, tossing around words like data science, software engineering, innovation centers and other greener industries. Both cities are well-educated and entrepreneurial so the potential is there. The early cultures of the two cities was Western. A trace of nostalgia remains in both cities illustrated by a certain penchant for cowboy boots and Stetson hats. It's now time for the boots and hats to mosey on down to greener pastures.

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