Going Global: The Oil Slump
Why can I finally afford to put gas in my car?
Columns / May 11, 2020
In the biggest crash in oil prices that history had ever witnessed, oil, for a day, reached a value of -$35.00. That negative symbol is not a typo. While that number is no longer negative, prices nevertheless remain highly volatile.
One thing that many casual observers have gotten wrong is the idea that oil as a commodity itself was in the negative. Online oil prices are often for what the market is pricing the next month’s contract at. In the case of the negative oil price, many companies realized that they didn’t have space for the excessive supply of oil they had, so they had to briefly pay others to take the oil elsewhere. It’s no different than someone downsizing your home and needing to pay a company for storage.
With that in mind, the post-COVID explanation for low oil prices is simple. Almost no one is travelling, by car or by plane. For airlines, the number one expense is often fuel, and no one is flying. For instance, Air Canada has taken a massive hit from a pre-COVID stock price of around $45.00 to about $16.30 today. Flights between North America and Europe used to run between 400 and 500 times per day. Today it’s closer to 80.
But pre-COVID, the oil crash was still coming in some way or another, spurred on by a trade conflict between Russia and Saudi Arabia. In March, Russia refused to reduce their oil production to keep prices stable.
Saudi Arabia is a fortunate producer in that it costs them very little to extract. Because of where they are, they essentially just need to stick a straw in the ground to get oil. Canada is practically in the opposite situation, as it has to contend with numerous geographical challenges for extraction. In Canada, most of the oil is far from the coasts, requiring pipelines to move the product at a cheap cost, which many people take issue with. Even if there were pipelines, it’s still expensive to frack.
It must be said though that Russia’s and Saudi Arabia’s oil business is a major part of their governments’ operating budgets. For Saudi Arabia, oil accounts for 80 per cent of its exports. However, the country cannot sustain these prices for long. They’ll need to borrow money or find other revenue streams to make up government shortfalls, which could end up delaying economic diversification. For Russia, the situation isn’t quite as dire, with oil making up 60 per cent of its exports and 30 per cent of its GDP. Like Canada, Russia has been trying to get pipelines built which advantage their products in an attempt to stay afloat, but no number of pipelines can save your budgets from an $18.00 oil price.
Still, Canadian oil producers need to see a price of at least $45.00 to make some sort of profit on oil. As of the writing of this article, the price is $18.00. Speaking to my own stock broker, and even just looking at Canadian investment message boards, it’s clear to many investors that the Canadian oil market isn’t a great place to park your money. Some oil producers have begun to look into making their operations geothermal. Personally, I’m not a fan of my investment risk being tied to the whims of monarchs and plutocrats on the other side of the planet.
It’s looking increasingly likely that millions, possibly billions of people around the world will keep working from home even after lockdown orders are lifted. The Bank of Montreal, for instance, has suggested that 80 per cent of their 36,000 employees are likely to have a flexible working arrangement even after the COVID-19 pandemic subsides. This means that reliance on oil will still be lower than it once was, with less people needing to rely on fuel-powered transportation in their day-to-day. And with nearly every auto manufacturer putting out electric cars, oil is not likely to come back in as big a way.
That doesn’t mean that oil is as dead as the dinosaurs. It will remain a commodity of value for the rest of our lifetimes. It’s still needed to make many plastics, and it still serves a purpose when it comes to moving goods. It’s just not likely to go back up to a $100 value any time soon.