Oil price war nothing short of catastrophic
Devastation keeps coming for Alberta with Saudi Arabia’s move, says Martin Pelletier.
For Albertans, the past six years have been one of the toughest stretches the province has seen since Trudeau senior introduced the infamous National Energy Program in the early 1980s.
Just when we thought there was a light at the end of the tunnel with some green shoots entering 2020, the country’s energy sector has been hit with what is looking to be a set of devastating blows.
First there was a series of anti-pipeline rail blockades that were allowed to rapidly expand across the country because of a delayed and muted response out of the Prime Minister’s Office. Not surprisingly, Teck Resources responded to the uncertainty by pulling its $20-billion Frontier oilsands project, bringing the total cancellations to a whopping $150 billion in the past few years. We don’t think it was a coincidence that anti-resource development Bills C-69 and C-48 were introduced over this period by the Justin Trudeau government.
Then on Sunday, the big one hit, as Saudi Arabia announced that it was waging an all-out oil price war on Russia and U.S. shale producers by flooding the market with an incremental one million to two million barrels per day. What makes this catastrophic is that it comes as oil demand was expected to contract by about
3.8 million barrels per day due to the economic hit from the coronavirus, according to IHS Markit.
Oil markets cratered with Brent and WTI oil prices falling more than 20 per cent. Monday morning they were trading at US$36 and US$32 a barrel, respectively. The Canadian dollar also fell more than one per cent down to US73 cents, which we think is quite moderate considering the impact this oil shock will have to our economy and especially Alberta.
According to Blake Shaffer, assistant professor at the University of Calgary, Alberta’s recent budget is premised on a WTI oil price of US$58 a barrel.
With Sunday night’s collapse he calculates that annual provincial revenue could fall by more than $5 billion. Depending on the WCS discount and Canadian dollar response, this shortfall could be as much as $7 billion.
While there are merits to having a provincial sales tax, now isn’t the time to be introducing tax hikes on Albertan consumers. Public sector layoffs are just starting to occur and in the private sector we worry that more oil and gas companies may simply wave the white flag by either massively slashing their capital programs following spring breakup or simply closing up shop altogether, something that would lead to more layoffs.
Unfortunately, there isn’t a lot the province can do at this point and it is now up to the feds to step up. This could include a coordinated effort by both the Bank of Canada and the federal government to proactively provide monetary and fiscal support such as announcing a multi-billion-dollar infrastructure program in Alberta and other affected regions, backstopped by another emergency rate cut.
Like the coronavirus, if the damage from this oil price shock isn’t contained, it will quickly become clear that it is not just Alberta’s problem — the entire Canadian economy will be affected as well. Based on a report co-authored by the Colorado School of Mines and the University of Calgary entitled Going Dutch? The Impact of Falling Oil Prices on the Canadian Economy, a 10-per-cent reduction in the price of oil correlates to a one-per-cent decline in national output and 0.9-per-cent fall in consumer welfare. Also remember that the 2014 oil crash sent the country into a recession and this one has the potential to be a magnitude worse.
Finally, bonds are often rebuilt among friends and family during times of adversity, and now couldn’t be a better time for Albertans to get some help from fellow Canadians.
Financial Post
Martin Pelletier, CFA, is a portfolio manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.