Yesterday, I found out that the price of a barrel of Western Canadian Select has plunged below $5. That means a barrel of Canadian oil costs less than a 6 pack of toilet paper.
Why is this the case?
Saudis have started a pricing war
The first is that recently, the Saudi Arabians and Russia have gotten into a bit of a price war. They were unable to agree on prices, after China’s drop in production severely crippled demand. Now Saudi has “turned on the taps” and flooded the market with more supply
Lack of Pipelines and Distribution
Due to political barriers and Aboriginal opposition, pipelines needed to increase capacity to transport bitumen from the oil sands south to USA and west to ports in BC have been cancelled or put on hold indefinitely. This has forced companies to instead have to pay a premium to ship their oil via rail or other methods. This has further decreased demand.
Abundant and Cheaper Alternatives
In recent year, shale oil production in USA has exploded, propelling America to be the 4th largest exporter of oil. This significant increase in supply has made Canadian crude look even worse in comparison. Shale is cheaper to manufacture than oil sands, which takes around $45 USD per barrel to breakeven.
Compounding the problem is that shale oil can slow and start production very easily. When prices are above an operation’s breakeven point, they will simply turn on the taps again, setting a cap on how high the prices of oil can go.
This is a purely qualitative analysis, so take it with a grain of salt. To me, it appears as if the Albertan oil industry will remain unviable for many years ahead. The industry is beset with poor unit economics, political headwinds, and superior competitors.
Countries have already started to invest significantly into renewable energy. Norway is the prime case study for how to take oil wealth and transition it into creating a more sustainable a circular economy. Texas (of all places) has become a renewable energy giant, with wind outpacing coal as a power source in Texas for the first time ever.
Alberta is still far behind the curve when it comes to renewable energy, but progress is starting to be made with propositions such as the Rattlesnake Ridge Wind wind farm project. This is a promising sign of things to come.
However, there is still more that can be done. The afore-mentioned project had a price tag of $200 million CAD. Meanwhile, the government is proposing an investment of $4.5 billion CAD into purchasing the TransMountain oil pipeline. What is the point of this? If we are aiming to transition into a green economy, why are we investing capital into infrastructure that will be outdated by the time it is actually built? $4.5 billion CAD would be enough for 22 wind generation projects.
The world is not moving back towards oil and gas. It is time to look to the future.