Canada’s oil industry is caught in the middle of a fight between two oil-producing bullies.
On one side, an emotional juvenile Saudi Arabian king has cut oil prices sharply, promising to add 2.5 million barrels of oil a day to the 10 million already being pumped by his fields.
On the other side, a sly Russian dictator refuses to go along with production cuts proposed by the OPEC oil cartel. Russia saw no reason to prop up oil prices with lower production when U.S.A. producers kept pumping more new oil.
The Russian dictator Putin saw a price war as the opportunity to shut down the shale oil industry in America. The shale oil fields need $30 oil to survive. So he thumbed his nose at the Saudi-led OPEC.
In a fit of anger, the Saudis started dumping oil in Russia’s traditional European markets at $22 to $23 US a barrel, cutting the price from $30.
Oil prices had already fallen from $45 to $50 as reduced demand caused by COVID-19 impacted markets.
Canadian heavy oil has been trading as low as $4US, well below the $30 to $50 needed for break even.
Oil producers and consumers wonder who will blink first in this stand-off.
Both parties are determined and bullheaded. Both have extensive war chests to subsidize the low oil revenues.
The Saudis have already depleted much of their oil price war chest since kicking off the oil price plunge in 2014. According to the financial press the Saudis have $502 billion US to subsidize government revenues.
Russia has $570 billion US currency reserves, including $170 billion in a national wealth fund, accumulated since 2017 from surplus oil revenues. Our politicians could learn to accumulate surplus oil revenues.
Russia has indicated its funds can sustain a price war for 10 years. The Russians have a big bonus, paying for cost of oil production in devalued rubles but receiving US dollars in payment. The benefit at 13 rubles to the dollar outweighs the benefit Canadian exporters receive.
The ruble, incidentally, owes part of the low value to sanctions imposed by the Trump presidency in America.
Low oil prices harm Russian producers less than in the U.S. or Canada as Russian oil royalties decline with prices.
According to a Bloomberg analysis, Saudi Arabian reserves have fallen from half of GDP to less than one per cent since 2018. Oil prices at these levels will create financial challenges within months.
While the two dictators take part in the oil fight Canada suffers as do American oil producers.
Canadians will have little choice but reducing production and massive job layoffs. Reduced production will start with less drilling to replace dwindling flow from existing wells.
To shut down any of the numerous steam-assisted gravity fields would cut pressure and future production.
This is a vital industry in Canada, accounting for 10 per cent of Canada’s GDP and considerably more in Saskatchewan and Alberta.
Ron Walter can be reached at [email protected]
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
