The (temporary) pain of tanking oil prices

The Globe and Mail ^ | Dec. 17 2014 | PETER TERTZAKIAN

[thackney]

“Your numbers must have a bust!” exclaimed my disbelieving friend who produces oil for a living.

“I don’t think so,” I said as I led him through some rough calculations. “If the price of a barrel of U.S. light oil averages $60 in 2015, the hit to the Canadian industry will be worse than in 2009.” I noted that at $80 (U.S.) a barrel, there was some immunity to the shock, but a sustained price below $60 will cause the industry to lose most of its white blood cells.

“Thanks,” he muttered with a wince, like a kid that had just opened up a disappointing Christmas present.

“Yup,” I said, “A lump of coal is forthcoming in the stockings of many Canadians this year – or at least a squirt of oil.”

Let’s look at the numbers. Slashing more than $30 off the price of an average Canadian barrel of oil means that even considering production gains, revenue from the sale of upstream hydrocarbon products will be down by $45-billion in 2015. Putting that loss in context, it’s like removing the entire Canadian mining industry from the nation’s economy.

But the root problem will be cash flow. Or lack of it. That’s the profitability at the wellhead that allows companies to reinvest their gains back into the economy. Diminishing cash flow squeezes out employment, cuts dividends and clobbers the stock market (which affects every pension plan in Canada). Hollowing out the industry’s profitability also crimps governments’ take at all levels – from municipalities that benefit from oil field exploration, to non-oil-bearing provinces whose migratory workers repatriate their income taxes back home.

Assuming that $60-a-barrel oil is realized next year, sales of upstream hydrocarbons in 2015 would exceed what was realized in 2009 by almost $14-billion...

[Travis McGee]

I see global political, economic and military forces lining up to ignite a war in the Middle East which will have the “side effect” of closing the Persian Gulf to oil transportation. Look at how many global players would like to see cheap Saudi oil cut off, and oil prices spiking upward.

That’s what my crystal ball says. War in the Straits of Hormuz.

[thackney]

Look at how many global players would like to see cheap Saudi oil cut off, and oil prices spiking upward.

I see far more buyers than sellers of crude oil in the OCED.