Already depressed oil prices [14] are now plummeting in response to the COVID-19 pandemic. Global oil consumption is said to be in "free-fall," and predicted to lead to the largest "annual contraction in history." Bloomberg [15] reports that oil traders fear that demand "may contract by the most ever this year, easily outstripping the loss of almost 1 million barrels a day during the great recession in 2009 and even surpassing the 2.65 million barrels registered in 1980, when the world economy crashed after the second oil crisis." (OilChange [16])
Impacts of the pandemic are being exacerbated by geopolitical manipulations, with inevitable implications for the North American industry. As Bloomberg [17] reports, "In the oil price war between Saudi Arabia and Russia, the first big victim is likely to be Canada." The price of crude produced from Canada's oil sands [18] plunged to a record low of US$7.47 a barrel on March 18, which means that "virtually every barrel of oil now produced there will come at a loss." Canada's National Observer [19] reported that the country's shale oil industry is now on "life support." (OilChange [20])
The next day, The Globe & Mail [21] reported that Canada's federal government is preparing a bailout package for the oil and gas sector, with a possible value of $15 billion. Under consideration is a share buy-out akin to the US Troubled Asset Relief Program (TARP [22]) for banks and automotive companies during the 2008 financial crisis. This follows Prime Minister Justin Trudeau's announcement that Export Development Canada [23] and the Business Development Bank of Canada [24] are working on a new public finance package [25] for the hydrocarbon sector.
In response, Bronwen Tucker, Edmonton-based research analyst with Oil Change International [26], stated: "We're in the middle of an unprecedented global health emergency and economic crash, we can't afford for the federal government to bail out a sector in terminal decline. Workers and communities are struggling right now—there are still massive gaps in Canada's COVID-19 response packages that are putting millions at risk of losing their homes, jobs, and health. It is criminal for Trudeau to be pursuing a massive handout to Big Oil instead of ensuring these basic needs are met."
Tucker added: "We have seen this movie before. The money from the 2009 TARP bailout overwhelmingly flowed to banks and wealthy shareholders. Since the oil crash in 2014, more than 50,000 jobs have not returned to Canada's oil patch, with companies prioritizing massive dividends for their shareholders instead..."
Permanently depressed prices?
The Russo-Saudi price war seems to be backfiring on Riyadh, for the moment. Moscow is intentionally tanking prices in a bid to protect its market share and derail the US shale oil boom—against the expressed wishes of Riyadh at the March 5 "OPEC-plus [27]" conference in Vienna. And Saudi Arabia has now scrapped its plan to stabilize prices, and is retaliating [28] against Russia by ramping up production—at the worst possible time. (CNN [29])
All this will loan fuel to the incessant talk in recent years about how low oil prices are now permanent [30] (mirrored, of course, in the similar talk 10 years ago about how high prices were now permanent). And the related talk about how the US is now immune from global market disruptions.
"We are independent, and we do not need Middle East oil," President Trump said during January's crisis with Iran [31]. But the actual story is little more complicated.
Yes, the US is now the world's leading oil producer, ahead of both Saudi Arabia and Russia. US output has doubled since 2011 to nearly 13 million barrels per day. The country is now actually exporting 3 million barrels a day. But this is largely due to the shale oil boom.
But the US refinery system, which was built in the last century, operates most efficiently with the heavy oil that is imported from the Middle East. Shale oil has greater utility [32] in production of heating oil, marine fuels, and the petrochemical industry. Production of gasoline, jet fuel and diesel remains largely dependent on imported heavy crude. "That is a matchup that was dictated decades ago," Bob McNally, president of DC-based consulting firm Rapidan Energy Group [33], told CNN [34].
Which means that events in the Middle East could still spark an oil shock—even now. "The reality is that a disruption anywhere produces a price spike everywhere, including here," said McNally said.
In which case, the beneficiaries of a petro-TARP will be laughing all the way to the bank.
