BUSINESS
03/09/2020 09:35 EDT | Updated 03/09/2020 13:47 EDT

Oil Price War Between Saudis And Russians Will Hit Alberta Hard

Gas prices will be "roaring lower" in the coming weeks, but budget deficits will be doing the opposite.

Lisa Marie via Getty Images
In this stock photo, the Calgary skyline is seen on a winter day. Alberta's finances could come under serious pressure due to a major collapse in oil prices over the weekend.

MONTREAL ― A policy dispute between Russia and Saudi Arabia has escalated into an oil price war that threatens to destabilize Alberta’s finances and puts yet another large question mark on the future of Canada’s fossil fuel industry.

But the upshot for Canadian commuters is that gas prices are headed lower.

The benchmark price for U.S. crude oil fell as much as 22 per cent over the weekend, to around US$32 a barrel. This comes after Russia and Saudi Arabia failed to come to an agreement on oil production cuts, and the Saudi oil exporter immediately cut oil prices to Asia by the largest amount in decades. 

Watch: Global stock prices fall on oil price shock and recession fears. Story continues below.

 

Western Canadian Select oil, which typically trades at a discount to global oil prices, was at around US$26 a barrel over the weekend, down from a recent level of around US$35. It’s down by more than half its previous value in the past year.

The weekend price slide had an impact on the Canadian dollar, which tends to move with the price of oil. It was trading at 73.5 cents U.S., down from around 74.5 cents last week, and the lowest levels for the loonie in two years.

Demand for oil had been dropping for weeks due to the slowdown in travel and manufacturing caused by the coronavirus, and the OPEC oil-producing nations had been in talks with partner Russia about an orderly reduction in production. With no deal reached, Saudi Arabia signalled this weekend it intends to ramp up production and flood the market with cheap oil.

When oil prices collapse, high-cost producers see their profit margins shrink the most, and Canadian oilsands operations have some of the highest production costs in the world. 

“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 ball is now in the federal government’s court, with stimulus now needed in the coming 2020-2021 budget. This is when Canada’s healthy federal balance sheet will be useful and why we’ve been advocating for domestic governments to improve their fiscal positions when times were good.”

Could cost Alberta billions

The oil price drop could prove particularly difficult for Alberta, where every dollar decline in the price of oil takes $350 million out of government coffers, 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. 

“We’re talking about a $7 billion decline in revenue expectations,” he told CBC News over the weekend.

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.

Gas prices coming down

There is an upside to this for Canadian drivers and transport-dependent industries: Falling gas prices, which are down 3.4 cents per litre on average across the country in the past month, and 6.4 cents lower than a year ago, according to GasBuddy.

“For motorists, I urge them to be in absolutely no hurry to fill up as gas prices will drop in nearly every nook and cranny of the country, from the smallest cities to the largest metros, at a time of year that prices are usually rising, we’ll see anything but that,” Patrick DeHaan, head of petroleum analysis for GasBuddy, said in a statement.

“The national average came into March like a lamb and will likely be leaving as a lion, with prices roaring lower.”