The year has drawn to a close and now it's time to look ahead to 2016.

What are the best-case, worst-case, the least-likely and most-likely scenarios for oil prices — and what do they mean for Edmonton's economy in 2016?

Best-case scenario:

Certain OPEC countries falter under the weight of low oil prices and supply eases up. Venezuela and Nigeria are the most likely candidates. Unlike Saudi Arabia, their production costs are high — yet their political and social environments are shaky.

Low oil prices will add strain to their refining and pipeline infrastructure. If social upheaval seems imminent, investors will bet on them curtailing some production.

That would push oil prices back up to $60 US or $70 US per barrel — still a soft price, but one that would bring stability to Alberta's petroleum sector.


Todd Hirsch is the chief economist for ATB Financial. (Supplied)

Worst-case scenario:

China's economy stumbles badly.

The oil price collapse in 2014-15 was driven primarily from the supply side of the equation — i.e. OPEC flooding the world with supply.

But the demand side of the equation matters, too.

Last summer, China's economy swooned and stock markets convulsed. It was enough to push oil from $60 to $38 between June and August. If China suffers even worse economic hardship and growth slips down to two or three per cent, investors will fret about global oil demand.

In the extreme, a Wall Street-style meltdown (circa 2008) in Shanghai would be enough to push oil to $20 a barrel — or lower.

Least-likely scenario:

Oil returns to $80 by June, and Albertans wake up from what turned out to be a bad dream. There is a storyline that would support this outcome, but it involves such horrific violence and turmoil in the Middle East that it's almost in poor taste to envision it.

The Middle East has never been a happy place (at least not since the Treaty of Versailles), but it could devolve into something even nastier.

A misfired rocket … another aircraft shot down … a nuclear missile pointed at someone … all of these sorts of tragic mishaps could threaten the entire Middle East, stranding the oil of Saudi Arabia, Iran and Iraq. And if that happens, investors could return their "terror premium" to prices and bid oil up to $80 a barrel or higher.

Most-likely scenario:

Oil hovers around $40 per barrel for the first half of the year, but then gradually drifts higher. This scenario involves slow but steady growth in global demand, and OPEC keeping the oil taps open and supply flowing.

Eventually, something is bound to crack. By refusing to act as a "swing producer" — that is, acting like a cartel that colludes to keep prices high — OPEC has basically written itself out of business. What purpose does it serve if not to allow the 12 producing nations to collude? Countries will start dropping out (explicitly or otherwise) and supply will trail off slightly. In the meantime, higher-cost oil projects in non-OPEC countries such as Russia, Brazil, Canada and Alaska will have been mothballed — and that will prevent much new oil coming onto the market a year from now.

Eventually, the growing demand will catch up with soon-to-be-falling supply, and oil prices will rise to around $55 or $60 by the end of 2016.

What does the most-likely case scenario mean for Edmonton?

With oil stuck around $40 and not getting back above $60 until the end of the year, it means a tough slog ahead for many companies, small businesses and households. There's no way to sugarcoat the situation.

The unemployment rate will most likely crest at 7.5 or even 8 per cent. Housing prices will wobble (but not collapse). And the provincial government will be forced to find more stable and predictable sources of revenue.

Sadly, we are likely to see some net outflow of labour to other provinces, a normal and predictable trend in times like these. Still, it's probably not going to be a massive exodus for the very reason that there aren't too many other places in Canada where the job market is much better (British Columbia is the one exception).

If we're lucky, the greatest-case scenario is that economic diversification happens organically. Other sectors of the economy such as agriscience, high-tech manufacturing, financial services, forestry and transportation are still doing quite well.

They tend to struggle against the petroleum sector when oil prices are high — it tends to behave a bit like a black hole that sucks up everything around it: labour, office space, investment capital.

But during an energy price downturn, other sectors have a chance to gain a foothold in the province, finding plenty of talent and attractive office space.

Everyone in the province should take heart. Alberta was built on adversity, and oil-price downturns occur with some regularity. We've made it through worse downturns, and we'll make it through this one too.

Todd Hirsch is the chief economist for ATB Financial. He is also author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.

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The most-likely scenario for Edmonton, ATB chief economist Todd Hirsch says, is oil will hover about $40 US for first half of 2016, meaning it will be tough going for many companies and households. (CBC)