What does the oil price drop mean for the average Canadian?

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Coronavirus outbreak: What negative oil prices mean
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Consumers may not see any immediate repercussions from the historic negative levels that global oil prices are now facing, but experts say that in the long run it could make life more difficult for some Canadians, especially in Alberta.

On Monday, the West Texas Intermediate contract for May delivery fell US$55.90 to US-$37.63 per barrel — which means contract holders were paying others to take the oil off their hands. On Tuesday, contract expiration day, the amount returned to positive territory, settling at US$10.01.

That low price was mainly due to over supply and lack of storage at the Cushing, Okla. facility where WTI stores its oil, but the fact is: globally, demand is down, hugely thanks to COVID-19 stay-home rules — and that demand is also down for Alberta’s oil.

“This is a multi-billion dollar impact to the Government of Alberta’s budget,” said Andrew Leach, an associate professor at the Alberta School of Business who specializes in resource economics.

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Some experts say oil production in Western Canada will likely fall by at least one million barrels per day and possibly as much as two million bpd as producers cut back where they can to avoid low prices.

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Crude oil futures prices turn negative for the first time in history
“[The impact] then flows down to what’s available for Albertans through royalties, corporate taxes, all of those sorts of things,” Leach said. “For almost everybody, that’s going to be a larger impact on the average Albertan than the savings on gasoline.”
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Leach added that while gas prices could go down further, he doesn’t expect it would ever reach a negative point for consumers. However, he said Albertans should still be concerned.

“As Albertans, we’re hugely leveraged still to oil in general. So whenever you see low oil prices, you have to think, one of our largest resources is getting less valuable by the day.”

Trevor Harrison, professor of sociology at the University of Lethbridge and director of the Parkland Institute, said that there will likely be major economic repercussions in the coming months that go beyond the oil and gas industry.

“This is a bit shift to Alberta’s economy and the government’s budget,” Harrison said. “We can probably expect more cutbacks. At the same time, as the cuts come, that may even drive the economy lower.”

Why are companies not stopping production as prices drop?

It seems like the simple answer: just halt production if the prices are sliding due to over supply.

But it’s actually not that simple, said Leach.

“For some companies, they’ll have conditions on their debt that require them to keep producing,” Leach said. “So if they were to decide to shut down production… they’d have ongoing covenants in their debt that would say, ‘You must demonstrate your ability to produce a particular volume.'”

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So any companies that do have conditions that require production would have to pay off their debt as a consequence if they were to halt production.

Harrison said that he believes companies are likely also worried about being left behind in the global production market.

“I suspect in Alberta and North America as a whole, they’re [companies are] also afraid of simply losing market share over time,” Harrison said.
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On top of that, there are concerns about what happens to oil sands if they’re left unworked.

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“If you stop production, you might actually do permanent damage to your reservoir. So your total long-term production might actually get affected by your decision in the short-term,” Leach said.

“There’s a lot of uncertainty there. I think that’s exactly what companies are wrestling with right now.”

Leach added that while the prices for West Texas Intermediate oil future contracts seem like a major cause for alarm, not all companies trade under that contract.

“The oil prices that you see, when you see the negative prices [Monday], that’s for a particular contract, for a particular type of crude, for delivery at a particular location,” Leach said.

“Not everybody is in the position of having to sell or buy crude at that contract at that time.”

Should the government be stepping up to help?

Jason Kenney made a plea to the federal government on Monday, saying it should be doing more to help the resource industry.

Leach said that while he doesn’t necessarily believe the right answer is the federal government  directly putting money into bailing out corporations, there is a situation brewing that could lead to Alberta’s industry becoming stunted.

“The more disruption that happens to companies and employer-employee relationships during this shutdown, the harder it is to ramp things back up,” he said. “It’s harder to start anything from scratch. So [if] companies go bankrupt, employees lose their jobs, it means that even as oil prices recover, Alberta isn’t [going to be] as able to respond and grow along with that.”
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Harrison said that he believes the government’s support role shouldn’t necessarily be focused on the industry itself.

“What we should be doing is certainly supporting the workers involved,” he said.

“We need to separate between an industry that is in crisis the workers themselves. It is clear and has been clear for some time that Alberta is going to have to transition away from oil and gas.

“What we’re seeing right now [with the industry] is probably going to come back to haunt us again, whether there’s a pandemic or not,” Harrison said.

While some Alberta companies are raising the alarm over the current pricing situation, other are remaining optimistic.

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Enbridge, which operates a tank farm in Hardisty, Alta, said Tuesday that it believed the current pricing situation is temporary.

“There are a number of factors contributing to the situation from an oversupply of oil to the impact of COVID-19,” said a statement from the company. “As the industry works through these issues, balance will be restored to the market in the long term.”

Trans Mountain Corporation runs a tank farm on the east end of Edmonton. It said that it provides limited storage, only what it needs to operate its pipeline on a monthly basis.

“The pipeline operated at its maximum capacity for the first quarter of 2020,” said Trans Mountain in a statement. “It’s very difficult to predict what future pipeline demand will be given the current conditions.”

–With files from The Canadian Press

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