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And there’s reason to think that lower oil prices are here to stay, writes columnist David Olive.
In recent years, American have been producing oil at volumes not seen in almost three decades. The country's resulting lack of appetite for imported oil from the likes of Nigeria and Angola has sent that glut of oil off to Asia in search of alternative markets.
KAREN BLEIER / AFP/GETTY IMAGES file photo
In recent years, American have been producing oil at volumes not seen in almost three decades. The country's resulting lack of appetite for imported oil from the likes of Nigeria and Angola has sent that glut of oil off to Asia in search of alternative markets.
By: David Olive Business, Business Columnist
The only real surprise about the latest collapse in oil prices — down about 25 per cent since June — is that anyone is surprised.
The oil-shale revolution in the U.S., which has the Americans producing oil at volumes not seen in almost three decades, has been underway for years. America’s resulting lack of appetite for imported oil from the likes of Nigeria and Angola has sent that glut of oil off to Asia in search of alternative markets.
But China, the chief factor in sustaining the world price above $100 (U.S.) per barrel these past few years, began signalling in 2013 that it would deliberately slow its previously torrid rate of economic growth. And Beijing has done so, in order to put a lid on spiralling debt and to head off an inflation spectre. Another of Asia’s major buyers, Japan, is still mired in a 24-year-long economic malaise.
To be sure, the volatile oil market is always ready to surprise even the experts with freak events. Which prompted Arden Haynes, when he headed Imperial Oil Ltd., to say that “Predicting energy prices has become as dangerous as playing leapfrog with a unicorn.”
Germany’s status as the only strong European economy seemed sustainable. Until it wasn’t. In retrospect, Germany’s recent, sharp drop in manufacturing output and export orders was predictable given that Germany simply couldn’t go on thriving when some 40 per cent of its GDP is exports to its struggling European neighbours.
And the Organization of the Petroleum Exporting Countries (OPEC) will be of no help in constraining supplies to achieve a recovery in the world oil price. At its much-anticipated full ministerial meeting Nov. 27 in Vienna, OPEC’s 12-member nations won’t even try. OPEC is caught up in magical thinking that a prolonged cold snap in North America this winter along with a strengthened U.S. dollar (world oil is priced in greenbacks) will keep oil in the $90 to $100 range.
There’s reason to think that lower oil prices are here to stay.
•New supplies: Prior to the Gadhafi regime’s demise, Libya was producing 3 million barrels of oil per day, compared with the current level of 900,000. There’s lots of upside potential there to further increase the existing glut. China has its own undeveloped shale-oil reserves. Mexico has a lot of conventional oil under development. And deepwater wells and oilsands projects abound, in the Brazilian offshore, Indonesia, Venezuela and elsewhere. Iranian oil has been largely held off the market due to sanctions over Tehran’s nuclear-weapons ambitions. If negotiations can resolve that issue, production from the world’s second-largest holder of conventional oil will flood an already glutted market.
•Price wars: Saudi Arabia, world’s largest exporter, has traditionally been the world-price stabilizer, constraining supply in times like these in order to restore a higher oil price, and exhorting its 11 fellow OPEC members to do likewise.
Not this time. Riyadh is far less interested in maintaining a high oil price than in protecting its market share from Nigeria, Brazil, Mexico and other rivals. As to the other OPEC members, most of them need as much oil revenue as they can get in order to balance their books. They’re more likely to increase production — worsening the glut —than being lone “heroes” in cutting back.
•Longer-term, the U.S., Europe, Japan and emerging economic superpower South Korea have already achieved “peak demand.” Which means they’re each now able to increase GDP without increasing their oil consumption in tandem. They’ve achieved that breakthrough with energy conservation, alternative energy, conversion of power plants to natural gas, and other measures.
Even China is already growing its economy with half the annual growth in additional oil consumption than was the case in the 2000s, before widespread efficiency and conservation methods kicked in over recent years. And Beijing is intent on further improving that performance.
•The $147 peak oil price reached in 2008 was a turning point for the industry. In response to it, both the EU and the U.S. forced vehicle makers to achieve rapid and significant fuel-efficiency gains. Which they have done.
That helps explain why American motorists, to pick an example, are still consuming less than 19 million barrels a day, down from 21 million in 2005, despite population growth and economic recovery over the past nine years.
For investors, here are three things to keep in mind:
•If you’re intent on betting on oil stocks, be aware of the distinction between “E&P” players (exploration and production) and integrated companies. E&P firms are solely occupied with finding and selling crude, which makes them fully exposed to price drops. Integrated firms also have refineries, filling stations and other so-called downstream operations whose continued revenues help cushion the blow from pump-price drops.
Practically, that means shares in Imperial Oil, with Canada’s largest downstream operations, have slipped just 2.9 per cent, while those in “pure play” oil producers Canadian Natural Resources Ltd. and Talisman Energy Inc. have fallen about 17 per cent and 44 per cent, respectively.
•When you buy an index fund, if it’s the S&P TSX you’re betting on, remember that the TSX is heavily weighted to oil and other commodities (which have also tumbled, notably gold). If you have mutual funds, check their resources exposure.
•Oil is not such a great investment, even in the best of times.
A basket of five major Canadian oil companies has suffered a loss of about 5.3 per cent over the past five years, compared with a 26.5 per cent gain for the S&P TSX during that time. The S&P 500, not overweighted to commodities, has done still better, with a 95.3 per cent gain.
It’s the same story with the global oil majors, led by Exxon Mobil Corp. A basket of five of those companies’ stocks has posted a meagre average annual gain of 1.4 per cent over the past five years.
By contrast, a random selection of five noncommodity Canadian stocks — Tim Hortons Inc., Canadian Tire Corp. Ltd., Toronto-Dominion Bank, Magna International Inc. and Telus Corp. — has posted a five-year gain of 199.5 per cent.
So, that’s a five-year average annual loss of 0.53 per cent on the Canadian oil stocks, compared with a near 20 per cent average annual gain on Timbits, lawn furniture, mortgages, auto parts and roaming charges.
For the farmer in North Dakota who gets a tap on the door from an oil company geologist saying the farmer has a pool of shale oil in the back forty, the oil-shale revolution has been a bonanza. For Main Streeters invested in the current oil glut, not so much.
