Canada used as pawn in international chess match over oil
With Saudi Arabia seeking more customers with lower price, higher- cost producers are losers
Behind the recent, and even dramatic, drop in oil prices is a chess match being played out between two major players in the oil world — Saudi Arabia and Russia.
The United States and Canada both stand to be part of this drama, mostly as collateral damage due to lower oil prices.
The price for Brent crude hit a high of $ 115.92 in June and has been on a downward slide ever since. In the past 12 months, Brent has fallen more than 16 per cent, with Wednesday’s trading leaving the commodity below $ 92 US per barrel. The story for West Texas Intermediate isn’t much different — down close to 13 per cent in the past 12 months and nudging below $ 88 per barrel. Exactly what’s going on? It starts with Russia’s invasion of Ukraine earlier this year. At the time, many ideas were being floated as to how best to punish Russia, including boosting the export of oil and natural gas to Europe from North America as a way to weaken Russia’s role as the dominant supplier to the region. Others talked of a way to engineer a drop in oil prices, possibly by selling barrels from the U. S. Strategic Petroleum Reserve and hitting Russia where it hurts by decreasing its oil- based revenue stream. The western world ultimately settled on a plan of economic sanctions aimed at slowing the already tepid Russian economy.
Now, seemingly out of nowhere, the price of oil is falling. To be sure, factors such as sustained production out of Libya and Iraq, a slowdown in China’s economic growth and the growing number of barrels being produced from the tight formations in the U. S. all have something to do with what’s happened to oil prices, both Brent and West Texas Intermediate.
But there are other variables to consider.
Let’s go to the punch line and work backwards.
Saudi Arabia appears intent to buy market share — and has recently cut the price it offers its customers to do that — by as much as $ 1.20 per barrel in Asia, where it wants to increase market share. It has also dropped prices to American, European and Mediterranean customers.
The Saudis, as well as the United Arab Emirates, are best able to tolerate lower oil prices compared with the other members of the Organization for Petroleum Exporting Countries.
But among the countries most reliant on a high oil price — and vulnerable to a sustained price shock — is Russia.
The sanctions are indeed beginning to bite and the Russian government, thus far, has been able to bolster affected companies.
That works as long as oil prices are higher than where they are now; Russia used a $ 117 per barrel average price for 2014 in its budget forecast.
With Brent trading at its lowest level since 2012, the loss of oil revenue could negatively impact the country’s already challenged economic growth prospects.
In addition to the Saudis buying market share in Asia, the combination of increased supply and weaker global demand weighed on prices.
Whereas non- OPEC production increased by 1.4 million barrels per day last year, demand increased by 1.2 million. This year is setting up to be different, with oil production forecast to increase by 1.6 million barrels per day, while demand is forecast to fall to between 600,000 and 700,000 barrels per day — about half of what was originally estimated.
Clearly the OPEC balancing act is going to be more difficult in the coming months compared with last year and the question is whether there is even a chance at some unity to cut production.
For some countries and regions — Japan and Europe come to mind — weaker oil prices amid weak economic growth is good news.
For others, such as the highcost producers and the climate change activists, low oil prices are bad.
It’s tough to convince populations and countries to use less oil when it’s cheaper. By the same token, it’s tough to make the case for announcing new projects or expanding existing ones when prices are soft.
That’s especially true in landlocked Alberta, which is vying to gain access to the West Coast as a way to sell oil production primarily into the Asian region.
Speaking to the Calgary Herald’s editorial board Monday, Alberta Premier Jim Prentice laid bare how the lack of West Coast access is affecting energy sector revenues: $ 14.8 billion in 2012 and $ 12.6 billion in 2013.
It meant a loss of $ 3 billion in royalties to the Alberta government in 2012 and $ 2.9 billion in 2013 — enough to fund a new school every two days — and about $ 2 billion in lost federal tax revenue.
And, as we have started to see, the challenge of lower prices, rising costs and the lack of pipeline access is starting to weigh on the entire sector.
Word has it business at engineering firms is down about 30 per cent since 2010, which makes sense. There are no new projects being announced in Alberta. Statoil just iced one of its projects, following the lead of Suncor and Total earlier this year.
In effect, the combination of increased production, decreased demand and the Saudis moving in to buy market share makes the notion of causing Russia further economic pain by putting downward pressure on global oil prices not so far- fetched.
But instead of the U. S. flooding the market by selling from the SPR, the Saudis are doing it by keeping production constant and charging a lower price.
Call it a proxy war of sorts, or a game of chess using oil barrels instead of pieces on a board.
This chess match could continue for a while, with highercost producers ultimately winding up as collateral damage; especially those whose market options are limited.
It’s but one more reason for the pressing need to elevate the dialogue on Canadian energy to a national level and make the diversification of markets a shared national interest.