Column: Saudi – Russia price war affects Canada too
April 8, 20205:34 AM
The effect(s) of the Russo-Saudi squabble on Canada. It could be argued that Saudi Arabia’s labelling of the USA could well partially apply to Canada. While senators from oil-producing states might want someone else to cut back, the Saudis might well argue that the current situation would be easier to deal with had the U.S. not doubled its oil production in less than a decade. Whichever side prevails, the geopolitical wrestling match could end up squeezing the US and also Canada. Will there be an agreement at all, and if so, what will it consist of? In terms of other Opec member states, the national budgets of many countries, especially the petro-states of Venezuela, Iran, etc. could be severely damaged. Volatile oil prices are an added complication while attempting to deal with the coronavirus pandemic. While Canada is not a “petro-state”, much of the economy and government budget(s) depend on the natural resources industry. That applies especially to Alberta, also British Columbia and Saskatchewan. That also extends, at least partially, to the other provinces through the equalization formula and the Federation as a whole. The combination of coronavirus and the price war are and will be very challenging to navigate and weather. Who benefits? Nations that mostly import, especially China which is the largest importer. Having been the first nation to be affected by the virus and its point of origin, the beginning of the end is present there. A key difference between Canada and its neighbour to the south is that the U.S. is an exporter whereas it used to be a customer. Over the past decade, the reverse has taken place in Canada, mainly concentrated in the eastern half of the Federation. The policy dispute between Russia and Saudi Arabia and the fragmenting of Opec+ threatens to destabilize Alberta’s finances and is another feature of many negative features and risks to Canada’s fossil fuel industry. The previously dire situation of the discount of Western Canadian Select oil has aggravated recently, having decreased by more than half of its previous value. Furthermore, the Canadian dollar is at its lowest value vis-à-vis the U.S. dollar in two years. It reinforces the image many have: this includes myself, as shortly after immigrating I became convinced that the CAD is primarily a petro-currency. Canadian oilsands operations have some of the highest production costs in the world, making the price war consequences particularly damaging to profit margins. “From a Canada perspective, the timing clearly couldn’t be much worse,” Bank of Montreal economist Benjamin Reitzes wrote in a client note Monday morning. “Oil was already under pressure from the COVID-related drop in demand, and the underlying economy wasn’t particularly strong heading into all this,” he added. The oil price drop could prove particularly difficult for Alberta: every dollar decline in the price of oil means that the provincial government drops $350 million. According to Blake Shaffer, an assistant professor of economics and public policy at the University of Calgary, Alberta’s recently-tabled budget assumed that the U.S. benchmark oil price would average at $58 per barrel this year ― a level that is now $26 higher than the actual price. Furthermore, “We’re talking about a $7 billion decline in revenue expectations,” It would seem to be imperative that calculations should be re-done to take more possibilities into account. Saudi Arabia, which has the lowest oil production costs anywhere in the world, is aware that deep price cuts threaten high-cost producers ― and that is part of the point. “Inefficient producers will have to get out,” Saudi oil minister Ali Al-Naimi declared in 2016, making it clear his country prefers to flood the market with cheap oil, rather than cut production when oil prices fall. It appears that Saudi Arabia’s aim is deliberate economic disruption or destruction. Russia, more particularly Vladimir Putin, is mostly keen on rebuilding its former empire. While the resource industry is one of its key tools, the overall aim does not reach to the same extent as that of Saudi Arabia. The price war has arisen due to Putin refusing to be bullied by the Kingdom. For Canada overall, the price war will mean lower costs for Canadian drivers and transport-dependent industries. That will be good for consumers while being harmful to industry in particular, the bedrock of the economy of Western Canada.