What do negative oil prices mean for Alberta and Canada’s economy?

The novel coronavirus pandemic has ushered in many “firsts” in modern economic history. That includes the impact on the oil market, where the benchmark price for U.S. oil dipped below $0 on Monday for the first time ever.

But what does that mean for Canada and its oil-producing provinces?

“It really brings home how real the decrease in demand is, how real the oversupply is, how big the price adjustments are going to have to be,” said Andrew Leach, an economist at the University of Alberta.

READ MORE: Plunging oil prices point to ‘deep collapse’ in sector, drilling firm CEO warns

What went negative on Monday was the price contracts for delivery of West Texas Intermediate (WTI) crude, the benchmark for North American oil prices. With planes grounded and cars sitting in driveways in locked-down economies, global oil demand has collapsed faster than oil producers have been willing or able to adjust.

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The result has been storage facilities quickly filling up around the world.

2:29 Oil prices drop to historic lows amid pandemic

Oil prices drop to historic lows amid pandemic

That’s what caused prices to fall below zero on Monday, experts say. Contracts for May delivery of WTI were set to expire on Tuesday, and many who held those contracts were desperate to to avoid having to take physical delivery of oil for which they had no space — desperate enough to be willing to pay buyers as much as US $37.63 per barrel to take the crude off their hands.

We may well see the same thing happen again when June and July, WTI contracts come due, said Blake Shaffer, an economist at the University of Calgary and former energy trader. And that’s bad news for Alberta’s oil producers, as much of the pricing of western Canada’s crude oil is based on WTI, Shaffer said.

“There’s definitely a lot of physical barrels here that change hands based on a set differential to WTI,” he said.

READ MORE: How does Western Canadian Select oil pricing work?

The degree to which individual producers are directly affected depends on how much of their production they’ve already sold, how they’ve hedged prices and other factors, said Leach.

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The largest players in the oilpatch, for example, rely on their own supply chains, with little, if any, of their barrels traded with the contracts that saw the sell-off on Monday, he added.

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Still, the key question for oil producers of any size, anywhere is how quickly and how strong the world’s demand for oil will come back, Leach said. And that, he added, depends on the speed and strength of the economic recovery.

4:34 The oil crashes impact on Saskatchewan with Greg Poelzer

The oil crashes impact on Saskatchewan with Greg Poelzer

Canadians are used to hearing that the problem is western Canadian oil trading at a discount because there aren’t enough pipelines to get landlocked crude to market, Shaffer said.

In this case, though, it’s much of the world’s oil supply that has nowhere to go.

“There will be lasting impacts from this,” Schaffer predicted. “There will be companies that don’t make it through.”

For smaller producers, shutting in traditional oil wells is going to be relatively easy, Leach said. For larger oilsands producers, the process is more complicated. For them the focus is more on production slowdowns and not bringing new projects online, he added.

READ MORE: What does the oil price drop mean for the average Canadian?

As for jobs, the impact may be less significant than one might expect, but only because the energy industry already went through ferocious cost-cutting during the downturn of 2015, Shaffer said.

Still, the top priority for both provincial and federal governments should be to provide support to workers so that they are able to stay home for as long as the health emergency lasts, Leach and Shaffer said.

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1:45 Oil price crash prompts calls for green energy

Oil price crash prompts calls for green energy

The second order of priority should be providing financial support to the energy industry, they added.

However, both warned against governments doling out cash or cheap loans directly to companies.

The goal should be to help the industry as a whole through the rough patch, not to prop up every single struggling business, Leach said.

READ MORE: Alberta public pension manager loses big in oilpatch investments: analysis

If the crisis leads to industry consolidation, with some companies taking over weaker ones, “the government doesn’t need to care,” he added.

One way in which either Ottawa or provincial government could throw a lifeline to the industry without bailing out single companies would be to guarantee loans made by financial institutions, Schaffer said. That way, it would be private-sector lenders who decide who is credit-worthy, he added.

On Wednesday, a new report called for stronger oversight of proposed energy-sector bailouts after finding that millions of dollars previously spent or invested by Alberta since 2015 have helped pay high salaries for executives and dividends for investors at several companies in or near bankruptcy.

2:03 Feds announce $1.7B to clean up orphan wells in B.C., Alberta, and Saskatchewan

Feds announce $1.7B to clean up orphan wells in B.C., Alberta, and Saskatchewan

The Alberta Investment Management Corporation “has been engaging in this bailout of Alberta’s oil and gas industry for several years, losing tens of millions in the process,” Duncan Kinney of Progress Alberta, a left-leaning non-profit research and advocacy group, said in a press release.

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“This should serve as a clear warning to the federal government as it works out the details of its own financial bailout of oil and gas companies,” he added.

READ MORE: Trudeau announces $1.7B to clean up orphan wells in B.C., Alberta, Saskatchewan

Prime Minister Justin Trudeau has said the federal government is working to provide aid to medium-sized oil and gas companies through Export Development Canada and the Business Development Bank of Canada.

“The challenge of our provincial and federal governments here is to … support the heart of the industry that’s going to make it through while allowing parts of the industry to wither and support workers who are negatively affected through that process,” Shaffer said.

That’s no easy task.”

— With a file from Mike de Souza at Global News

© 2020 Global News, a division of Corus Entertainment Inc.

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