Why Alberta needs to embrace energy disruption, not fight it

Times are no doubt tough in Alberta these days. Segments in our housing market have gone no-bid, restaurants are closing after 20 or 30 years of business and auto sales have plummeted to their lowest level in five years. You know things are dire when local colleges start advertising the benefits of leaving the oil and gas business behind in favour of becoming personal fitness trainers.

The problem is that thanks to high oil prices we as a province have had it relatively easy for way too long. As a result, we forgot how we got our start by hard work, entrepreneurship and thinking outside the box.

Our current situation is no different from other industries that were once sheltered from competitive threats such as manufacturing, media, transportation and now oil and gas. In other words, Alberta has fallen victim to the age of disruption.

For investors there are some important lessons to be learned from this, and could be a warning for those who feel safe in our tightly-held and protected financial services and telecommunications sectors.

One of the first things we do before choosing to invest in a company is to identify what their strategic advantage is and how long they can not only protect but also grow their market share and overall profitability. The problem is that the longer a company operates without competitive threats in a highly profitable business environment the greater the likelihood someone else will be incentivized to innovate their way in to get a piece of the pie.

The smart management teams will recognize this and will quickly adapt by building bridges instead of walls either through diversifying their revenue streams or embracing the disruption and becoming low cost operators.

It was not that long ago that Peak Oil was supposedly on the immediate horizon, with many proclaiming that $100 oil was the “new norm” and that “it was different this time.”

But good old fashioned American capitalism kicked in, motivated by the record setting oil prices, and in a blink of an eye more than 4 million barrels of oil per day were unlocked by new and innovative drilling and fracking technology.

This comes at the same time as declining oil demand by OECD countries, thanks to new technological advances improving overall energy efficiency. Making matters worse is that the anti-fossil fuel movement is so strong that cities such as Paris have introduced car-free days, outright banning vehicles from parts of the city. Norway is also planning to ban the sale of all fossil fuel-based cars within the next decade. On the other hand, you have the State of Michigan with their last stand by making it illegal to sell Tesla electric cars.

The saving grace for those in the oil and gas sector is that non-OECD countries are still increasing their demand for fossil fuels at a respectable pace given they do not have the luxury of moving to higher priced alternatives — at least for now.

All of this means that barring a major supply disruption, the days of record-setting oil prices are likely a thing of the past. And that isn't necessarily a bad thing. Those oil companies that choose to adapt by not only becoming low-cost manufacturers but that also find ways to innovate and diversify their product lines will be highly profitable and at the same time stealing market share from those choosing to operate as they did in the past.

It will also help to once again see companies embrace the benefits of hedging out their commodity exposure and reducing the overall risk of their operations while locking-in attractive rates of returns in this low-interest rate environment.

Finally, this means that Alberta will have to change as well by embracing disruption instead of fighting it, with the goal to once again become a global leader in energy development. While there is no easy and immediate solution — although a national oil pipeline would certainly help — we have little doubt that Albertans will rise up to the challenge and find a way to adapt to the new environment we are faced with.