Here we go again. Oil is back down to $40 or less per barrel. A few years ago, oil was trading at $160 per barrel. At that time, if one suggested that the price would go down to $40 the professionals (oil and gas CEOs, pipeline CEOs, government finance experts) would have said “you are crazy.” They would have estimated that the price of oil in the immediate future (at that time) would have been $160 per barrel, plus or minus 30 per cent.
Yet here we are; oil is down more than 75 per cent from its high.
The supply and demand for oil and gas is not at equilibrium. It will return to equilibrium when price manipulation stops. Middle East countries flooded the market with oil at about the same time that demand went down due to COVID-19. There is so much oil afloat in tanker ships that the ships are used for temporary oil storage.
The obvious expectations are that oil-producing countries would have less income and inflation would be lowered. However, because of the pandemic, people are travelling less though they can afford to travel more because of much cheaper fuel.
Oil is becoming less important today compared to 10 years ago.
The unintended consequences are many. Airlines are in trouble. Cheaper fuel should have had a positive effect on their bottom lines. The opposite is the case as people are not flying as much as they used to. The same with ground transportation. People are working at home more and having holidays near home.
I used to fill up my car with gasoline at least once every two weeks. Now it is once a month at most.
Muskrat Falls was built assuming the cost of oil would have been $80 or $90 per barrel or more. Now it is cheaper to keep the Holyrood plant running rather that Newfoundland Power (a Fortis subsidiary) buying more expensive electricity from Newfoundland Hydro (a Crown corporation).
Husky Energy has had to deal with COVID-19 during the last six months, resulting in cost overruns for its offshore platform, which it could have managed had not the price of oil plummeted. The platform is more than half complete, but with Husky Energy selling oil at depressed prices its balance sheet doesn’t look good. Its share price has gone from $37 to $3.70 in seven years; the money is just not there to complete its capital projects.
Oil is becoming less important today compared to 10 years ago. Homes and cars are more energy-efficient. Wind and solar energy projects are expanding resulting is less consumption of oil. Notwithstanding, there are many more homes, cars and gadgets requiring electricity now than10 years ago.
However, the price of oil may not stay low for long. What if Middle East countries restricted the flow of oil? Energy companies will become more valuable, as will Muskrat Falls.
Remember the Boy Scout motto: be prepared.
Ian McMaster
St. John’s
