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Energy sector capacity utilization rates on the rise

Energy sector capacity utilization rates on the rise

Posted on: 3/13/2018 | Author: ATB Financial's Economics + Research Team

​​Economists are well-known for their esoteric and academic terminology. One of the wonkier terms is a popular indicator called the “capacity utilization rate.” Despite what the name suggests, the indicator is remarkably simple.

The industrial capacity utilization rate is the ratio of an industry's actual output to its estimated potential output. A lower rate suggests more machines and equipment are sitting idle whereas a higher rate indicates less spare capacity in the system.

The graph below shows twenty years of capacity utilization rates in Canada. The blue line is the all-industry average; the orange line is oil and gas extraction. Between 1997 and 2009, Canada’s hydrocarbon producers were running at capacity rates close to the all-industry average. After 2009, capacity utilization in oil and gas extraction dropped. It reached a low of 72.5 per cent in the spring of 2016 when oil prices reached their bottom.

The energy sector utilization rate is rising again. It reached 83.0 per cent in the fourth quarter of 2017, the highest rate in a decade. That sounds positive but higher rates can also be driven by less equipment and machinery in the industry. Throughout the 2015-16 downturn, many producers sold drilling rigs, equipment and machinery, often at fire sale prices. That’s left less physical equipment available to use, which has helped push the capacity utilization rate higher.

Tomorrow, The Owl will look at capacity utilization rates in another industry close to Alberta’s energy sector: petroleum refining.

Capacity utilizaiton rates, graph

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