So, I am stuck in the house, like so many of us and I am starting to see unprecedented events; and only one thing goes through my mind: what does Alberta’s future look like? Anyone who knows me, knows that this is not unusual. For the last few years, I have posted – sometimes, more regularly – about that future. However, this COVID era is reconfirming some of my fears. Consequently, I find myself writing.
I bought my first car in my mid-twenties. I had just started a new job and I needed to get around. So, the price of gas became a new and important priority in my life. If memory serves, in 2004, gas was something like 70 to 75 cents a litre in Southern Ontario and it had never really been cheaper since. Well, at least that is what I thought when the pandemic started. At the beginning of January 2020, gas prices had not changed very much. Over the past few years, I had become used to seeing gas prices which were between $1.00/L to $1.30/L and that was what I saw. Then gas prices started to fall. So much so that I even saw a few stations advertise a price that shocked me: 59 cents per litre. While, price of gas seems to have stabilised at 80 cents, we have seen historic gasoline pricing; and all because of one thing: for a moment, we all witnessed negative Forward Contracts for Oil. Yet another exciting experience in this COVID era.
Because of stay-at-home orders which are affecting most of the world, we are awash in oil. Since, China, India and other low cost producers are not producing goods, oil is not being used. Accordingly, airplanes and ships are not moving between China, India and the rest of the world. Factories and Commercial Buildings which control that movement are mostly empty. As a result, consumers – by any definition; either BRIC, OECD and/or Western Countries – are largely not spending money; that is, if they are employed. Thus, the world is awash in oil.
For some, this COVID might be a time to do only one thing: fight the pandemic. However, as great leaders have taught us, as President Lincoln & President Roosevelt, as Prime Ministers Borden, Mackenzie and Churchill did during Wars, we need to do more. We need to take the time to take stock, ask questions and contemplate about the future. This is a time to not just be led blindly; but to ask simple questions like “where are we going” and “how do we get there”. This is especially true, since for Alberta, this new normal will last for over 3 years.
Why would I say that? Well, let’s remember the last time oil prices suddenly changed. On September 6, 2014, when Premier Prentice had become Premier, the price of West Texas Intermediate OIl (WTI) was $ 95.53 USD. By the time, Rachel Notley had learned that she would be Premier the price of oil was at just above $59 USD after falling to $44.90 earlier in 2015. However, this was not the end of the story.
On Feb 10th of 2016, the Price of Oil would be just about $27 USD a barrel. While this was not a historic low for the world, it was a historic moment for me. I had owned a car since 2004 and I had never seen Oil Prices – and Gasoline Prices – which were this low. In fact, depending on whether you want to use inflation adjusted Oil Prices or not, the World had not seen Oil this cheap since either 1999 or 2001. Yet, this is where we were – and to be honest – where we still were at the beginning of this year.
At the beginning of this year, the UCP Government was still running deficits. Calgary’s Commercial Real Estate vacancy rate was still over 25%. The city of Calgary was trying to rebalance its budget to deal with the vacancy rate issue; while CBC was running news about how the prolonged downturn was effecting Red Deer and other Western Cities. Yet, in all that time, no governing party – neither the PCs, the NDP nor the UCP – levelled with Albertans. No governing party explained to the Province that the Government’s Budget was dependent on royalties from Oil and Gas to balance its budget; and that if the price of oil was not above $60 USD per barrel, the Government of Alberta could not get out of the red. Thus, if nothing changed, deficits and debts would be run forever.
Now to be fair to Prentice, Notley and Kenney, they inherited this problem. As documented in an article, entitled “Alberta’s Problems of Plenty”, written in 2011 by Herb Emery and Ron Kneebone for Policy Options Magazine, Alberta has been dependent on Oil Royalties since the Getty era. No Premier since Getty – not Klein, nor, Stelmach, nor Redford… – has seriously tackled the problem. For, to tackle the problem, a serious increase in taxation would be required and that was not politically popular.
So, every Albertan Government since Getty depended on the royalties and taxes on the Oil and Gas Sector to avoid the different taxes other provinces had to levy. This gamble was called the “Alberta Advantage”. However, our luck ran out in 2016 because the oil price dropped. Or put differently, many of Alberta’s bitumen and heavy oil producers needed the WTI to be over $60 USD so that they could make good money. But when WTI dropped to $59. They hoped it would not fall further because they couldn’t make money at lower prices.
If you want evidence of this, please read an excerpt from a Reuters article published on OCTOBER 18, 2017. It noted that: “as the era of large new projects comes to a close, many mid-sized producers – those with fewer assets and producing less than 100,000 barrels of oil a day in the oil sands – have shelved expansion plans, unable to earn back the high start-up costs with crude at around $50 per barrel. Larger Canadian producers, meanwhile, focus on projects that in the past were associated with smaller names.”
Written by Nia Williams, and entitled “Canada’s oil sands survive, but can’t thrive in a $50 oil world”, the column goes on to quote two chief executives (Athabasca Oil’s chief executive Rob Broen and Derek Evans the chief executive Pengrowth Energy) and the problems they were having at $50 a barrel. One cannot imagine what CEOs would say now that WTI is south of $50.
Without companies that could recover oil, the Alberta Government would not be able to receive royalties on each barrel of oil; and get the income tax and other revenues that come from a viable oil industry. So, since the price of a barrel of oil will likely be below $40 USD for the near future, one can legitimately ask one question: “what should Alberta do now?”
If I am to be non-partisan and generous, my response would be we need more objective data. The first step in this task would mean reassessing the expected price of Oil in Alberta’s budget. In the document that the Alberta Government presented to the Legislature earlier this year, the Kenney Government assumed that the average WTI price of Oil over the year would be $68 USD per barrel. Considering WTI started at $61.12 (on January 2nd) and ended up in the low $50s, by the time the budget was presented, the assumption of an average price of $68 USD for 2020 was a bit of a stretch. With that being said, as University of Calgary economist Trevor Tombe notes, “hoping” for higher resources revenues is akin to an Alberta Tradition.
In an article, about the UCP 2020 budget, Mr. Tombe noted that:
“Budget 2020 continues the very long tradition in Alberta of basing financial decisions on hopes and dreams. The previous NDP government did this very same thing. As did the PC government before them. And the Social Credit government before them.” (OPINION | Gambling on oil prices, Alberta’s budget is not prudent, responsible — or new, by Trevor Tombe, CBC.ca Feb 28, 2020)
Mr. Tombe argues that this pattern goes back to the 1940s and it needs to change because it only leads to poor planning. Now, I suggest that this is generally true. With the exception of Peter Lougheed, no Alberta Premier has tried to break the cycle. So since the 1980s, we have a similar problem: every time WTI or other Oil prices tank, Alberta’s budget takes a significant hit.
We can change that. Our more aptly, Premier Kenney and Finance Minister Toews could do a historic thing and break that cycle. Premier Kenney, based on the year so far, can ask Finance Minister Toews to come up with a new projection. The legislature could be informed of that better number and the 2020 budget could be revised. Instead of assuming $68 USD per barrel, we could go with what private sector forecasters and oil trading futures markets were arguing for at the time: a price which was closed to $50 USD a barrel. Or now that WTI has fallen to $20 USD, we could choose a lower number. Choosing a more realistic number is important because it will allow us to deal with the other bad news: the Oil Market will not return to normal for quite some time.
Singapore’s COVID experience alone tells us that the Oil Markets will not return to normal for about 2 to 3 years. Singapore seemed to be an early COVID success story until they started suffering from “second wave” infections. Hong Kong and Taiwan – from early reports – are suffering from the same problem. In fact, a number of people including American Senator Richard Durbin, Jeremy Konyndyk, Leon Cooperman and Dr. Osterholm are talking about 12 to 18 months of COVID related disruption. At best, we will see waves of openings and closures with little international travel.
For Alberta, this means a simple thing: high, worldwide inventories for the next 18 months at a minimum. According to Planete-energies.com (an initiative of the Total Foundation), the aviation industry represents 7.8% of the world’s oil consumption. Maritime Shipping makes up 6.7%, while road transportation (passenger cars and freight vehicles) makes up 49.3%. If those numbers are correct, then 63.8% of the world’s oil consumption is used to get things from point “a” to point “b”. Since China, India, US and Western Europe make up just under half of the world’s population and all are in lockdown, one can understand why that high oil inventory will not reverse itself soon. In fact, the reversal of high oil inventory will not be a reality unless the world gets back to full and consistent production; and as every medical professional says, that will not happen until we have a form of medical intervention (ie. a prophylactic, a vaccine or immunization). Given that the medical community estimates that an intervention will come to us 18 to 24 months down the road, and that it will take at least a year to fully implement; we could have high oil inventories until the next provincial election.
But the problems don’t end there. For, if the last few financial crises are any indication, the world will likely use less oil moving forward. In 2008, American and European governments saved the World Economy by doing two things: having their consumers buy new more fuel efficient cars; and forcing those same car manufacturers to up their game every year since. The result has been clear. From 2016 to 2019, we have seen a rise in the world’s vehicle fleet fuel efficiency. Let’s take just the US as an example. In 2014, according to the EPA, the US vehicle fuel efficiency was 24.2 mpg. However, by 2017, it had jumped to 24.9 miles per gallon (mpg) – that’s 10.58 km/l. At the time, that was the record. Then in 2018, that figure increased to 25.1 mpg (10.67 km/l), a new record. By 2019, it was 25.5 mpg (10.84 km/l).
On top of that, while the Trump Administration has rolled back the ambitious goals of the Obama Administration, the US is still poised to make further gains because new technology is coming to market. Toyota’s new Dynamic Force Engine, as an example, has an efficiency of 40% as a conventional engine and 41% as a hybrid one; while conventional internal combustion engine thermal efficiency is about 20%, it. Such an efficient engine alone will cause a reduction in the amount of oil the world requires.
However, this is not the only trend. Volvo has committed itself by the end of this year to no longer producing internal combustion engines. Peugeot’s CEO recently said that the “Combustion engine will be dead by 2030”. Nissan, VW and Ford have already said that they will be doing the same within the decade; while Mercedes is making the switch. GM has reintroduced the Hummer as an electric car; and then there is Tesla. Pushed by European and Chinese regulations, one trend is emerging: older gasoline, diesel and petrol powered cars being replaced by cars who use either no oil or much less oil.
When GM introduced the EV-1 in 1997, few saw it as being the future. However, today there are 5 millions electric cars on the road. While, this is a small amount, if one looks behind the numbers one can see a scary trend for Alberta. Norway, cold Norway, is leading the way. Norway – the Oil and Gas producer Norway – has already said that they are going to phase out internal combustion cars by 2025. In March of this year (i.e. March 2020), 75% of all new cars sold in Norway were either Battery Electric Cars or Fuel Cell Electric Cars. Yup, fossil fuel producing Norway, is on its way to eliminating the internal combustion engine.
While the global stock of electric passenger cars was only passing 5 million in 2018, it was up 63% from the year previous. Much of that is due to China. In 2017, 39% of all electric cars were Chinese. In 2018, that was 45%. As Europe and China keep pushing for more electric cars, the effect will be seen in the Oil Market. By 2030, Norway will not be alone in banning the internal combustion engine because bans in Denmark and the biggest towns in Spain, the Netherlands and Belgium will take effect. By the end of 2035, all of the UK will be onboard; with France, Italy and Germany joining in 2040. Imagine what will happen when many G7 and G20 countries stop using oil. The market will be flooded and Alberta companies will not get a good price for their oil.
This is especially true when one thinks of smaller economies who are doing the same thing. New Zealand is on track for a 2030 ban. California is pushing the Trump Administration to maintain its own state wide standards which could eliminate cars that use gas. If California wins, 14 other states – which use California Emission Standards – would follow suit . Quebec and BC have their own deadlines. In fact, with the exception of the Trump Administration, Governments around the world have only become more restrictive. Consequently, market forces indicate that the world will have an excess of oil for the near and intermediate future; and, as a result, the price of oil will not likely hit $60 USD WTI.
So with all of this evidence, it is time to look at the budget again. It is time to witness that hoping for a barrel of oil to be $50, $60, $70 or $80 USD will not make it so. For the good of our province, we should witness what is and reconcile ourselves to the hard work of change. Just as Lougheed, Davis and Chretien recognized in the 1970s through the Winnipeg Agreement, we have to admit that structural change is needed. In fact, since we are unlikely to see an $80 barrel of oil ever again, we should find a way to make our fellow citizens whole. That starts by looking at the Budget of the Government of Alberta and recognizing that we are worse off then the numbers told us we were. By just having the conversation, in this hard time, we can talk about what the future of the province is. I know that over the next few months, I will be writing and thinking about it. But for now, having facts is important. Let’s update the budget so all Albertans know where things are.