Ed Martin: Falling oil prices not a worry for industry

The CEO of Newfoundland and Labrador's Crown energy corporation says falling oil prices is part of the nature of commodity business, and there's no real need to worry about future oil developments.

Low prices of Brent crude oil has already prompted the provincial government to put a freeze on discretionary spending and hiring, after oil prices dropped about 35 per cent from the summer.

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But during a quarterly update,Nalcor's Ed Martin said that's just the nature of the market, and prices are likely to go back up.

We cannot run a business like this in six-month intervals.- NalcorCEO Ed Martin

"The ebb and flow of the commodity market is, as demand goes up price goes up. Right now we have increases in supply and demand, there's a lull, and the way it shakes out in the commodity business is that price drops," said Martin.

"Some developments will be put on a shelf, people will be deferred, which means additional production coming in goes down again. Usually demand picks up as the economy turns, and you have the reverse."

Martin said for Nalcor, looking at the long-term is vital, and there's no point worrying over a constantly fluctuating market.

"We cannot run a business like this in six-month intervals. We look at 50-year horizons, the decisions we made are very strong, and in our particular case we made our investment decisions on recent projects when prices were $50-$70 per barrel," he said.

No fallout on the horizon

Premier Paul Davis said last week the declining prices for barrels of oil havecreated some budgetary problems for government.

Jim Feehan, an economist at Memorial University, said if oil recovers that will mean a bad year for the province, but that's about it.He added there's no short-term fallout on the horizon for oil production.

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"Maybe in the very long term, if long term prices are adjusted it may have implications for development of oil, say, out in the Flemish Cap. But that's a very long ways away anyway," said Feehan.

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However, if prices stay down for an extended period, it could mean a serious structural problem for the province's economy, Feehan said.

"The oil industry itself will continue to work the fields and continue to produce, the people who are employed there will, I think, continue to be employed, Hebron will go ahead, but without the royalty revenues associated with the prices of $100USD a barrel or more, it certainly has substantial impacts for the province's fiscal position and therefore the economy."

Feehan said that no one could have predicted oil prices would drop from around $110 in the summer to about $70 now, but the province could have provided more of a cushion in its budget in case of falling prices.

"When you think it's going to be $105 but you know there's great risk it could go up or, in particular, down, it would make a lot more sense to say, 'OK, we believe it's going to be $105 if we have to have a forecast of some type, but let's budget on the basis of $95.'"

The lower oil prices in general mean less money for the provincial government to spend, but while oil companies will have lower profits, they'll still be making plenty of money even at current prices.