Oil was the top-performing asset in the third quarter but now it’s on one of its sharpest declines in recent years. It’s the kind of trend that can spell trouble for the Canadian economy and yet another hit for the country’s energy sector.
The price of the U.S. crude benchmark West Texas Intermediate (WTI) dipped below US$69 per barrel on Dec. 12 for the first time since late June, marking a decline of 26 percent from its Sept. 27 level of over US$93. Brent, the international oil benchmark, is on a seven-week losing streak.
These shorter-term declines aren’t quite in the same ballpark of late 2014 to early 2016—when the price of WTI fell by roughly 70 percent—or the very sudden and massive shock due to the COVID-19 pandemic in early 2020.
But another down week for oil would be its longest losing streak since 2015, and that kind of trend can pop up on the central bank’s radar.
The Bank of Canada, on Dec. 6, noted that oil prices are about $10 per barrel lower than what was assumed when it released its quarterly forecasts in late October.
In January 2015, the BoC cut interest rates due to the sharp drop in oil prices and its adverse effects on economic growth and inflation.
The central bank said back then that business investment in the energy sector would decline—which it did significantly.
In its January 2015 monetary policy report, the Bank of Canada said the prolonged drop in energy prices into the US$50–US$70 range could lead to a big hit to the housing sector if households can no longer service their already-high debt load due to lower incomes or unemployment.
The BoC cut rates again in July 2015 and added weaker-than-expected exports to the growing problem of falling business investment plans in the energy sector.
Oil Hurdles for Canada
The main reason for the current decline, according to most analysts, is that markets have been growing increasingly worried that the supply of oil will overwhelm global demand. The November 30 OPEC+ meeting failed to inspire confidence in the cartel’s production cuts, and non-OPEC+ supply has been ramping up.OPEC+ consists of the 13-member Organization of the Petroleum Exporting Countries (OPEC) plus 10 other oil-producing countries, most notably Russia.
“The oil market has become skeptical over OPEC+’s longer-term ability to effectively curb supply,” said BMO senior economist Art Woo in a Dec. 8 commentary.
BMO revised down its forecast for WTI to an average of US$80 per barrel for 2024 from US$82.50 “as the cohesiveness of OPEC+ has shown signs of fraying,” said the bank in a Commodities & Industry update on Dec. 7.
Dan McTeague, president of Canadians for Affordable Energy, raises yet another concern for the oilpatch—the discount it gets relative to the price of WTI. In good times, the discount is $15 or less, but now it is close to $20.
“So while the Americans get US$70 a barrel and [are] paid in their own currency, we get 50 bucks a barrel, and it’s in Canadian currency losing its purchasing power,” Mr. McTeague told The Epoch Times.
Canadian oil trades at a discount for a number of reasons and one of them is a lack of export markets.
Canadian Association of Petroleum Producers president and CEO Lisa Baiton said that while the industry group doesn’t comment on oil price volatility and the investment decisions that may result, oil production is strong. She expects oil exports to pick up and for global demand to be strong for decades to come.
“The Trans Mountain expansion will provide further capacity and is expected to diversify the international market for Canadian oil,” Ms. Baiton told The Epoch Times.
Volatile Market
Countries’ subsidies for fossil fuels almost doubled in 2022 due to soaring energy prices, according to a Dec. 1 report from the Organisation for Economic Cooperation and Development (OECD).It’s a law of economics that when the price of a commodity is high, more of it is produced.
“Countries sought to cushion the impact of surging energy prices on households and firms,” the OECD news release said. Countries provided subsidies for coal production as well.
But going forward, Mr. McTeague expects oil prices to go up. He painted a scenario where colder weather comes later in December, which increases consumption of natural gas and diesel and results in prices moving higher in January.
He adds that the fundamentals of oil are not reflected in the financial markets, where traders are positioning for lower prices.
“It’s likely to see even less investment being placed on new finds. That is inevitably going to lead us either to rely more on OPEC or alternatively a supply crunch. That’s inevitable, it’s going to happen,” Mr. McTeague said.
‘Third Carbon Tax’
Aside from the plunge in oil prices, Ottawa’s proposed cap on oil and gas emissions, which could come into effect in 2026, is viewed by some as a production cap on oil and gas.DBRS Morningstar said in a Dec. 12 commentary that the emissions cap on oil and gas is a challenge for the industry given that oil production will likely grow over the next few years.
DBRS said the government’s objective to reduce greenhouse gas emissions by 35–38 percent below the 2019 level by 2030 would place the industry’s emissions at a level that existed in the mid-1990s, when Canada’s oil production was around 43 percent of what it was in 2022.
“While the federal government maintains that the measures will set a limit on emissions and not on production, it is conceivable that if the regulations are finalized as proposed, then O&G [oil and gas] production in Canada could drop,” according to DBRS.
Mr. McTeague calls Ottawa’s cap-and-trade system for emissions reductions a “third carbon tax” and an “existential threat” to the energy sector.
