Alberta Bitumen Bubble and The Canadian Economy: Revisiting My Industry Analysis Case Study

Bitumen prices are low because the province has ignored at least a decade of warnings.

Over five years ago now, March 11, 2013, I published this mayo615 blog post on the Alberta bitumen bubble, and the budgetary problems facing Alberta Premier Alison Redford, and the federal Finance Minister Jim Flaherty at that time, both of whom were surprisingly candid about the prospect for ongoing long-term budgetary problems for both the Alberta and Canadian national economies. Fast forward five years to today and the situation has essentially worsened dramatically.  The current Alberta Premier Rachel Notley is facing another massive budget deficit, just as Alison Redford predicted years ago, and was forced to call a new election. My most glaring observation is that despite years of rhetoric and arm-waving, almost nothing has changed. Meanwhile, the Canadian economy is on the precipice of a predicted global economic downturn which could easily become a global financial contagion.

READ MORE: Alberta Bitumen Bubble And The Canadian Economy 

Today, the Tyee has published an excellent article detailing how and why this trainwreck of Alberta fossil fuel-based economic policy developed, and has persisted for so long without changing course.

Source: Alberta’s Problem Isn’t Pipelines; It’s Bad Policy Decisions | The Tyee

In 2007, an Alberta government warned that bitumen prices could eventually fall so low that the government’s royalty revenues — critical for its budget — would be at risk. Photo via the Government of Alberta. 

 

The Alberta government has known for more than a decade that its oilsands policies were setting the stage for today’s price crisis.

Which makes it hard to take the current government seriously when it tries to blame everyone from environmentalists to other provinces for what is a self-inflicted economic problem.

In 2007, a government report warned that prices for oilsands bitumen could eventually fall so low that the government’s royalty revenues — critical for its budget — would be at risk.

The province should encourage companies to add value to the bitumen by upgrading and refining it into gasoline or diesel to avoid the coming price plunge, the report said.

Instead, the government has kept royalties — the amount the public gets for the resource — low and encouraged rapid oilsands development, producing a market glut.

With North American pipelines largely full, U.S. oil production surging and U.S. refineries working at full capacity, Alberta has wounded itself with bad policy choices, say experts.

The Alberta government and oil industry is in crisis mode because the gap between the price paid for Western Canadian Select — a blend of heavy oil and diluent — and benchmark West Texas Intermediate oils has widened to $40 US a barrel.

Some energy companies have called on the government to impose production cuts to increase prices.

The business case for slowing bitumen production was made by the great Fort McMurray fire of 2015.

The fire resulted in a loss of 1.5 million barrels of heavy oil production over several months. As a result, the price of Western Canadian Select rose from $26.93 to $42.52 per barrel.

Premier Rachel Notley has appointed a three-member commission to consider possible production cuts, something Texas regulators imposed on their oil industry in the 1930s to help it recover from falling prices due to overproduction.

Oilsands crude typically sells at a $15 to $25 discount to light oil such as West Texas Intermediate. It costs more to move through pipelines, as it has to be diluted with a high-cost, gasoline-like product known as condensate. According to a recent government report, it can cost oilsands producers $14 to dilute and move one barrel of bitumen and condensate through a pipeline.

And transforming the sulfur-rich heavy oil into other products is more expensive because its poor quality requires a complex refinery, such as those clustered in the U.S. Midwest and Gulf Coast.

But the growing discount has cost Alberta’s provincial treasury dearly because royalties are based on oil prices.

Earlier this year, an RBC report pegged the loss at $500 million a year, while a more recent study estimates the losses could be as high as $4 billion annually.

While a few oilsands companies such as heavily indebted Cenovus say they are losing money due to the heavy oil discount, others are making record profits and say no market intervention or change is necessary.

The difference is those companies heeded the decade-old warnings and invested in upgrades and refineries to allow them to sell higher-value products.

Canada exports about 3.3 million barrels of oil a day. About half of that is diluted bitumen or heavy oil.

And the current dramatic price discount has divided oilsands producers into winners and losers.

The winners invested in upgrades and refineries, while the losers are producing more bitumen than their refinery capacity can handle or the market needs.

During Alberta’s so-called bitumen crisis, the three top oilsands producers — Suncor, Husky, and Imperial Oil — are posting record profits.

All three firms have succeeded this year because they own upgraders and refineries in Canada or the U.S. Midwest that can process the cheap bitumen or heavy oil into higher value petroleum products.

Imperial Oil, for example, boosted production at its Kearl Mine to 244,000 barrels in the most recent quarter but refined and added value to that product.

As a result, its net income for the quarter doubled to $749 million.

CEO Rich Kruger said that the collapse in bitumen prices was not a concern.

“Looking ahead, in the current challenging upstream price environment, we are uniquely positioned to benefit from widening light crude differentials,” he stated in a press release.

Suncor also reported that most of its 600,000-barrel-a-day production is not subject to the price differential because it upgrades the junk resource into synthetic crude or refines heavy oil into gasoline.

In its most recent business report, Husky reported a 48-per-cent increase in profits as cheap bitumen has fed its refineries and asphalt-making facilities.

The Alberta government knew this was coming.

A technical paper on bitumen pricing for Alberta Energy’s 2007 royalty review warned the province about the perils of increasing production without increasing value-added production.

“Bitumen prices, when compared to light crude oil prices, are typified by large dramatic price drops and recoveries,” it noted. Between 1998 and 2005, “bitumen prices were 63 percent more volatile than West Texas Intermediate prices,” it said.

Two things are apparent from the bitumen (BIT) and West Texas Intermediate (WTI) price series shown above. First, bitumen prices, when compared to light crude oil prices, are typified by large dramatic price drops and recoveries. In fact, over the period shown, bitumen prices were 63 percent more volatile than WTI prices. Image from 2007 Alberta government report.

The analysis added that “for bitumen to attract a good price, it needs refineries with sufficient heavy-oil conversion capacity.”

The province’s push to develop the oilsands quickly increased the risk, the report said. “Price volatility for bitumen, especially the extremely low prices that have been witnessed several times over the past several years, is the most obvious risk.”

And the report noted that increasing bitumen production posed “a revenue risk for the resource owner” — the people of Alberta. When the differential widens, Alberta makes less money on its already low royalty bitumen rates.

Companies can compensate for the price risk by buying or investing in U.S. refineries; securing long-term pipeline contracts; investing in storage or using contracts to protect them from price swings.

Many oilsands producers, including Suncor, Imperial, and Husky, have lessened their vulnerability to bitumen’s volatility by doing all of these things.

But the provincial government is more exposed to price swings, the report said.

“For the province, the variety of risk mitigation strategies that can be pursued by industry is generally not available. Therefore Alberta is absorbing a higher share of price risk, particularly where royalty is based on bitumen values.”

In 2007 Pedro Van Meurs, a royalty expert now based in Panama warned the government that its royalty for bitumen was way too low in a paper titled “Preliminary Fiscal Evaluation of Alberta Oil Sand Terms.”

Van Meurs noted that upgrading considerably enhances the value of bitumen and would generate more revenue for the province.

But that did not appear to be the policy the government was pursuing, warned Van Meurs in his report to the government.

Low royalties “raise the issue whether it is in the interest of Alberta to continue to stimulate through the fiscal system such very high-cost production ventures,” wrote Van Meurs, a chief of petroleum developments for the Canadian government in the 1970s.

Charging higher royalties would not only slow down production and avoid cost overruns in the oilsands but also encourage “upgrading projects with higher value-added opportunities,” he wrote.

But Alberta succumbed to sustained oil patch lobbying in 2007 and ignored Van Meurs’ advice.

As a result oilsands royalties remained low and there was little incentive for companies to add value or build more upgraders and refineries.

In 2009 the province’s energy regulator said in an annual report on supply and demand outlooks that low bitumen prices were a direct consequence of overproduction.

Planned additions for upgrading and refining would resolve the problem in the future.

But after the 2008 financial crisis, planned upgrades in Alberta did not materialize.

With no provincial policy encouraging value-added processing, the industry took a strip-it-and-ship-it approach on bitumen and depended solely on pipelines to deal with overproduction.

Robyn Allan, an independent B.C. economist and former CEO of the Insurance Corporation of British Columbia, says the 2009 report by the energy regulator clearly shows the Alberta government knew the risks of overproduction.

“It won’t matter how many pipelines are built if oil producers continue to increase the amount of low-quality product they pump from the oil sands. Pipelines do nothing to improve quality and with new regulations on sulfur content, the world is telling us the downward pressure on heavy oil prices will only get worse,” said Allan.

In 2017, only 43 percent of the bitumen produced was actually upgraded in Canada while 57 percent was shipped raw to U.S. refineries.*

Sorry Alberta, BC Will Not Pay for Your Bungling

READ MORE 

As bitumen prices plunged this year, U.S. refinery margins jumped to record levels.

According to a Nov. 6 article in the Wall Street Journal, Phillips 66, a major buyer of cheap Canadian bitumen, ran its refineries at 108 percent of capacity and was “earning an average $23.61 a barrel processed there.” Profits jumped to $1.5 billion, an increase of 81 percent over last year.

“U.S. refining has really gone from being a dog to being a fairly attractive business model,” one consultant told the Wall Street Journal. “I don’t think that’s going to change any time soon.”

Another beneficiary of Alberta’s no-value-added policy has been the billionaire Koch brothers.

They own the Pine Bend refinery in Minnesota, which turns more than 340,000 barrels of Canada’s crude into value-added products every day.

A widening of the price discount of heavy oil by just $15 adds an additional $2 billion in windfall profits a year for Koch Industries, one of the most powerful companies in North America.

The risks of Alberta’s policy of shipping raw bitumen to U.S. refineries was outlined again during the province’s 2015 royalty review, which like the 2007 report, resulted in little change due to successful industry lobbying.

In 2015, Barry Rogers of Edmonton-based Rogers Oil and Gas Consulting warned the government that low royalties for bitumen simply encouraged the industry to export the heavy oil to U.S. refineries with no value added in Canada.

“By not charging a competitive fiscal share Alberta is, in fact, subsidizing the industry. This gets government directly into the business of business and removes the benefits of market-priced signals — leading to reduced innovation, higher costs, reduced competitiveness, a transfer of economic rent from resource owners to industry and reduced economic diversification.”

Rogers added that the current policy might benefit a few powerful companies but was “a disaster for the overall industry, and, therefore, a disaster for Alberta — both for current and future generations.”

New Accelerate Okanagan Report On Tech Industry: Devil Is Again In the Details

Problems Persist With New 2016 Accelerate Okanagan “Tech Industry Analysis”

 Accelerate Okanagan should be commended for publishing a document, the stated goal of which is to “assist in attracting new talent, companies, and potential investors to the Okanagan, as well to inform policy makers and the media.”  Such reports are commonly used to promote a community or region’s economy. However, as with the earlier 2015 report, there are persistent issues, particularly with the industry definition and methodology of the study.  The result is questionable data and numbers that simply do not pass a basic “sniff test.” Accepting the results of this study as published may only serve to mislead community leaders on planning, and mislead prospective entrepreneurs considering relocating here.

I taught Industry Analysis at the University of British Columbia, and my entire career has been in high-tech in Silicon Valley and globally, beginning with many years at Intel Corporation, so my assessment is exclusively from a professional perspective. A PowerPoint presentation of my work in this area is posted on this website, under the heading Professional Stuff.

The report begins by explaining that the study was completed by an unnamed third party, apparently affiliated with Small Business BC.  A review of the Small Business BC website, staff, and services indicates the organization is almost exclusively organized and resourced to provide services only to individual small businesses. For example, scanning SBBC’s “Market Research” heading, it indicates that its services are focused entirely on smaller scale research for an individual small business, not a large scale analysis of an entire industry in a region.  Industry analyses of such scale are better suited to a local educational institution like UBC, with all the requisite skills and resources.  Though I have no inside knowledge, it seems reasonable to surmise that some degree of budgetary constraint and political influence were involved in the selection of SBBC, and a desire to emphasize local promotion over objective accuracy.

With regard to methodology and industry definition, the Report states that it follows the methodology of British Columbia’s High Tech Sector Report, the most recent of which is from 2014. A closer look at this methodology can be found on the provincial government website. A separate document is listed, “Defining the British Columbia High Technology Sector Using NAICS,” published fifteen years ago in 2001. My review of this document indicates that while it offers some useful discussion, it is seriously out of date and in need of revision.  A more professional approach would have required the development of a more current methodology relevant to the Okanagan situation. The BC methodology document does provide some very cogent cautionary remarks on high-tech industry definition and methodology:

The “high technology” sector is a popular subject of discussion and analyses, partly because it is viewed as an engine of growth both in the past and for the future. However, the high-technology sector has no specific and universally accepted definition. Defining and measuring the high technology sector can be done as part of basic research at the level of individual firms. A second, more “modest” approach uses pre-existing data collected on “industries” which are defined for general statistical purposes. The challenge is to determine which of these industries warrants inclusion in the measurement of the high technology sector.

The AO Report author seems to have accepted both approaches. Page 4 of the Report explains that the author decided to also include “the previous survey undertaken by Accelerate Okanagan.”  The previous AO survey was simply a Survey Monkey survey submitted by individual local businesses. The results were apparently compiled without additional professional judgment applied, or follow-up contact with companies by phone or other means and cross-referencing with the more “modest” macro data methodology mentioned in the 2001 BC document. IMHO, if my assumptions are correct, the Survey Monkey data should have been thrown out as unreliable, or regenerated with much greater scrutiny and judgment applied.

Then there is the issue of Kelowna as an employment market, as noted in the recently reported Bank of Montreal (BMO) and BC Business low national and provincial rankings of Kelowna’s employment market. These issues have also been reported in KelownaNow.  Hootsuite, whose founder is from Vernon, consciously chose Vancouver to start his company.  CEO Ryan Holmes openly admitted that he did not base Hootsuite in the Okanagan because he knew he would not be able to attract the necessary talent here. It is also important to note that a significant number of local business and community leaders met with the BC Labour Minister and reported that their primary concern was a lack of Temporary Foreign Workers, not economic development or the growth of the local high-tech industry.

The AO Report touches on these issues only very tangentially and indirectly in the closing pages. A more credible approach would have been to confront these local problems directly, citing the BMO report for example, and what AO and the community plan to do about it.  Clearly, there are unresolved and ignored contradictions with the AO report that damage its credibility and usefulness.

Finally, this week’s media coverage of the report has died down, having duly reported all the desired sound bytes, but a Google search shows that the media coverage has so far been nearly exclusively from the local Okanagan media which does not meet the stated goal of the AO effort to broadcast the promotion beyond the Okanagan.

Read the complete AO September 2016 report here:

Click to access Economic_Impact_Study_2015_Edition.pdf

MAYO615 REPOST from January, 2015:

AO Tech Industry Report Lacks The Rigor Necessary To Give It Much Credibility

Read the AO January 2015 press release and access the full report here

The AO report’s “economic impact” conclusions are based on 2014 Survey Monkey voluntary responses, which are problematic due to an apparent lack of critical assessment. The report does not follow the kind of rigorous industry analysis performed by leading technology consultancy firms like International Data Corporation (IDC) or Gartner. The definition of an “industry,” for example the “automobile industry in Canada,” involves broad activity around all aspects of “automobiles,” but at some point, firms like Kal Tire or “Joe’s Brake Shop” might be excluded from a definition of the automobile industry.  The report does not mention the rigor applied to this industry analysis, so the question is left open, “What exactly is the “tech industry” in the Okanagan?”  A well-defined $1 Billion industry is the mobile advertising industry in Canada.  Is that what we have in the Okanagan? By way of comparison, I reported on New Zealand’s Ice House tech incubator economic impact report, which has much greater credibility.  The AO report is essentially claiming that the Okanagan technology economy is more than twice the size of New Zealand’s…That’s too big of a leap of faith for me. Read New Zealand’s Ice House Startups Achieve Impressive Results and contrast it with the AO report.

Then there is the issue of Kelowna as an employment market, as noted in the recently reported Bank of Montreal (BMO) and BC Business low national and provincial rankings of Kelowna’s employment market. These issues have also been reported in KelownaNow. Clearly, there are unresolved contradictions with the AO reports.

Read More: Kelowna’s Low Jobs Ranking

Read More: Okanagan economy likely to worsen next year

I offer a summary view of “industry analysis” here: Industry Analysis: the bigger picture

OECD Slashes Canadian Economic Forecast Yet Again

One day after federal Finance Minister Joe Oliver deflected concerns over Canada’s poor economic showing to start 2015, the OECD announced that it now projects Canadian growth this year at about 1.5 percent, down sharply from 2.2 percent during its previous temperature reading in March and a full percentage point below its forecast last November. Oliver on Tuesday told a Parliamentary Committee that he does not anticipate a recession.

Carolyn Hyde of Bloomberg News discusses the revised OECD global economic forecast, and further negative impacts to the Canadian and U.S. economies

Today, June 3rd, the Paris-based body has also adjusted its timetable for the start of monetary tightening by the Bank of Canada to early-2016 from mid-2015.

Commenting on the main risk to even its reduced Canadian forecast, the OECD cites “a disorderly housing-market correction, particularly given high household debt, which would depress private consumption and residential investment and could, in the extreme, threaten financial stability.”

Other potential negatives for the Canadian economy range from a further fall in oil prices and slower than expected growth in the United States, to a sudden Chinese slowdown, which could translate into “a greater and more protracted than expected deceleration in activity, including weaker investment, exports and private consumption.”

Potential Canadian pluses include a recovery in oil demand and prices and higher than anticipated growth in the United States and other important export markets.

Royal Bank of Canada is more upbeat in a forecast also released today. The bank predicts a much better second half for the Canadian economy, with growth reaching 1.8 percent this year and 2.6 percent in 2016.

RBC acknowledges that investment will be weak for the rest of the year, as energy companies slash capital spending by about 30 percent. But the bank expects other sectors to pick up part of the slack, thanks to low financing costs and stronger demand.

But the OECD worries that investment everywhere will remain below the level of previous recoveries, partly because of weak consumer demand, continuing uncertainty about fiscal policies and a lack of structural reforms in several key economies.

“Despite tailwinds and policy actions, real investment has been tepid and productivity growth disappointing,” the OECD report says.

“By and large, firms have been unwilling to spend on plant, equipment, technology and services as vigorously as they have done in previous cyclical recoveries.

“Moreover, many governments postponed infrastructure investments as part of a fiscal consolidation.”

CNN Money: Canada’s Economy Is A Disaster From Low Oil Prices

The evidence of a Canadian economic train wreck just keep rolling in. This report from CNN Money mentions last week’s Bank of Canada dismal report on the Canadian economy, and goes on to add additional economic data and comment from respected investment banks around the World. The one glaring omission is any political discussion of how Canada got into this mess, and who is responsible for it.

Canada’s economy is a disaster from low oil prices

By Nick Cunningham for Oilprice.com @CNNMoneyInvest

Low oil prices are threatening the health of Canada’s oil and gas sector, which in turn, is causing turmoil in Canada’s economy as a whole.

The fall in oil prices is forcing billions of dollars in spending reductions for Canada’s oil and gas industry. In February, Royal Dutch Shell (RDSA) shelved plans for a tar sands project in Alberta that would have produced 200,000 barrels per day. Last year, Petronas put off plans to build a massive LNG export terminal on Canada’s west coast.

Moody’s recently predicted that very few of the 18 proposed LNG projects in Canada will be constructed. Most will be canceled. The oil industry is expected to lose 37% of its revenues in 2015, or a fall of CAD$43 billion.

That is bad news for Canada’s oil and gas sector. But even worse, Canada’s overdependence on oil and gas will threaten its broader economy now that the sector has gone bust.

The severe drop in oil prices has made the Canadian dollar one of the worst performing currencies in the world over the past year. The “loonie” used to trade at parity to the U.S. dollar, and even appreciated to a stronger level a few years ago, but now a Canadian dollar gets you less than 80 U.S. cents.

Disaster levels: While a weaker currency has complicating effects on the economy (it will also boost exports, for example), on balance low oil prices have been an unmitigated disaster for Canada’s economy.

Canada’s GDP “fell off a cliff” in January of this year, according to a report from Capital Economics, a consultancy. Canada’s economy could be shrinking by 1% on an annualized basis. For the full year, Capital Economics predicts growth of 1.5%, followed by a weak 1% expansion in 2016.

“Overall, unless oil prices rebound soon, the economy is likely to struggle much longer than the consensus view implies, even as the improving US economy supports stronger non-energy exports,” Capital Economics concluded. Other economic analysts agree.

Nomura Securities worries about “contagion,” as the collapse in oil prices lead to less drilling, declining demand for supporting services, falling housing prices, a sinking stock market, and weakness in other sectors like construction and engineering. The pain could be concentrated in Alberta in particular, where household debt averages CAD$124,838, compared to just CAD$76,150 for the rest of Canada. Now with the rug pulled out beneath the economy, there could be a day of reckoning.

High-cost oil: Much of Canada’s oil production comes from high-cost tar sands. When they are up and running, tar sands operations can produce relatively more stable outputs than shale, which suffers from rapid decline rates. But, nevertheless, tar sands are extremely costly, with breakeven prices at $60 to $80 per barrel for steam-assisted extraction and a whopping $90 to $100 per barrel for tar sands mining.
Even worse, Canada’s heavy oil trades at a discount to WTI, which makes it all the more painful when oil prices are low. The discount is nearly $12 per barrel below WTI right now. Some of that discount is the result of inadequate pipeline capacity, trapping some tar sands in Canada. The stalled Keystone XL pipeline is the most controversial, but not the only pipeline that has been blocked. The head of Canada’s Scotiabank recently warned that the inability to build enough energy infrastructure, plus Canada’s near total dependence on the U.S. market, puts Canada’s economy at risk.

The Bank of Canada surveyed the top executives at Canada’s 100 largest businesses found that two-thirds of them think it is critical to diversify the economy away from oil. With such a dependence on commodities, the oil bust has rippled through the economy, forcing layoffs and increasing unemployment. Consumer confidence is low, and hiring is at its lowest level since 2009, during the immediate aftermath of the global financial crisis.

Of course, diversification can only be achieved over the longer-term. In the near-term Canada’s fate is tied to the price of oil.

Alberta Bitumen Bubble and The Canadian Economy: Industry Analysis Case Study

Over two years ago now, March 11, 2013, I published this mayo615 blog post on the Alberta bitumen bubble, and the budgetary problems facing Alberta Premier Alison Redford, and the federal Finance Minister Jim Flaherty at that time, both of whom were surprisingly candid about the prospect for for ongoing long term budgetary problems for both the Alberta and Canadian national economies. Fast forward two years to today, and the situation has essentially worsened dramatically.  The current Alberta Premier Jim Prentice is facing another massive budget deficit, just as Alison Redford predicted two years ago, and has been forced to call a new election. The most glaring difference in my mind is that there is no Jim Flaherty, and there is no candid talk coming from the current Finance Minister, Joe Oliver, or anyone in the Harper government, on this issue or when a new federal budget may be expected. Meanwhile, according to the Bank of Canada’s most recent report, the Canadian economy continues to plummet into a black hole.

READ MORE: Alberta Bitumen Bubble And The Canadian Economy

Originally posted March 11, 2013:

The Canadian media (CBC, Globe & Mail, Canadian Business) have been buzzing with analyses of Alberta Premier Alison Redford’s  pronouncement last month that the “Bitumen Bubble,” is now crashing down on the Alberta economy, and potentially the entire Canadian economy. The Alberta budget released last Thursday, March 7, acknowledged a multi-Billion dollar deficit from this year, and “even larger declines in the next several years,” due to forecasts for significant price decreases for “Western Canada Select“ (WCS), the market term for the Alberta oil sands. This is contrasted with “West Texas Intermediate“ (WTI) which is also known as the standard for “light sweet crude,” which is much cheaper to refine.   Canadian Finance Minister Jim Flaherty echoed the impact of reduced oil sands revenue on the federal budget, by warning of significant cutbacks in federal spending as well.  The impact of this sudden change in the prospects for the Canadian petroleum industry and for government oil tax revenues, will likely also have serious implications for the BC economy, jobs growth, business investment, consumer spending: essentially the Canadian economy as a whole will suffer.

As an Industry Analysis case study for Management students, how did this happen, why was it not foreseen?  Why weren’t foresighted  policies put in place, and what are Alberta and Canada‘s strategic options now?

The June 25th, 2006, CBS News 60 Minutes report by senior CBS News Correspondent Bob Simon, can be taken as a convenient departure point for this analysis.

Video (1min 52 sec.) CBS 60 Minutes: 6/25/2006: The Oil Sands

The so-called “proven reserves” of oil in the Alberta oil sands are estimated to be 175 Billion barrels, second only to Saudi Arabia’s estimated 260 Billion barrel reserve. In the CBS video, Shell Canada CEO, Clive Mather estimates that the total may be as large as 2 Trillion barrels, or eight times that of Saudi Arabia. The CBS 60 Minutes report at the time in 2006, was considered so positive, that it was eventually shown in an endless loop in the foyer of Canada’s Embassy in Washington D.C., at Canada House in London, and elsewhere around the World.   The Alberta oil sands were seen as the harbinger of a great new era of Canadian economic progress and wealth.

Since that time a variety of external market factors, and long-standing failures of Canadian government policy have converged like Shakespeare’s stars, to turn this Pollyanna scenario into the national disaster it has become for Canadians.

Perhaps the single most important point in this discussion is that Canada has historically been a natural resource based economy, which has led to complacency and neglect of investment in innovation.  Innovation is the most important determinant of business competitiveness and economic prosperity in a world of global markets and rapid technological change.  Canada’s overall investment in R&D in science and technology has been below the OECD average for decades, and continues to decline year to year.  As a consequence, Canada has also fallen sharply behind the United States in productivity.  Essentially, there has been a “robbing Peter to pay Paul” mentality in Canada with regard to investment in the future of the Canadian economy. So long as we can simply dig a hole and ship the rocks or oil overseas we are doing just fine, thank you very much!

In a serendipitous coincidence, the current events in Venezuela have provided a parallel to the petroleum industry issues in Canada. Yesterday, the HBR Blog Network published a post by Sarah Green. Ms. Green interviewed Francisco Monaldi, Visiting Professor of Latin American Studies at the Harvard Kennedy School. Professor Monaldi is a leading authority on the politics and economics of the oil industry in Latin America.

During the HBR Blog interview, Professor Monaldi referred to the “resource curse” of Venezuela, also citing Canada and Saudi Arabia as suffering from the same malaise. Venezuela has done all the wrong things under Chavez, and consequently the Venezuelan economy is in shambles. Monaldi cited Chile, who also had a natural resource boom, but are creating a national stabilization fund by not putting all of the money back in the economy at once, a counter cyclical policy almost unheard of in Latin America. A similar scenario of reinvestment in innovation has occurred in New Zealand, whose government has sought to reduce its vulnerability to over-reliance on natural resource exploitation.

A Canadian Broadcasting Corporation interview March 7th on The Current with oil industry expert Robert Johnston, and CBC business columnist Deborah Yedlin, revealed that the Venezuelan Orinoco crude is actually very similar to Alberta WCS, but it does not require massive destruction of the land. Transportation routes to U.S. refineries designed to deal with extra heavy crude have been up and running for years.  The U.S., despite the political tensions with Venezuela, is currently the single largest customer for Venezuelan extra heavy crude.  In The Current interview yesterday, both Johnston and Yedlin admitted that the Alberta oil industry was ” very uneasy”  about their competitive situation vis-a-vis Venezuela.  Yedlin also underscored Canada’s “resource curse” and the failure to diversify Canada’s investment in innovation and technology.

Listen to the CBC interviews: http://www.cbc.ca/thecurrent/episode/2013/03/07/the-future-of-venezuelas-oil-industry-and-what-it-means-for-albertas-oil-patch/

Alberta oil sands, by contrast, are completely land locked, and the Alberta producers are in the midst of an unsavory political wrangle over two pipelines, which has brought undesired attention to the other problems with Canadian bitumen.  Without at least one pipeline, the Alberta oil sands industry is in a questionable state. Should the United States elect not to approve the Keystone XL pipeline to the Gulf of Mexico, Canada’s only viable remaining option would be to sell the oil to China.  Some Canadians are taking the position that Canada “should” sell the oil to China.  The Harper government is now hypersensitive to China’s interest in the oil sands. Others have suggested that we should refine the oil ourselves, but it is cheaper to send it to Texas than to build refineries in Canada. According to Yedlin, Canada is now locked into the urgent need for the pipelines, with no other options or strategy.

The argument can be made that Canada should have been implementing policies like those in Chile or New Zealand years ago, anticipating the boom and bust of the global petroleum market, and socking away money to deal with it.

The most recent 2012 OECD Economic Survey of Canada also serves to underscore the urgent need to change our national policies with regard to natural resource exploitation and investment in innovation to improve our performance in global productivity.

As the oil boom and high value of the loonie have pushed wealth westward, Canada’s productivity growth has been relatively flat in recent decades, and has actually dropped since 2002. Meanwhile, as the OECD observes, productivity growth south of the border has risen by about 30 per cent in the last 20 years — a gap that is causing Canada to lose competitive ground.

“Canada is blessed with abundant natural resources. But it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and an equitable distribution of the fruits of growth,” study author Peter Jarrett, head of the Canada division at the OECD Economics Department, said in a press release.

Meanwhile, yesterday, Friday, March 8th, the Globe & Mail published a scathing criticism of federal Natural Resources Minister Joe Oliver for characterizing the Alberta oil sands industry as the “environmentally responsible choice for the U.S. to meet its energy needs in oil for years to come.”  G&M Journalist Tzeporah Berman wrote, “At a time when climate change scientists are urgently telling us to significantly scale back the burning of fossil fuels, having a minister promote exactly the opposite really does feel like being told that two plus two equals five.”

Our most respected national journal simply reached the end of its patience with Canadian government “doublespeak.”  Every independent study, including one from the U.S. Department of Energy, has found that the oil sands are one of the World’s dirtiest forms of oil, producing three times more emissions per barrel produced and 22 per cent more greenhouse gas emissions than conventional oil (when their full life cycle of emissions, including burning them in a vehicle are included).  The problem is simple: the massive “energy in versus energy out” equation simply does not work for oil sands.  Large amounts of natural gas and water are required simply to prepare the bitumen for transport to refineries. Yet our government continues to wave its arms in a desperate attempt to divert attention from the facts, rather than to deal with the facts. One would think that our national government by now would have a reality-based strategy to deal with major economic and political issues of this scale.

This discussion has barely touched on the opposition to the two pipelines, Keystone XL and Enbridge Gateway, attempting to move the landlocked tar sands out of Alberta. This is a strategic market issue that should have been addressed years ago, but was not.  The thorny issues of both pipelines are now a rod for Alberta’s own back. Considering the market competitor Venezuela, with comparably unattractive “extra heavy crude,” but having existing transport, the prospects for Alberta are not favorable, and it has finally sunk in for Alberta oil executives.

The long awaited U.S. State Department Draft Environmental Impact Assessment (DEIA) on the Keystone XL pipeline, released early this month, was written by oil industry consultants which have raised significant concerns of a serious conflict of interest in their findings. The Executive Summary of the State Department DEIA took a decidedly neutral position, saying that the pipeline would have “no effect” on the development of the Alberta oil sands. But buried in the report were findings that argue against the need for the pipeline.  The recent developments in Venezuela and the increasing energy independence of the United States were not factored into their findings.

The DEIA specifically evaluated what would happen if President Obama said “no” and denied Keystone XL a permit. It concluded that not building the pipeline would have almost no impact on jobs; on US oil supply; on heavy oil supply for Gulf Coast refineries; or even on the amount of oil sands extracted in Alberta. If these findings are accurate, then one must ask why it is necessary to build the Keystone XL pipeline.

So in conclusion, how could the Canadian federal government not have foreseen this calamity, and prevented it?  Could it have been the giddy euphoria of the 2006 CBS 60 Minutes report?   The only best solution, investing government oil revenue into innovation and technology R&D, may no longer be a viable option.

In such a situation, what would you do to address this crisis for the Canadian economy?

Bank of Canada & OECD See Ever Widening Economic Impact of Oil Collapse

The Bank of Canada’s Spring 2015 Business Outlook Survey (link to complete report below) released this week, gives more reason for serious concern regarding the economic prospects for all Canada, and the widening impact of Canada’s “natural resource curse”: it’s fossil fuel based economy. The report points to a significant increase in business pessimism about the economy as a whole, well beyond the oil economy, which is causing business to significantly reduce plans for capital spending and hiring. As I pointed out previously, the impact of the oil economy collapse is likely to reverberate throughout the Okanagan. The BofC report suggests that the impacts will be even deeper and more diverse. The report also looks to greater macroeconomic impacts: longer term weakness and volatility of the loonie. With Canadian interest rates at an all time low there is even the prospect of deflation. The report’s optimistic expectations for some upside from a robust U.S. economy have vanished this week, with projections of zero growth in the U.S. economy in 2015.

Bank of Canada survey shows oil dimming business confidence

Read the complete Bank of Canada Report here: Business Outlook Survery – Spring 2015

Read about OECD Composite of Leading Indicators: OECD marks slowdown in Canada, even as other economies recover

Hiring intentions drop to lowest since 2009 in central bank’s quarterly scan of big companies

REBLOGGED from the CBC:  Pete Evans, CBC News Posted: Apr 06, 2015 11:46 AM ET Last Updated: Apr 06, 2015 9:29 PM ET

The Bank of Canada says cheaper oil prices are hurting sales forecasts and starting to hit confidence in industries far beyond the energy sector.

In its quarterly Business Outlook Survey, the central bank surveyed 100 representative companies across various Canadian industries and found that broadly speaking, cheaper oil has reduced sales expectations and cut into confidence in doing things like investing in new equipment and machinery, and possibly hiring new staff.

“More businesses than in previous surveys anticipate an outright decline in sales volumes,” the report said.

The survey interviewed business owners between the middle of February and the middle of March. The ongoing slump in oil prices had been underway for several months at that point, but it’s worth noting that Monday’s report is the first such survey since the central bank surprised markets with a rate cut at the end of January.

‘The oil price collapse is taking a toll’– TD Bank’s Leslie Preston

The survey “showed that firms are quite pessimistic about expanding their capacity over the next year,” TD economist Leslie Preston said. “The oil price collapse is taking a toll on Canada’s economy.”

The Bank of Canada’s quarterly survey suggests that gloom in the oil patch is starting to spread into different parts of the overall economy, potentially affecting hiring and purchases of new equipment. (Todd Korol/Reuters)

Although it remains in a range the bank calls “positive,” the outlook for hiring has dropped to its lowest level since 2009, when the world economy was in recession just about everywhere following the credit crisis.

Forty of the companies surveyed said they expect to hire more people in the next 12 months than they did in the previous 12. Another 40 said they expect to hire the same amount, with the remaining 20 saying they expect to hire less.

Good news?

If there’s a source of strength, it’s that the bank’s report suggests companies with strong ties to the U.S. economy are more upbeat. The U.S. is benefiting more from cheap oil than most economies, because it is the most diverse economy on earth and cheaper energy is good news for virtually every other sector.

“Firms’ outlook for the U.S. economy is generally strong, with the majority expecting this strength to support their future sales,” the report says. Cheaper oil has also hurt the loonie, which exporters to the U.S. cited as another reason for cautious optimism about sales from here on out.

Several firms reported foreign demand had increased thanks to the weakened Canadian dollar, but “while many firms outside the energy sector characterize the effects of lower oil prices and the weaker Canadian dollar as favourable for their business outlook, they expect some of the benefits to unfold only gradually in the future,” the report says.

UBC Faculty Joins Other Prestigious Universities Calling for Fossil Fuel Divestment

The University of British Columbia is following the lead of faculty and students at Harvard University, the University of California, Stanford University and many other universities across North America.  Also of note, Norway’s sovereign investment fund, the largest in the World @ $1.3 Trillion, has already made the decision to divest. The current fossil fuel market collapse and likely long term instability is prima facie evidence of the need for divestment, and to prevent further increases in carbon emissions.

UBC Faculty Open Letter Here: UBC Faculty Call For Fossil Fuel Divestment

This Big Idea is sweeping public and private institutional investment funds globally in the belief that it is overdue to begin more demonstrative action against human caused climate change.  Canadians have a particularly important role to play in this.  Current government policy has focused the economy on fossil fuels, at the expense of a broader based economy, and is now experiencing the wrath of the “natural resource curse. Canadian innovation and productivity have plummeted on the OECD scale, and Canada is entering a highly volatile and uncertain recessionary period, as forecast by The Conference Board of Canada, the International Monetary Fund, and numerous Canadian banks.

From the Canadian Broadcasting Corporation:

Faculty at the University of British Columbia have voted in favour of the institution divesting its existing fossil fuel holdings and forgoing further investments in companies connected with fossil fuels.

“Students have spoken. Faculty have spoken. It’s time for UBC to act,” George Hoberg, professor in forest resources management, said in a statement. “Climate change presents an urgent crisis for humanity.”

The results of the referendum were released Tuesday, with 62 per cent of voters supporting divestment.

A fossil-free portfolio

Of UBC’s $1.2-billion endowment fund, more than $100 million is invested in oil, natural gas and coal. The faculty vote is calling on the university to divest completely from those holdings within five years.

“Just as UBC has pledged to use its campus as a ‘living laboratory’ for sustainability, we call on our university to apply its expertise with the same vigour to the endowment,” said Kathryn Harrison, professor of political science and a climate policy expert.

“UBC should devise a profitable, fossil-free portfolio that can serve as an inspiration for sustainable investing by other institutions.”

The faculty will now put their proposal to the university’s board of governors.

“UBC is a place of academic dialogue and debate, and we welcome our faculty members’ interest in our investment policies,” the university said in a statement responding to today’s result. “As the trustee of the endowment, UBC has a fiduciary obligation to ensure that it is managed prudently.”

A growing movement

The fossil fuel divestment movement started in the United States and has spread across North America and Canada.

Last year, UBC students held their own referendum on the issue, with an almost four-to-one vote in favour of divestment.

Today’s vote comes just before Global Divestment Day on Friday when, the UBC campaigners say, a divestment campaign will be launched at the University of Calgary.

Preparing For The Long Term Consequences In Texas And Western Canada

UPDATE: January 20, 2015. Target announced this week that it will be closing all 133 stores in Canada, including the Vernon and Kelowna stores. eliminating at least a couple of hundred local $10/hr jobs and a handful of slightly better paid management jobs. The Wall Street Journal is reporting that Target’s 17,000 + Canadian layoffs of low income workers will be the largest in Canadian history.

OPEC Report Downgrades Demand for Its Oil as Prices Fall Again

The growing downturn in the fossil fuels industry has extraordinary implications globally.  While some are proposing theories that this downturn will be short-lived, there simply isn’t much evidence to support an optimistic forecast.  Saudi Arabia is openly executing a long term strategy to squeeze “high cost oil producers,” using its unquestioned leverage and the lowest production costs in the World.  Europe is facing potential deflation, and the current European recession is forcing the European Central Bank to begin “quantitative easing,” beginning this week, essentially printing money.  The Russian economy is in shambles as the ruble weakens, something Putin did not plan on occurring.  The Chinese economy has weakened sharply and will likely remain weak into the near foreseeable future. Meanwhile Canada is at the mercy of these global forces, with little in the way of economic reserves to defend its economy, having bet the entire Canadian economy on oil. Somehow Joe Oliver promised he would balance the Canadian budget in 2015, and then the next day, Oliver ate crow, and walked back his promise.  In a surprise move, The Bank of Canada then reduced the lending rate to 0.75%, causing the loonie to plummet below 81 cents. Things are not what the government wants us to believe.

There are significant hedge bets in the market that oil will soon return to $100 per barrel. A prominent optimistic theory suggests that Saudi Arabia and the United States are collaborating to squeeze Putin and the Russian oil economy, and oil will bounce back within 90 days. However, most economists and oil industry analysts are projecting a much longer and deeper petroleum industry recession than in the 1980’s, for example.  The predominant view is that it will persist for at least five years or longer.

In Texas, Hunkering Down for the Oil Bust

Reblogged from The New York Times

By CLIFFORD KRAUSSJAN. 19, 2015

MIDLAND, Tex. — With oil prices plummetingby more than 50 percent since June, the gleeful mood of recent years has turned glum here in West Texas as the frenzy of shale oil drilling has come to a screeching halt.

Every day, oil companies are decommissioning rigs and announcing layoffs. Small firms that lease equipment have fallen behind in their payments.

In response, businesses and workers are getting ready for the worst. A Mexican restaurant has started a Sunday brunch to expand its revenues beyond dinner. A Mercedes dealer, anticipating reduced demand, is prepared to emphasize repairs and sales of used cars. And people are cutting back at home, rethinking their vacation plans and cutting the hours of their housemaids and gardeners.

Dexter Allred, the general manager of a local oil field service company, began farming alfalfa hay on the side some years ago in the event that oil prices declined and work dried up. He was taking a cue from his grandfather, Homer Alf Swinson, an oil field mechanic, who opened a coin-operated carwash in 1968 — just in case.

Photo

Homer Alf Swinson, left, an oil field mechanic, opened a coin-operated carwash in 1968 — just in case oil prices declined. CreditMichael Stravato for The New York Times

“We all have backup plans,” Mr. Allred said with laugh. “You can be sure oil will go up and down, the only question is when.”

Indeed, to residents here in the heart of the oil patch, booms and busts go with the territory.

“This is Midland and it’s just a way of life,” said David Cristiani, owner of a downtown jewelry store, who keeps a graph charting oil prices since the late 1990s on his desk to remind him that the good times don’t last forever. “We are always prepared for slowdowns. We just hunker down. They wrote off the Permian Basin in 1984, but the oil will always be here.”

It’s at times like these that Midland residents recall the wild swings of the 1980s, a decade that began with parties where people drank Dom Pérignon out of their cowboy boots. Rolls-Royce opened a dealership, and the local airport had trouble finding space to park all the private jets. By the end of the decade, the Rolls-Royce dealership was shut and replaced by a tortilla factory, and three banks had failed.

There has been nothing like that kind of excess over the past five years, despite the frenzy of drilling across the Permian Basin, the granddaddy of American oil fields. Set in a forsaken desert where tumbleweed drifts through long-forgotten towns, the region has undergone a renaissance in the last four years, with horizontal drilling and fracking reaching through multiple layers of shales stacked one over the other like a birthday cake.

But since the Permian Basin rig count peaked at around 570 last September, it has fallen to below 490 and local oil executives say the count will probably go down to as low as 300 by April unless prices rebound. The last time the rig count declined as rapidly was in late 2008 and early 2009, when the price of oil fell from over $140 to under $40 a barrel because of the financial crisis.

Unlike traditional oil wells, which cannot be turned on and off so easily, shale production can be cut back quickly, and so the field’s output should slow considerably by the end of the year.

The Dallas Federal Reserve recently estimated that the falling oil prices and other factors will reduce job growth in Texas overall from 3.6 percent in 2014 to as low as 2 percent this year, or a reduction of about 149,000 in jobs created.

Midland’s recent good fortune is plain to see. The city has grown in population from 108,000 in 2010 to 140,000 today, and there has been an explosion of hotel and apartment construction. Companies like Chevron and Occidental are building new local headquarters. Real estate values have roughly doubled over the past five years, according to Mayor Jerry Morales.

The city has built a new fire station and recruited new police officers with the infusion of new tax receipts, which increased by 19 percent from 2013 to 2014 alone. A new $14 million court building is scheduled to break ground next month. But the city has also put away $39 million in a rainy-day fund for the inevitable oil bust.

“This is just a cooling-off period,” Mayor Morales said. “We will prevail again.”

Expensive restaurants are still full and traffic around the city can be brutal. Still, everyone seems to sense that the pain is coming, and they are preparing for it.

Randy Perry, who makes $115,000 a year, plus bonuses, managing the rig crews at Elevation Resources, said he always has a backup plan.

“We are responding to survive, so that we may once again thrive when we come out the other side,” said Steven H. Pruett, president and chief executive of Elevation Resources, a Midland-based oil exploration and production company. “Six months ago there was a swagger in Midland and now that swagger is gone.”

Mr. Pruett’s company had six rigs running in early December but now has only three. It will go down to one by the end of the month, even though he must continue to pay a service company for two of the rigs because of a long-term contract.

The other day Mr. Pruett drove to a rig outside of Odessa he feels compelled to park to save cash, and he expressed concern that as many as 50 service workers could eventually lose their jobs.

But the workers themselves seemed stoic about their fortunes, if not upbeat.

“It’s always in the back of your mind — being laid off and not having the security of a regular job,” said Randy Perry, a tool-pusher who makes $115,000 a year, plus bonuses, managing the rig crews. But Mr. Perry said he always has a backup plan because layoffs are so common; even inevitable.

Since graduating from high school a decade ago, he has bought several houses in East Texas and fixed them up, doing the plumbing and electrical work himself. At age 29 with a wife and three children, he currently has three houses, and if he is let go, he says he could sell one for a profit he estimates at $50,000 to $100,000.

Just a few weeks ago, he and other employees received a note from Trent Latshaw, the head of his company, Latshaw Drilling, saying that layoffs may be necessary this year.

“The people of the older generation tell the young guys to save and invest the money you make and have cash flow just in case,” Mr. Perry said during a work break. “I feel like everything is going to be O.K. This is not going to last forever.”

The most nervous people in Midland seem to be the oil executives who say busts may be inevitable, but how long they last is anybody’s guess.

Over a lavish buffet lunch recently at the Petroleum Club of Midland, the talk was woeful and full of conspiracy theories about how the Saudis were refusing to cut supplies to vanquish the surging American oil industry.

“At $45 a barrel, it shuts down nearly every project,” Steve J. McCoy, Latshaw Drilling’s director of business development, told Mr. Pruett and his guests. “The Saudis understand and they are killing us.”

Mr. Pruett nodded in agreement, adding, “They are trash-talking the price of oil down.”

“Everyone has been saying `Happy New Year,’” Mr. Pruett continued. “Yeah, some happy new year.”

Can Accelerate Okanagan’s Report On Local Tech Industry Economic Impact Be Believed?

 AO Tech Industry Report Lacks The Rigor Necessary To Give It Much Credibility

Read the AO press release and access the full report here

The AO report’s “economic impact” conclusions are based on 2014 Survey Monkey voluntary responses, which are problematic due to an apparent lack of critical assessment. The report does not follow the kind of rigorous industry analysis performed by leading technology consultancy firms like International Data Corporation (IDC) or Gartner. The definition of an “industry,” for example the “automobile industry in Canada,” involves broad activity around all aspects of “automobiles,” but at some point firms like Kal Tire or “Joe’s Brake Shop” might be excluded from a definition of the automobile industry.  The report does not mention the rigor applied to this industry analysis, so the question is left open, “What exactly is the “tech industry” in the Okanagan?”  A well-defined $1 Billion industry is the mobile advertising industry in Canada.  Is that what we have in the Okanagan? By way of comparison, I reported on New Zealand’s Ice House tech incubator economic impact report, which has much greater credibility.  The AO report is essentially claiming that the Okangan technology economy is more than twice the size of New Zealand’s…That’s too big of a leap of faith for me. Read New Zealand’s Ice House Startups Achieve Impressive Results and contrast it with the AO report.

Then there is the issue of Kelowna as an employment market, as noted in the recently reported BC Business low ranking of Kelowna at 17th. Clearly, there are unresolved contradictions with the AO report.

Read More: Kelowna’s Low Jobs Ranking

Read More: Okanagan economy likely to worsen next year

I offer a summary view of “industry analysis” here: Industry Analysis: the bigger picture

To See The Future Of The Western Canadian Economy Look To Texas

UPDATE: May 21, 2015.  Goldman Sachs has just released an oil price forecast suggesting that North Sea Brent crude will still be $55 in 2020, five years from now.  As Alberta’s Western Canadian Select (WCS) bitumen is valued lower on commodity markets this is extremely bad news for Canada. Further, the well-known Canadian economic forecasting firm, Enform is predicting that job losses across all of western Canada, not only Alberta, could reach 180,000. 

UPDATE: January 15, 2015. Target announced today that it will be closing all 133 stores in Canada, including the Vernon and Kelowna stores. eliminating at least a couple of hundred local $10/hr jobs and a handful of slightly better paid management jobs. The Wall Street Journal is reporting that Target’s 17,000 + Canadian layoffs of low-income workers will be the largest in Canadian history.

To Understand Alberta’s Future, Look to Texas

Brace yourself. I haven’t gotten the sense that the coming economic bust in western Canada has yet sunk in with all Canadians. The problem is centered in Alberta, but radiates throughout western Canada, and even well beyond in complex ways. If you want to get a credible sense of what we are facing, you need only look to journals like The Wall Street Journal, CNN Money, Bloomberg and many others to get the evidence you may seek.  Kelowna Now‘s recent story on jobs in Kelowna noted a key issue locally: many of the employed in Kelowna work up north in the oil patch. Then there is the matter of the Nova Scotia workers in Fort MacMurray and their future. Closer to home than Texas, we should also consider the radiant job loss effect in places like North Dakota and Wyoming.  SF Gate has also reported 700 layoffs by a Canadian oil company in Bakersfield, California.  The “pollyanna’s” who are denying that this is happening are “whistling in the graveyard.”

Reblogged from The Wall Street Journal Blog:

Plunging Oil Prices Test Texas’ Economic Boom

Downturn Has Many Wondering How Lone Star State Will Weather a Bust

Oil tankers are loaded with crude in Corpus Christi, Texas, in December. The area has prospered in recent years due to the energy boom in the Eagle Ford shale formation, but falling prices could test that.

Retired Southwest Airlines co-founder Herb Kelleher remembers a Texas bumper sticker from the late 1980s, when falling energy prices triggered an ugly regional downturn: “Dear Lord, give me another boom and I promise I won’t screw it up.”

Texas got its wish with another energy-driven boom, and now plunging oil prices are testing whether the state has held up its end of the bargain.

The Lone Star State’s economy has been a national growth engine since the recession ended, expanding at a rate of 4.4% annually between 2009 and 2013, twice the pace of the U.S. as a whole.

The downturn in energy prices now has triggered a debate over whether Texas simply got lucky in recent years, thanks to a hydraulic-fracturing oil-and-gas boom, or whether it hit on an economic playbook that other states, and the country as a whole, could emulate.

One in seven jobs created nationally during the 50-month expansion has been created in Texas, where the unemployment rate, at 4.9%, is nearly a percentage point lower than the national average.

But a big dose of the state’s good fortune comes from the oil-and-gas sector. Midland, which sits atop the oil-rich Permian Basin, had the fastest weekly wage growth in the country among large countries: 9% in the 12 months ending June 2014.

Now that oil prices have plunged nearly 51% from their June peak to $52.69 a barrel, some Texans sobered by memories of past energy busts are bracing for a fall. The argument among economists and business leaders isn’t whether the state will be hurt, but how badly.

Mr. Kelleher is among the Texans predicting this won’t be a replay of the 1980s oil bust and banking crisis, which drove the state unemployment rate to 9.3%. As evidence, he and others cite a more cautious banking sector, a tax and regulatory environment favorable to business, and a state economy less dependent on energy and other resources.

“Texas has become a well-rounded state,” Mr. Kelleher said. “People did remember not to overextend themselves.”

Michael Feroli, a New York-based economist at J.P. Morgan Chase & Co., is one of the skeptics of the “this-time-is-different” camp. Although the oil-and-gas industry today makes up a smaller share of Texas’ workforce than it did in the mid-1980s, it accounts for roughly the same share of its economic output, he said. So a decline in oil prices similar to the plunge of more than 50% seen in the mid-1980s, he said, could have a similar result: recession.

“If oil prices stay where they are, Texas is going to face a more difficult economic reality,” Mr. Feroli said.

Oil exploration companies already are scaling back drilling plans for next year. Oil-field-service companies that provide labor and machinery, such as Halliburton Co. andSchlumberger Ltd. , are laying off workers. The number of oil and gas rigs in Texas, which had grown 80% since the start of 2010, has been dropping over the past few weeks. The rig count in the state stood at 851 at the end of December, down from 905 in mid-November, according to oil-field-services firm Baker Hughes Inc., which compiles the data. Meanwhile, yields on junk bonds tied to energy companies have soared as investors brace for financial fallout from the oil-price bust.

Yet Dallas Fed President Richard Fisher likens the J.P. Morgan report to bull droppings. He noted that sectors including trade and transportation, leisure and hospitality, education and construction all have produced more new jobs in recent years than energy. Houston has experienced fast growth in the medical sector, Austin in technology.

“This is a test,” Mr. Fisher said. “Is Texas indeed as diversified as people like me say it is?”

ENLARGE

Analysts at the Federal Reserve Bank of Dallas estimate that a 45% decline in the price of oil—from $100 a barrel to near $55—will reduce Texas payrolls by 125,000, all else being equal. Payrolls were up 447,900 in November from a year earlier, or 3.9%. The Dallas Fed estimate implies growth of more than 300,000, or nearly 3%, even with a lower oil price, still faster than the national average of 2%.

Pia Orrenius, a Dallas Fed regional economist, sees the price bust washing through the Texas economy in both positive and negative ways. It could help the booming petrochemicals sector and manufacturing by lowering costs. A construction boom centered on petrochemical plants is already under way along the Gulf Coast, a source of blue-collar jobs. Yet the price bust will hurt sectors like construction, transportation and business services that have expanded to serve the oil industry, and consumer spending more broadly as workers lose their jobs.

“We will see significant spillovers,” Ms. Orrenius said.

Nowhere is the evolution of the Texas economy more apparent than in Houston, the nation’s fourth-largest city, with 2.2 million people.

After oil-and-gas prices crashed in the mid-1980s, energy companies in the city laid off thousands of petroleum engineers and other well-paid industry workers, and the real-estate market crumbled, helping trigger a regional-banking collapse. One in six homes and apartments in Houston stood vacant at the beginning of 1987, and the county tax rolls dropped by $8 billion, according to a history of the bust by the Federal Deposit Insurance Corp. That prompted civic leaders to push for an expanded medical sector and more diversified economy.

Today, the Texas Medical Center is the world’s largest medical complex, with more than 20 hospitals, three medical schools and six nursing schools, employing 106,000 people. Health-care and social-services companies made up 10.4% of jobs in the greater Houston area in 2013, compared with 5.9% in 1985, according to Labor Department data. Roughly 4.3% of jobs in the county were in the oil-and-gas industry last year, down from 5.9% in 1985.

Still, most of the 26 Fortune 500 companies based in Houston are in energy, includingPhillips 66 , Halliburton and Anadarko Petroleum Corp. , and energy employees flush with cash recently spurred a run-up in real-estate prices in the region that has raised red flags among some economists. Fitch Ratings recently declared that Houston home prices were the second-most overvalued in the country, behind Austin, when compared with historical averages, and that current prices may be unsustainable, citing the current oil-price drop.

The energy boom has strengthened the state’s budget. Revenues are expected to take a hit with falling levies on oil and natural gas production, but less than previously. The levies accounted for 9.4% of state tax revenue in 2013 compared with 20.2% in 1985, according to data from the Texas state comptroller’s office.

Texas banks also appear to be in better shape to handle a shock than they were in the 1980s. Between 1986 and 1990, more than 700 Texas banks and thrifts failed. During the worst of the last financial crisis in 2008 and 2009, seven Texas banks failed, according to the FDIC. Fewer than 1% of state banks have high measures of nonperforming loans now, compared with 20% in the late 1980s, according to the Dallas Fed.

Texas is the only state that limits home-equity borrowing to 80% of a home’s value, a provision enshrined in its state constitution. The rule helped keep Texas homeowners from piling up debt against their homes during the national real-estate boom of the 2000s. Only 10% of nonprime mortgages were underwater in 2011 in Texas, compared with 54% in the rest of the U.S., according to the Dallas Fed.

“Even though we saw our banking brethren in other states doing these crazy deals, we refused to do so because we remembered the ’80s,” said Pat Hickman, chief executive of Happy State Bank, a community bank in the Texas Panhandle. “We learned lessons.”

Texas has something else going for it: A bounty of resources other than oil and natural gas, most notably, land and people.

The state’s population grew 29% between 2000 and 2014, more than twice as fast as the U.S. as a whole, according to the Census Bureau. The median age in Texas was 34 last year, 3 1/2 years younger than the nation overall. Growth has come from a combination of migration from other states, immigration and a higher birthrate than the national average.

The U.S. economy has been restrained in recent years by slow labor-force growth. Texas, on the other hand, has more young people entering their prime working years and fewer elderly residents, as a percentage of the population, than does the nation overall. That has given its economy a solid foundation of available workers.

Workforce and land were two factors that drew Firefly Space Systems, a manufacturer of low-orbit rockets, to the Austin area earlier this year. The firm needed a place to launch test rockets and chose Texas over Los Angeles for an expansion. It found a supply of tech-savvy workers in the Austin area and plentiful land.

“It was the geography, and it was making sure our employees were comfortable there,” said Maureen Gannon, the firm’s vice president for business development. The firm plans to hire 200 people in coming years.