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A quick thread on the surreal gridlock that Canada's oil industry -- which, as a reminder, is a super big part of the economy -- finds itself in. See this story below 👇 1/n
A quick thread on the surreal gridlock that Canada's oil industry -- which, as a reminder, is a super big part of the economy -- finds itself in. See this story below 👇 1/n
Canada's oil industry is in a crisis right now -- it's producing more oil than all the pipelines, rail cars and storage tanks can handle. So prices are falling, and falling quickly.
How bad is it? Bad. On Labour Day, a barrel Canadian heavy oil was selling for $45 U.S. (down already from $55 in July).
Now, it's selling for $15.75. A drop of two-thirds in two-and-a-half months.
Now, it's selling for $15.75. A drop of two-thirds in two-and-a-half months.
$15.75 is a really, really low price to get for a barrel of oil, so people are growing desperate. There's two camps: companies who want government to intervene, and those who want to leave it up to the market.
This came to a head last month when Rachel Notley, the Alberta premier, led a closed-door meeting that hinged largely on the issue, sources tell me. It basically pitted oil producers against "integrated" ones that also have transport and refining capacity.
So like, a low Canadian oil price doesn't suck as much if you're selling to your own refinery. Your refinery gets a great deal. But if you don't have a refinery, you're out of luck.
Also out of luck is Alberta -- royalties are obviously much lower when prices are low. It's desperate times already for the Alberta treasury and this isn't helping.
It's really messy. Pipelines are full so companies bid on spots, which get sort of divvied up and rationed out. There are complaints about that process favouring some over others.
Of course, looming large in all of this is a feeling of we-wouldn't-be-in-this-mess-if-we'd-gotten-another-big-pipeline. KXL, TransMountain, Gateway, Energy East, whatever. No new pipes + loads of new production = problem.
So, what to do about it? There's a fear among some sources that an industry-wide coordinated, OPEC-style production cut would, uh, be illegal. That leaves two options essentially: a forced cut by government, or let things / the market sort themselves out.
Advocates of a forced cut say it would be temporary -- maybe only a few months. Wait until supply levels come down and storage space opens up and maybe the price plunge stops. Maybe prices even recover.
Opponents say two things. One: don't mess with the free market. (This is Alberta, after all.) Two: don't punish companies that bet on an integrated model and are now reaping the benefits.
Imperial Oil opposes intervention, we're told. Their CEO said this month: ``Our view is you live with the consequences of your decisions in your investments and we're quite happy that we are an integrated and a balanced company.''
So, where's Notley in all this? Pretty jammed. Her gov is saying that, yes, she has power to force a cut, but that it's more complicated than when Peter Lougheed did it. She left the meeting and announced a push for more rail cars, instead. But she's also leaving the door open.
In the meantime, companies are already cutting production on their own. That'll be pretty messy, and brutal. Whomever has the highest-cost barrels will be forced to take them offline, cut production, probably cut jobs.
The question boils down to this: everyone agrees the price now is way, way too low and that it's very bad for Alberta.
But who should fix it -- Notley, or the market? (Notley herself seems to think the latter, at least in part.)
But who should fix it -- Notley, or the market? (Notley herself seems to think the latter, at least in part.)
In the meantime, regardless of what you think about WHETHER Canada should sell oil, it's selling oil at a near-record discount to U.S. prices, which are falling themselves.
Doesn't look to be an easy fix.
Doesn't look to be an easy fix.
Update: Canadian heavy crude dropped again today. Now $13.46 per barrel. That is a record low.
Other heavy oils trade for a few dollars or so less than the global Brent price ($66).
Huge, huge, huge gap between prices fetched for Canadian oil vs. pretty much everyone else.
Huge, huge, huge gap between prices fetched for Canadian oil vs. pretty much everyone else.
Story on the record low: bloomberg.com/news/articles/…
And a story on Jason Kenney backing market-based solutions (siding with Suncor, Imperial, Husky): bloomberg.com/news/articles/…
