Can you remember when in 1973-74, OPEC used the oil weapon during the Yom Kippur war? First, it meant raising prices by 17%, then reducing production and finally, establishing an embargo. The economic disruption in the US, Canada and Europe was dramatic.
The recent Saudi-Russian price war brought oil prices to lows not seen in decades. The COVID-19 pandemic cratered global demand by 50% off a January peak. The price war was to acquire market share and punish North American competition.
The glut of low-priced oil filled up all available storage, causing prices to fall into negative territory for a brief time. That is, producers were paying consumers to take supply off their hands. That, in turn, caused production levels in the US to fall by 10% to 11.5 million barrels per day. And new drilling activity (rigs working) fell by two thirds.
Alberta’s oil sector was one of the first and hardest hit by the crisis. Production dropped by a million barrels per day. In Alberta, only 20 rigs were working in May. The industry was already crippled by delays in pipeline access and the federal government’s anti-industry policies. Now companies have fears of even greater collapse.
In recent weeks prices have recovered. Conventional oil is trading in the $35-40 USD range and bitumen based is trading in the $25-30 USD range This is because production has slowed, and some demand has rebounded. There is some optimism that OPEC’s price war will end.
With its focus firmly on climate change, the Canadian government has been highly reluctant to provide support to the oil industry. A minority government and retail politics in central Canada makes helping the industry a dicey proposition. The Prime Minister rarely misses an opportunity to promote his climate agenda without acknowledging the economic consequences.
After months of delay, the federal government offered a very thin lifeline for 5,000 workers to clean up abandoned wells. Some debt financing for energy companies at commercial terms might be available. But implementation hasn’t started, and the strings attached might make the programs ineffective. Only the federal wage subsidy program to retain employees offers real help to energy companies.
BUT WHAT MATTERS MOST
The real lesson that should be taken from the price war is the strategic importance of North American energy self-sufficiency. It can be achieved! In the past 15 years or so, shale oil and oilsands production increased North American supply by 10 million barrels per day. North American reliance on foreign oil dropped from 70% to 20%.
Yet the current federal government policy is aimed at inhibiting oilsands production. The objective of energy security and collaboration with the US and Mexico to maintain the gains in energy self-sufficiency is not on their radar. It ought to be! And a better climate change policy would be to encourage improvements to reduce industry’s carbon intensity, not killing Canada’s biggest export sector.