While British Columbians may be loving the low gas prices in the wake of the COVID-19 crisis, it’s an omen for bad things to come in the energy industry, according to an expert.
Dan McTeague, the president of Canadians for Affordable Energy (CAE) and former Member of Parliament, said the ever-decreasing prices of resources in the energy sector will be detrimental to the economy in several ways.
Rooted in the energy sector
As of March 30, the lowest-price gas station in B.C. is in Prince George at just 69.9 cents per litre. On March 27, WCS (Western Canadian Select), one of North America’s largest heavy crude oil streams, ended the day at US$4.58 per barrel while New York-traded West Texas Intermediate dropped to US$21.55.
“It could go lower,” said McTeague. “Unfortunately, it’s bad news — any way you slice it.
“That’s never been heard of before; no one sells oil for $4 a barrel.”
Usually, a barrel of oil is worth between $40 and $50.
McTeague said 10 to 15 per cent of the economy depends on oil, and Canada will struggle if things don’t turn around quickly.
“If this goes on much longer you won’t have much of an economy left,” he said.
However, for energy producers, the outlook is much grimmer.
“The energy sector is destroyed beyond repair,” said McTeague.
Record low prices for oilsands crude could lead to up to 20 per cent of Canada’s thermal bitumen production being shut down over the next few months.
Analyst Matt Murphy of Tudor Pickering Holt & Co. said that would equate to about 340,000 barrels per day of the 1.7 million barrels produced each day by projects that use steam to pump the heavy, sticky oil from wells in northern Alberta.
After removing the cost of blending, Murphy estimated the price that flows through to the producer is about 83 cents per barrel, a level at which no producer can be profitable.
He blamed the steep decline over the past few weeks on weakness in U.S. Gulf Coast demand for WCS, as higher production from Saudi Arabia floods the market and refineries buy less crude in anticipation of lower demand because of the COVID-19 pandemic.
He said he also expects companies to announce cuts in conventional heavy oil production as they prepare to announce first-quarter financial results starting next month.
“It’s certainly a tough time for Western Canada producers right now,” he said.
Western Canadian Select prices in February were at US$27.28 a barrel, although that was almost 40 per cent lower than the average in February 2019.
The loss of value in Canada’s primary resources, according to McTeague, could result in less investment, less economic activity, more unemployment, and possible long-term hits to government revenues.
“This is a veritable threat to a sector of the economy we just can’t do without,” explained McTeague.
The Canadian dollar takes a hit
While B.C. may not feel the direct hit of the damaged energy sector as harshly as some other provinces, the greater effects on the national economy will be felt in the province, said McTeague.
On Jan. 1, the Canadian dollar was worth USD$0.77. Now, as of March 29, that same dollar is worth just USD$0.71.
McTeague attributes this to the struggles of the energy sector.
“Our purchasing power has been diminished,” he said. “We’ve done nothing to really understand how that’s happening, except for the fact that most of our exports — around 20 per cent — is oil and gas.”
What hurts Canada most, said McTeague, is that its commodities are priced in U.S. terms.
“Whether it’s made here or not made here, it’s all priced in U.S. dollars,” he said. “We’ve just become a whole lot poorer.”
-With files from the Canadian Press