No One Is Buying Canada’s Oil: A Preview Of The Near Future New Normal

March 29th, 2020 by Michael Barnard

Two weeks ago, I published an article outlining why the oil and gas sector was the primary driver of economic losses in the Dow Jones Industrial Index due to the coronavirus. The global economy’s dependence on products that are changing the climate is inherently economically risky. Oil and gas are increasingly risky, not only as a source of energy, but because the industry is a contagion vector as well.

But that’s far from the entire story. Even within the fragile fossil fuel industry there are winners and losers, and the ones winning and losing today are exactly the ones who will be winning and losing in 2030 and 2040 as more troughs and fewer peaks emerge as the world electrifies.

Russia and Saudi Arabia, both very cheap producers of vast amounts of much lighter oil than Canada’s, are in a price war. They are going to kill the most expensive producers. They know that at the end of the age of oil we will still have lots of oil, just as the stone age didn’t end due to a shortage of stones. That’s been multiply attributed, but even a long term Saudi energy minister said it in the early 2000s. That means that in times like this, cheaper producers try to kill expensive producers and ship as much of their product as they can while they can still make money on it. This has two benefits for the Saudi Arabias and Russias of the world. First, they make revenue today. Second, they eliminate competitors for peak demand periods in the future. This is a competitive game that’s been playing out with variations for 20 years and is only increasing. The days of OPEC keeping oil prices high are over.

One of the results is that Alberta’s crude oil is selling for less than it costs to ship it, with the Western Canada Select, the domestic heavy oil benchmark, coming in at $4.58 USD per barrel. Canada’s crude oil is expensive to extract, higher in CO2 emissions from extraction, far from water, and more expensive to refine. That’s why it’s at the bottom of the market today, and that’s why it will be at the bottom of the market when climate change action reduces demand.

Oil sands projects are shuttering. Production limits are coming. Meanwhile, the Premier of Alberta, Jason Kenney, has declared this failing industry in a time of a global glut of oil an essential service. That means that the oil sands workers who should be sheltering at home with their families until demand returns, for as long as it does, will instead be expected to be working in remote work camps, using shared kitchens, bathrooms, and working cheek to jowl with other people flown in from southern Alberta for their shifts.

In the middle of a pandemic, Alberta is increasing the spread of the disease, not limiting it. They continue to pretend that they can push back the tide of reality, a reality which is going to make the industry that they depend on far too heavily disappear.

Alberta and the rest of Canada have many lessons to learn from COVID-19. One of them should be that the oil sands shouldn’t receive more federal funding. Canada subsidizes the oil and gas industry directly through federal funds to the tune of US$2.5-$35 billion per year. Canada bailed out the industry with $1.6 billion CAD in 2018, money which did nothing in particular to change reality. Canada’s Liberals spent $4.5 billion CAD buying a pipeline to water so that it might eventually be tripled in capacity to bring more of the still higher emissions, still more expensive to refine product to a market which has shown remarkably little interest in receiving more of it.

Alberta has cut royalties on oil and gas regularly over the past decades, and most recently gave oil and gas companies a massive tax cut, purported to be a generic corporate tax break which would boost the economy despite zero evidence for that rosy prediction. Companies responded by pocketing the money and in many cases shutting down Alberta offices and operations, increasing investment in other geographies.

Alberta isn’t alone in this of course. British Columbia, with a government that should know better, is giving the natural gas industry subsidies of close to a billion CAD per year.

And now Canada is going to throw billions more at the failing industry as it deals with the global loss of demand. Billions in 2018. Billions in 2019. Now billions in 2020.

When will Canada learn? Stop throwing money at the fossil fuel industry. Let it live or die on its own with its decades of subsidized profits. Shift investment to clean technologies, technologies which are also much lower in contagion pathways for Canadians. Stop investing in the past and start investing in the future.









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