By David Yager
April 7, 2020
It seems like an eternity, but it was only a month ago when the OPEC+ meeting ended abruptly with no agreement on production cuts. A day later, March 7th , the Kingdom of Saudi Arabia (KSA) declared war on world oil markets by announcing it would increase production and cut prices. Russia responded with similar bluster and boasted how long it could survive US$30 oil.
When oil markets closed the next trading day, NYEX WTI was down 32% below the average for the previous week and half of where crude started the year. Over the remainder of March oil prices continued a downward spiral with no basement in sight. The last close in March was US$20.09, 60% lower than when 2020 began. Western Canada Select collapsed, at one point losing 90% of its average January value of US$36.82.
That the world’s oil industry was in deep trouble became patently obvious in only three weeks, an incredibly short period of time considering its 140-year history. By Friday, April 3, US President Trump was musing about import tariffs, KSA had called an emergency meeting for OPEC+, and production all over the world was shut in as storage fills rapidly.
Whatever bravado KSA and Russia displayed in early March had disappeared. Three unlikely bedfellows – US, Russia and KSA – were seeking solutions. Alberta and Texas offered cooperation. By April 6 even Norway was ready to throttle back output to stabilize prices. Everyone in the business acknowledged the necessity of a solution to prevent the destruction of a large portion of the world’s oil infrastructure; corporate, human, supply chain and reservoir.
Understanding that oil will be essential to the recovery of the world’s economy, futures markets responded immediately. NYMEX WTI closed at US$28.34 on Friday April 3, a 42% gain over the March 30 price. WCS more than doubled from previous lows.
There is, and should be, endless speculation on the likelihood, mechanism and definition of success. But until people start moving again the world’s oil markets are grossly oversupplied. In the same way that the collapse of oil prices and demand has been unprecedented, so will whatever agreement or cooperation emerge to protect it.
If it works it will be because the number of parties that must be consulted is limited and the participants highly motivated. The process will be driven by economics and common sense, not passion, politics or ideology. It will succeed because the alternative is too awful to contemplate.
This problem wasn’t created by the posturing of a petulant Saudi Prince or the former KGB officer in charge of Russia. And it wasn’t COVID-19 itself. Oil, wells, tankers, pipelines, refineries, gas pumps, cars, boats and airplanes are immune to viruses.
What collapsed the market for oil was tens of thousands of decisions by multiple layers of governments and their elected and non-elected representatives, from the capitals of the biggest countries to the municipal politicians and bureaucrats of the smallest communities.
Crippling oil demand was driven by fear, panic and chaos. When the virus problem first emerged, nobody knew how serious it was nor what could or should be done about it. It exposed a fundamental flaw of modern politics. When an important politician is asked a question regarding a new and difficult challenge the correct answer is not acceptable: “I have no idea.”
So all kinds of leaders said all kinds of things including that there was no need to panic. But after COVID-19 was declared a pandemic by the World Health Organization (WHO); after more information emerged that people were dying; and after more people became concerned; indecision was replaced with decisive action. And act they did.
Thus began a cascading series of decisions by governments all over the world to close borders, ground airplanes, strand cruise ship passengers, cancel professional sports, shutter public places, empty schools, close non-essential businesses, ask people to stay home in some countries and forbid them to leave home in others. Nobody moves, nobody gets hurt. Human interaction and contact had to be minimized. Globally.
So here we are. This is what collapsed the price of oil. Fixing supply may prove simple compared to the daunting challenge of restoring demand.
In response to unplugging the modern economy, governments responded with massive economic stimulus and support programs like nothing ever seen except in times of war. The digital money printing presses are humming in every nation with a sovereign currency to provide solvency to banks, income support for the unemployed and balance sheet relief for businesses as the economy experiences a government-mandated shut-down of massive proportions.
We’re assured this is better than it would be otherwise, at least health-wise. Everyone certainly hopes so. Coined “flattening the curve”, at least in Canada most citizens have been sufficiently terrified by news reports from places like Italy that they are for the most part complying.
But the devastating financial impact has only begun. Applications for Employment Insurance are at record levels, as are requests for mortgage relief. Savings in mutual funds and RSPs have been clobbered by the market collapse. Personal and household savings and borrowing capacity are being vaporized with every day that passes since the last pay cheque.
It’s not terrible yet. Only a month has passed. More financial help is on the way, income supplements included. It won’t be enough liquidity for enough people, but it will certainly help. Everybody watches the virus test numbers and fatality statistics daily praying this is working. COVID-19 is virtually the only news most media carries.
But the time has come to start discussing what a recovery is going to look like and when and how it is going to occur. It will be much more complex and challenging than stabilizing oil prices because the players involved in deciding what will happen next are materially different and much more diverse.
Once it was decided that “self-distancing” was the next step to controlling the spread of the virus, elected politicians and other government officials attacked it with determination and zeal. Canada has three official layers of government and all responded the challenge. The main role of the federal government is trans-national matters like immigration, issuing general policy directives and providing financial support. Health care is under provincial jurisdiction as is most business and non-criminal legal and permitting regulation. Major changes introducing and enforcing behavior modification got serious when provinces declared states of emergency and issued orders on who could do what.
It then cascaded down to the municipal level which dutifully acted on whatever was left to regulate. Determined to demonstrate their deep concern and protect their flock cities, towns and counties shut down or restricted whatever they could.
When it was over, in a matter of weeks all three levels of government decreed that virtually all non-essential activity should stop and those who could stay home must do so.
The problem is defining what is essential, and what level of government should make that decision. What about the unintended consequences of their actions, or the people it affects? Where does it stop? Who is in charge? If not coordinated or at least thought through, where does it end?
The first reaction was a form of xenophobia, the dictionary definition being, “…having a dislike of or prejudice against people from other countries”. Since it started in China, keep it in China. In February the US starting restricting travel from that country. This didn’t work immediately or effectively because of the massive interconnectivity of goods, trade and commerce. Then more countries piled on blocking more international travel. This is how we learned that millions of people are out of their home country on any given day in the modern world.
The next manifestation was local decisions that seriously affected others who were in the wrong place at the wrong time. Close the ports. Cruise ships were not permitted to unload leaving passengers stranded offshore. Too bad. Not letting potential virus carriers into any community was deemed the right thing to do, so this decision was made many times in many places. Whatever consequences resulted was somebody else’s problem. This was also a form of xenophobia except the nationality of those affected was often unknown. Port authorities didn’t care.
Regionally, more levels of government have either tried or are proposing to restrict or close their borders. Canada is regressing into countries within a country. CBC News reported April 6 that eight provinces or territories had introduced border checks, interrogating their fellow Canadians about their health, destination and purpose of their visit. At the sub-provincial level at one point the highway to Tofino and Ucluelet on Vancouver Island was blockaded to prevent visitors, but it was later reopened. Canmore, which only exists in its current form thanks to tourism and absentee property owners, has advised visitors they are not welcome and to please stay away.
Large outdoor industrial projects have also been deemed a menace because the workers live in camps. There have been repeated calls for projects like BC’s Site C Hydro Dam, Trans Mountain Coastal Gas Link to halt activity because workers living in mobile housing might carry and spread the virus. A local councilor in Kamloops recently urged BC’s Premier and Health Minister to suspend work because, “The associated influx of TMX workers represents a direct threat to the health and lives of all Kamloops-are residents.”
Read this carefully. It says continued pipeline construction could kill people in Kamloops. That this will certainly put several hundred more people out of work who don’t live in the area is not a local problem. If they need money, ask Ottawa. Allowing fellow Canadians to keep working is no longer considered an essential activity if it takes place nearby.
Unless of course they supply food, road, postal, police, health care or fire services. Stuff essential in your community. That’s different.
Parks, pathways and playgrounds are closed or restricted across the country. Is this bureaucratic overkill, or forward-thinking politicians performing their civic duty? Obviously, these measures will serve their stated purpose. But I’d have a lot more confidence in all these decisions if so many of the officials making them had not previously declared their selfless commitment to miraculously protect the country or their community from a climate emergency.
Meanwhile, the anti-oil, climate alarmist crowd is taking full advantage of the disaster to forward their agenda, human and economic misery be damned. The oil industry, like everyone and everything else struggling under the forced lockdown, is expecting financial assistance from the governments which ordered the creation of this mess. Not a day goes by without some left-wing lobbyist, politician or environmental group urging the federal government to take this unique opportunity to let the oil industry collapse. Don’t help prevent the economic devastation of Alberta and its major industry. Instead, direct the funds towards their ill-conceived, expensive and ultimately unworkable green energy crusade.
A widely publicized letter urging Ottawa to let the oil industry sink by withholding federal financial support was signed by 265 people with jobs, primarily publicly compensated university professors. Thirty-seven were from Alberta’s universities; Lethbridge 21, Edmonton 13 and Calgary 3. Incredible. Apparently, in Alberta money does grow on trees.
At a time when the terror of the virus is displacing human compassion, the behavior of professional climate alarmists and their supporters is appalling as they ignore hundreds of thousands of lost jobs and billions of dollars of destroyed investment capital in favor of their personal crusade. Recent news reports indicate Trudeau’s government is struggling with oil’s promised support package because it might alienate certain cabinet ministers, MPs and loyal Liberal voters.
No other major and unquestionably essential industry except oil is being singled out as unworthy of public support. For the greater good of course. The proponents of such intentional and massive personal and economic destruction should be ashamed.
But there’s a lot of that going around right now; save your own ass first. The US has reportedly ordered 3M not to export N95 medical respirators to Canada. When political leaders feel duty-bound to pursue selfish protectionism for their own jurisdiction – as is being done at every level – what message is that to discourage ordinary people from hoarding food and virus protection supplies and buying guns and ammunition? Where is the leadership? What is the message? Get too close to somebody in a public place, even by accident, and they increasingly look at you with fear, disdain or both. There is now police enforcement with fines for getting to close to another human being in a public place.
While surely not planned this way, the anti-virus lockdown is the beginning of the end of civil discourse and humanity. This is the worst consequence of the virus response and is not sustainable. Everybody knows that. And not just for economic reasons. It is also about the preservation of dignity, civility, compassion and the protection of individual rights that society has fought for centuries to establish and maintain.
Like the reaction of KSA and Russia following the OPEC+ meeting a month ago, the massive changes forced upon the world in the last four weeks were done with much more haste and emotion than organization and planning.
Restoring normal human activity and oil demand will require people to resume talking about what we can do, not what we can’t do. Revisit “essential” with more common sense and a bigger picture view of the world beyond the locale under immediate jurisdiction. Less fear and more humanity.
And develop plans to unwind these protective measures with a fraction of the actors that put them in place. A process managed by political leaders committed to protecting the whole country, all of its industries and all of its citizens. It cannot be undertaken by vote-seeking politicians seeking to appease and retain their green supporters next election or who put ideology ahead of humanity and compassion.
At the moment it seems commercial self-interest is functioning more effectively than human nature. Change that please.
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 2019 book From Miracle to Menace- Alberta, A Carbon Story is available at www.miracletomenace.ca.