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Woulda, Coulda, Shoulda: Outlook 2020 and the Uselessness of Unsolicited 20/20 Hindsight – David Yager


By David Yager

The unfortunate confluence of multiple negative events in early 2020 has precipitated yet another outbreak of laser sharp 20/20 hindsight. It happens every time the industry goes into the dumpster.

Woulda, coulda, shoulda. If we had just changed history – done something different – using the information nobody had at the time, then things would be much better.

So what? With so many challenges today and tomorrow, why revisit the impossible?

Thanks to another oil price war among OPEC, Saudi Arabia and Russia, as this article is written WTI is trading 50% lower than it began the year. There have been no WTI prices near US$30 a barrel for over four years. This is against the backdrop of shrinking oil consumption as the world quits moving in an attempt to slow the spread of COVID-19.

This is terrible for an industry entering its sixth year of tough times. Cash-strapped producers are making the obvious and essential necessary reductions to their spending plans to live within their means. Oil service will do even worse. Here we go again. This will be painful and disruptive.

What is most frustrating is that the current economic situation is entirely beyond the control of Canada’s oil and gas producers and the political jurisdictions in charge of managing the industry’s day-to-day affairs, the provinces of British Columbia, Alberta, Saskatchewan, Manitoba and Newfoundland-Labrador.

Ignoring the reality of how little control we actually have over global oil markets, a legion of genius 20/20 hindsight commentators continues to dispense advice on how things could be less awful if history had been different.

Much has been said about how Alberta should have been more like Norway and saved more money in the Heritage Fund. That if the province had a sales tax it wouldn’t have deficits. Or Alberta should have diversified its economy into something other than hydrocarbon production so it wouldn’t be so vulnerable to commodity price volatility.

This relentless and unsolicited onslaught of after-the-fact wisdom has been increasingly common since 2014. While some is local, most originates from other parts the country which have had the good fortune to be able to focus more on esoteric issues like climate change and gender equity because they haven’t had to protect their jobs, homes and companies from economic devastation.

The reality is that none of the calamitous events that have rained financial disaster and reams of unwanted advice on Alberta and the oilpatch have been caused by any of the people charged with managing their day-to-day affairs or mitigating their impacts.

The current oil price collapse is the sixth in the past 35 years. One of the best charts illustrating 47 years of oil price volatility (business was simple before OPEC in 1973) comes from website www.inflationdata.com  It is based on the price of Illinois light sweet crude with data from Plains All American, a pipeline and midstream company. It shows five disastrous oil price drops of one-third or more since 1986 in nominal and inflation-corrected 2020 dollars. This year’s event is the sixth.

The first big crash took several years but the floor was reached in 1986. That year WTI crude fell 49% from an average of US$22.93 in January to $11.59 in July. It had already lost over US$16 a barrel in the previous six years, making the 1986 basement less than one-third of the 1980 peak price.

Except for a brief surge during the First Gulf War in 1991, crude didn’t rise materially in inflation-corrected real terms until 2001. Fifteen long years. What saved Alberta’s bacon was natural gas.

The second big downward spike was brief but painful. That was the Asian financial crisis in 1998. This was not as severe as the other four but was a major disruption nonetheless. WTI opened the year at US$16.92 but by December was down to US$11.35, a 33% decline. Note that according to the chart, in 2020 inflation-corrected dollars 1998 suffered the lowest real oil price since the Second World War and only 45% of what crude fetches right now.

The third big crash that caused oil to fall by 34% over the year was America’s hijacked airplane terrorist attacks in September of 2001, so-called “9/11”. WTI opened that year at US$29.59 and was down to US$19.39 by year-end as international air travel was materially restricted in a big way for the first time in modern history. That was short-lived but negatively affected spending, employment and capital markets. Oil prices didn’t recover until well into 2002.

The fourth big plunge was a whopper, the financial collapse of 2008. WTI plunged 69% from an average US$133.88 in June to only US$41.12 by December. This was caused by the international meltdown of major financial institutions and insurance companies. Oil prices would never again be as high as they were in June of 2008 – nominal or inflation-corrected – and didn’t see the sunny side of US$100 a barrel again until 2011.

The fifth oil price collapse took place in late 2014. The cause was similar to that of 2020, the failure of OPEC to implement the production reductions necessary to sustain prices. That year WTI peaked at an average of US$105.79 in June and closed in December down 44% at US$59.29. Over the next 14 months it would fall another 50% to average only US$30.32 in February of 2016, a staggering 71% below the peak monthly price of 2014.

We all know about this collapse. We’re still living it.

The only possible connection the domestic industry or Alberta have had in any of these economically devasting oil price plunges would be in 2014. The imbalance in oil markets that OPEC chose not to manage that year was caused by technological advancements in US shale oil extraction and continued expansion of Alberta’s oil sands. The US and Canada had added 4 million b/d of new production in the previous four years, enough to supply all of the increase in global oil consumption over the same four years for the first time in history.

The significant increase in North American oil production caused by western capital and ingenuity materially changed global oil markets. This freed the world from the clutches of the OPEC cartel and Middle East producers, collapsed the price of the world’s most important energy source, and significantly improved wealth and opportunity for every oil consumer in the world.

Not utilizing free markets and capitalist ingenuity to provide lower energy prices to the world is the only piece of unwanted advice we haven’t received yet. What Alberta could have done is not embrace new technology, not outwit the oil sands, not invest money, not create wealth and jobs, not cut global energy prices, and leave the world at OPEC’s mercy. Then we might not in this current financial mess.

Sorry about that.

What is most frustrating about the plethora of brilliant post-apocalyptic advice is it completely ignores the geographic and political realities of western Canada.

The comparisons to Alberta’s Heritage Fund and Norway’s massive sovereign wealth fund are ludicrous. When the Heritage Fund was created in the late 1970s because of the unplanned, unprecedented and unrepeatable (check out the inflation-corrected price of oil from 1978 to 1980 from the chart above and think about operating costs and wages at that time) influx of oil wealth into the Alberta treasury, it was immediately a magnet for discontent by the rest of Canada who figured they were paying for it.

Shortly after its creation in 1976, then Premier Peter Lougheed realized Alberta’s new-found wealth symbolized by the Heritage Fund was causing political trouble. Therefore, in the spirit of Canadian unity $1.9 billion of the fund’s assets were set aside and loaned to other provinces like Nova Scotia, New Brunswick, Nova Scotia and Quebec Hydro. Leading up the 1980 Quebec separation referendum, writer and author Peter C. Newman wrote in Macleans magazine how Lougheed’s magnanimous loan to Quebec Hydro might show Quebecers the value of remaining in Canada and help the “no” side win.

In 1980 modern vote-seeking politics took over. Under the Liberal government of Pierre Trudeau, the upstart west and its immoral oil wealth were cut down to size with the National Energy Program. This included a federal production wellhead tax that was ultimately declared unconstitutional in 1982. After OPEC started raising oil prices in 1973 Ottawa immediately capped domestic oil prices below world levels. When Alberta tried to protect more of its oil wealth by raising royalties, Ottawa passed a budget making Crown royalties non-deductible for income tax purposes.

During the highest oil prices in Alberta’s history, the province was never allowed to receive the world price nor keep all the money. This was when conventional oil production – Alberta’s most profitable petroleum – peaked at 1.4 million b/d.

Meanwhile, offshore Norway a giant oil discovery was made at Ekofisk in 1969. When oil prices began to rise in 1973 Ekofisk was already on stream and Norway’s output was on its way to 3.2 million b/d in 2000. Norway pocketed hundreds of billions of dollars by capturing and saving the difference between world prices, operating costs and a rate of return on capital high enough to convince producers to keep drilling.

Norway has a very high royalty/corporate tax rate – as high as 78% – but it is designed to encourage profitability and reinvestment. The government website reads, “It is therefore the companies that are taxed, not the oil and gas fields. The companies are entitled to deduct all relevant costs from the tax basis. Deductions for investments (depreciation and an extra deduction from the special tax basis, called uplift), are designed to prevent the high tax rate from reducing the willingness of companies to invest on the Norwegian shelf…only the company’s net profit is taxable…Deductions are allowed for all relevant costs, including costs associated with exploration, research and development, financing, operations and decommissioning.”

In Canada the province charges royalties on the production regardless of profitability and both levels of governments charge corporate taxes on profits. Meanwhile, there is steady pressure in Canada from the greens to classify Norway’s pre-tax deductions as “subsidies”.

Accumulating all this oil wealth was possible because Norway was a country, not a smaller province in a poorly assembled collection of former colonies. Norway never had to endure any of the internal political struggles that pitted Canada’s heavily populated oil consuming regions against the sparsely populated oil producing regions, or the endless battles over federal/provincial revenue and tax sharing.

While Canada has dithered over the future of oil and pipelines in the past decade, uber-green, oil-rich Norway developed its new Johan Sverdrup field. It just came on production with the same planned output that the Trans Mountain expansion may carry one day. Maybe.

Recent calculations show that since the early 1970s Alberta has contributed nearly $700 billion more in transfer payments to the rest of the country than it has received. In terms of dollar value, this starts to approach Norway’s $1 trillion+ sovereign wealth fund.

Alberta would love to be like Norway. But Canada has never permitted it. Advising Albertans we should have more money in the Heritage Fund is not only irritating, but irrational and historically irrelevant.

Then we’re told we need a sales tax. After the latest Alberta budget The Globe and Mail, central-Canada’s official mouthpiece, wrote two opinion pieces with headlines that fall squarely in the category of revisionist history. An editorial on March 4 was titled, “If Alberta taxed like other provinces, it would have a huge budget surplus”. On March 10 a columnist opined, “Message to Alberta: A crisis is a horrible thing to waste”.

Ignoring all the reasons Alberta’s economy is in its current state, they both carried the same message; all Alberta needed to right its budgetary ship was a major transfer of wealth from the citizens to the provincial government through a retail sales tax.

This of course applies to every government in the world spending more than it collects. Brilliant. Premier Kenney immediately and rightly rejected the idea that taking more money out of the private sector when the economy was contracting was the right antidote for what ails Alberta.

If Canada cared, other actions that would stabilize the economy and secure Alberta’s future include being honest about future emission reduction commitments, ending blockades, tearing up investment destroying legislation like Bills C-48 and C-69, getting rid of the pending Canadian fuel standard, reforming or eliminating equalization, and enforcing the constitution ensuring the free flow of goods across Canadian interprovincial borders.

The last useless nugget is economic diversification. Do something else you boneheads. Embrace renewable energy. Encourage new industries.

As I explained in my book From Miracle to Menace – Alberta, A Carbon Story, Alberta without oil, gas and coal is Manitoba with mountains. Look around. Alberta in North America is the most geographically isolated region of the continent with a climate that can sustain agriculture. To the west is nearly 1,000 km. of mountains to the Pacific Ocean. To the north, nothing. To the east is the most underpopulated region of Canada until southern Ontario, 2,500 km. away. To the south are some of the most sparsely populated and economically smallest states of the US; Montana, North Dakota, South Dakota, Wyoming and Idaho.

Without access to tidewater and major population centers, what precisely should we supply from Alberta that our neighbors and other parts of the world don’t have?

So we sell what we’ve got. Some of the world’s largest supplies of hydrocarbon resources – oil, natural gas and coal. Which is why 4.4 million people live here and don’t live in such numbers anywhere nearby.

There is almost zero acknowledgment from Ottawa or most of our fellow Canadians that there is any aspect of our challenges that they played a part in. Nobody will be sending us any cash, just more useless advice.

As the global economy struggles to cope with the impact of COVID-19, the greatest single financial boost to the most people will be from reduced energy prices and cheaper fuel. As of Saturday March 14, gasoline prices in Montreal were down $0.271 a litre from the January average. Toronto was down $0.336 over the same period, Vancouver $0.26.

Let’s assume this applies Canada-wide. In the past few years Canada consumed about 45 billion litres of gasoline annually. Using the average price reduction in country’s three largest cities and if Alberta’s oil price misery lasts for a year, Canada’s struggling oilpatch would save Canadians about $13 billion cash on gasoline alone. Diesel fuel demand is another 19 billion litres. The same price drop for diesel would chip in a further $5.5 billion.

Fuel volumes won’t be that high as the economy slows. Nevertheless, the price plunge will be helpful financial relief from the COVID-19 mess. No federal government relief programs are likely to pump this much cash back into the pockets of ordinary Canadians.

You’re welcome.

Instead too many Canadians tell us Alberta should have saved more money, introduced a sales tax and gone into the aircraft or automobile manufacturing business.

And people wonder why Albertans are angry.

David Yager is a Calgary oil service executive, energy policy analyst, writer and author. He is currently President and CEO of Winterhawk Well Abandonment Ltd. His book From Miracle to Menace- Alberta, A Carbon Story is available at  www.miracletomenace.ca



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