By, Rowland Goddard
Canada’s oil industry has taken a beating over the past few years and these last two weeks have felt like the knockout punch. The combination of the Saudi-Russian price war along with the COVID-19 pandemic has created a double edge sword, where energy supply is abundant, but demand is crumbling. Where does the industry go from here?
During the first two months of 2020, the price of West Texas Intermediate (WTI) crude oil, a benchmark for global oil prices, dropped roughly 25.0%. In early March, the price of WTI plunged 47.0% when Saudi Arabia undercut Russia. This was achieved by the Saudi’s raising the maximum production rate of its state owned producer, Saudi Aramco, to a record 13.0 million barrels a day. This equated to a large increase of supply in the market, driving the price of oil down.
Three years ago, the Organization of Petroleum Exporting Countries (OPEC) and eleven allied non-OPEC providers — such as Russia, Mexico and Kazakhstan — created the Declaration of Cooperation, an agreement to stabilize oil prices. Together, they constitute OPEC+, effectively controlling 55.0% of global oil supply. Their intent behind the formation of this group was to influence international oil markets on a level that had never been seen before.
In recent months, the alliance became increasingly unbalanced as Saudi Arabia took a greater share of aggregate output. Then the Saudi’s wanted to cut oil prices further by limiting production to offset the market implications created by COVID-19. The agreement completely fell apart when Russia rejected OPEC’S demand to cut oil production by 1.5% of the current world supply.
Knowing Russia would soon ramp up production and drastically decrease prices, the Saudis pre-empted them to expropriate Russia’s market share.
This has created ripple effects across the industry and, along with COVID-19, has created economic turmoil in countries that rely heavily on oil exports such as Canada. Canadian companies are forced to operate at a deficit to keep production running, in most cases out of necessity. The Alberta tar sands, the world’s largest industrial project, requires a constant flow of steam; a lack of steam will cause the viscous petroleum to clog the pipes. Thus, sustained shutdowns are unprecedented.
Layoffs across North America are expected. To stimulate the oil and gas sector, Alberta wants a $15 billion stimulus package that would include access to credit. Furthermore, the government will give tax exemptions to companies hit by the price war. Any laid off workers will be able to use Trudeau’s $27.0 billion emergency aid package to help support their families in the coming weeks.
Uncertainty in the coming months is sure to create a great impact on the oil industry. Not only will it expose the sustainability of the Canadian oil sector, it will also show how the market will be shaped in future as the world moves from fossil fuels to renewable energy.