This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Construction Industry Forecasts

Notes from Alex Carrick - Feb 25, 2011

Alex Carrick
The focus shifts to oil prices, extraction capacity and construction costs

Statistics Canada has released the results from its latest Public and Private Investment (PPI) survey. New construction put-in-place in 2011 is expected to be 3.6% higher than in 2010. The leader among the provinces in non-residential construction activity will be Alberta with a gain of 9.9% year-over-year in current dollars.

Canada-wide total capital spending will rise 3.3%. The one sub-sector that will stand out, partly because it is so big in the first place, will be mining and oil and gas extraction (+11.4%). Investment in non-conventional oil extraction, mainly in Alberta, will rise 27.8%.

The mining sector will be no slouch either, with an increase in investment of 23.8%.

Based on a sample of 28,000 public and private firms conducted between October 2010 and January 2011, the findings may already be out of date, having been overtaken by recent events.

The primary cause for such an eventuality would be the swift upward movement in oil prices that has taken place as a result of regime change in Tunisia and Egypt and the possibility (at least at the time of writing) of the overthrow of Muammar Gaddafi’s dictatorship in Libya.

While Libya contributes only 2% of world oil supplies, it is the threat from the possible domino effect on other North African and Middle Eastern nations that is affecting the price.

In the case of Egypt, the military is currently in charge on a supposedly interim basis. What worries some is that the nature of the future government may have unpleasant implications for operation of the Suez Canal and essential pipelines that run through the country.

Perhaps even more important is whether or not the unrest in the streets of Cairo and Tripoli will spread to Iran and Saudi Arabia. Iran earlier demonstrated a tendency towards “taking it to the streets” after the most recent disputed national elections. Saudi Arabia is living with uprisings on its borders in Bahrain and Yemen.

Saudi Arabia has said not to worry. It will make up any supply shortfall. But some oil analysts are asking more penetrating questions about the Saudis’ actual oil reserves and equipment in place to access them. They are throwing doubt on that nation’s ability to raise output at will.

The effect of oil market turmoil is being felt in the world economy. In times of uncertainty, investors seek security. Bond prices have rallied because U.S. Treasury Bills have again gained favor. This has resulted in an interesting side effect. Speculators have shifted money out of agricultural commodities in favor of oil, providing the first relief for food prices in some while.

In such times, a geopolitical risk factor becomes embedded in the price of oil. Currently, the number seems to be about an extra $10 to $15 USD (U.S. dollars) per barrel.

The supply of oil in North American is currently under no constraint. Extra capacity on the Keystone Pipeline from Alberta’s Oil Sands to refineries in Oklahoma has taken the edge off. Furthermore, similar to what has happened in natural gas markets, technological advances involving horizontal drilling have opened up new oil fields to development.

Also, speculation is growing about a resumption of deep water drilling in the Gulf of Mexico. This had been placed on hold during BP’s Macondo well disaster last summer. There may be a speed-up in implementation of new rules to ensure greater safety and better quality assurance in the future.

Higher oil prices carry a fall-out for the economy in terms of their impact on the overall price level. For example, there is already talk about the need for airline fuel surcharges. Heating, transportation (by land, sea and air), material input and even electricity prices can all be affected by elevated oil charges. 

For Canada’s construction industry, however, higher oil prices are a both a curse and a blessing. With respect to the former, they have unfortunate consequences for construction costs. But at the same time, they are a reason for owners in the oil patch to speed up mega investment projects.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.


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Read Other Recent Alex Carrick Posts

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