Issue 30: Canada Needs an All-Of-The-Above Response to Counter Low Oil Prices
Canada's energy sector will play a central role in Canada's pandemic recovery. It is also central to our transition to a green economy. Here's how to support it.
Policy for Pandemics is produced and edited by Andrew Potter and co-edited by Charlotte Reboul and Paisley Sim (bios here). Today’s briefing is by Ruhee Ismail-Teja (RIT), a graduate student at the Max Bell School of Public Policy. She is currently riding out the pandemic at her home in Calgary, Alberta.
DEMAND FOR OIL HAS FALLEN BY NEARLY 30 MILLION BARRELS per day since April, shaking oil-producing economies worldwide.
This precipitous fall in demand triggered oil producers (OPEC+) to attempt to negotiate an agreement to decrease global supply and stabilize prices. When negotiations failed, a price war began between Saudi Arabia and Russia, leading each country to increase oil production in protest. It costs Saudi Arabia just $3 to produce a barrel of oil. In Canada, it costs between $52 and $85 USD per barrel. As the globe’s largest exporter of oil, Saudi can afford to continue producing long after other countries. If other countries shut-in production due to sustained unprofitability, Saudi will have even greater control over the global oil market.
Despite chaotic negotiations, OPEC+ has now agreed to reduce supply by 9.7 million barrels per day – approximately 10% of global production. However, prices have continued to fall because the 30 million barrel per day decline in demand far exceeds the decrease in supply. Additionally, the curtailment deal does not come into effect until May 9, a full month after it was agreed upon.
Oversupply and delays caused oil prices to plunge, trading at a negative value for the first time, leaving producers with no choice but to pay others to take their oil. The deal negotiated was based on supply cuts, not production, which allowed countries to continue producing but not selling oil. While it is clearly unprofitable to sell oil in the current market, it is generally more expensive to stop production than pay for storage. With storage capacity filling up, the price of storage continues to rise. Negative prices occur when buying oil storage is more expensive than the oil itself.
How does this affect the Canadian energy industry?
The benchmark oil price is West Texas Intermediate (WTI), but Canada actually receives Western Canadian Select (WCS) pricing, which is consistently about $15 per barrel less than WTI. The price discount is largely because Canada sells 96% of its oil to the United States which adds transportation costs, and produces a heavier grade of oil. At the peak of the collapse, WCS sold for as low as -$52.91 USD per barrel, but has recently hovered around $14 USD per barrel.
Oil and gas contributed $359 billion to federal and provincial tax revenues between 2000 and 2018 and the industry accounts for over 10% of Canadian GDP. In a time when Canada’s economy is shrinking and expenditure is increasing, a suffering energy industry creates undeniable economic challenges.
More importantly, this has severe social implications for the 832,000 people directly or indirectly employed in the oil and gas industry. Unemployment in Alberta is anticipated to increase to 25% and energy industry jobs are expected to be lost, particularly in Alberta, Saskatchewan, and Newfoundland and Labrador. Unemployment leads to higher rates of suicide, mental health diagnoses, homelessness, addiction, crime, and domestic violence. Rapid spikes in unemployment exert a devastating social toll.
What can the government do now?
Governments have introduced numerous programs to support people and industries through this crisis, but as we begin to return to ‘normal’ our economy will continue to lag. As governments move to support Canada’s recovery, they should prioritize investment in projects that support personal well-being, the economy, and the environment.
Infrastructure spending is used as a fiscal stimulus to inject money into the economy and create jobs. Spending should target the hardest-hit industries and prioritize shovel-ready projects that get people back to work immediately. Although the Canadian energy industry is in its sixth year of sustained low oil prices and low employment, it continues to innovate and meet growing demand.
Infrastructure investments should be made in innovative technologies that reduce emissions from the sector, including enhanced oil recovery technologies and carbon capture and storage projects. Many of these projects have been or are at risk of being shelved due to sustained low oil prices. Fiscal support from the government will assist in providing funding for these technologies and the jobs that support them.
The government should also consider investments in storage facilities. Canada produces approximately 4.5 million barrels per day and has around 90 million barrels of storage capacity, only about 55 million of which are on Canadian soil. Storage capacity is about half full at any given time, which gives Canada just a few days of storage capacity. Every recession, energy prices tank and Canadian companies are forced to sell at extremely low prices, which often results in unemployment. Creating storage facilities will help the energy sector weather these storms by allowing for oil to be stored until it can be sold at higher prices.
In the short-term, it is crucial that Canada’s major sectors have access to capital. Programs such as Export Development Canada’s Business Credit Availability Program should continue providing liquidity to sectors that drive economic growth and employment.
Why should we invest in oil?
Prior to the pandemic, global demand for oil showed little sign of declining. Developing countries lead demand for increased fossil fuels and are relying on affordable and reliable energy to lift people out of poverty. Current forecasts indicate a 30% increase in global energy demand by 2040. Even with renewable energy increasing by 400%, it will still only meet 6% of global energy needs.
Electric cars have created an increased demand for plastic car parts which are derived from petrochemicals. Wind turbines and solar panels use petroleum products as inputs. As countries around the world increase their investments in renewable energy technologies, Canada’s oil and gas sector can aid in the transition to different energy sources. Achieving a greener economy that improves the quality of life of people all over the world will take an all-of-the-above approach. (RIT)
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