The headlines don’t stop. “Oil crashes to fresh 18-year low.” “Crude-oil prices post the largest quarterly percentage drop on record.” “Canada is first price-war casualty.”

As the COVID-19 pandemic leaves its mark on lives and economies across the globe, Alberta’s already-volatile oil industry is gearing up for another storm as oil prices around the world plummet.

Recently, some types of oil have even traded at negative oil prices.

Negative. Oil. Prices.

It’s what Alberta Premier Jason Kenney called a “triple whammy — the pandemic, the recession and the oil price crash.”

At the same time, Kenney has announced a $1.5-billion investment in a multinational pipeline company to build the controversial Keystone XL pipeline to the U.S. Gulf Coast, and the federal government is reportedly floating plans for a $15-billion bailout of the industry.

Oil and gas producers have asked governments to consider investing public funds into their private companies — not unlike what was done to try to shore up auto companies in the last major recession.

With so much news flying around, we wanted to take a couple steps back and clear up a few basic questions. 

Why are oil prices so low? How can an oil price be negative? And what the heck is “homeless crude?”

Read on.

1. So is this the lowest oil prices have ever been?

When we talk about Alberta’s crude oil — specifically, bitumen from the oilsands — we look at a benchmark price called Western Canadian Select (WCS). And while Western Canadian Select has been low before, it’s never been quite this low. 

Western Canadian Select dipped down to US$3.82 per barrel on Monday. There are 159 litres in a barrel of oil, so that’s just over two cents per litre. 

In the past, Western Canadian Select had been as low as US$5.97 per barrel. That was back in December 2018, according to data from the Government of Alberta.

Western Canadian Select prices. Source: Alberta government. Graph: Carol Linnitt / The Narwhal

2. Is the price of oil so low because of the pandemic? 

The pandemic certainly hasn’t helped oil prices, as demand is plummeting (think fewer flights, less driving, less economic activity in general). 

But the real price crunch is the result of a long-simmering price war. 

The basics tenets of supply and demand make it obvious that prices go up when supply is low. So for years, major oil-producing countries like Saudi Arabia, a member of the Organization of the Petroleum Exporting Countries (OPEC), and Russia, not a member, have been trying to agree to reduce supply (i.e. sell less) to keep prices high.

But in March, that all changed. Saudi Arabia essentially said “to hell with this” and started increasing supply again. Prices plummeted as expected (thanks, econ 101!).

3. But why would Saudi Arabia flood the market with cheap oil? Isn’t it ultimately losing, too?

While Saudi Arabia and Russia have been trying to curtail supply to keep prices higher, the trouble is, not everyone has been on board with that strategy (ahem, the United States).

Crude oil production in the U.S. has doubled in less than 10 years, according to data from the U.S. Energy Information Administration. This meant Saudi Arabia and Russia were trying to curb their production while the U.S. was still “going gangbusters” with production, according to Clark Williams-Derry, a Seattle-based energy finance analyst with the Institute for Energy Economics and Financial Analysis.

That meant the supply was staying high — and the prices were staying low.

As Jeff Rubin, former chief economist of CIBC World Markets, put it, “Saudi Arabia did what is the rational course of action for the lowest-cost producers.”

“[It said,] ‘If we’re going to a price war and I’m the lowest-cost producer, I’m turning open the spigot.’ ”

So that’s what it did. 

It flooded the market, because even at a low oil price, the low cost of its production means it can still make money. According to Rubin, the cost of production in Saudi Arabia is easily a tenth of what it is in Alberta’s oilsands.

So while Saudi Arabia is losing out compared to what it would have made had prices stayed high, it is still making money.

Alberta, on the other hand, is in a different boat. Oil from the oilsands costs more to produce and sells at a lower cost than much of its competition.

4. Why is Alberta’s oil worth so much less?

“We talk about oil as if it’s one thing. But it’s actually a range of things, a mixture of hydrocarbons,” Williams-Derry explained to The Narwhal last month. “Each barrel of oil is its own thing.”

Alberta’s crude is different from oil produced elsewhere. 

Alberta has two main disadvantages: location (we’re landlocked) and the quality of oil produced (thick like cold molasses).

“You’re talking apples and oranges,” Rubin explains. “One is a much lower quality oil.” That’d be Alberta’s.

That creates what’s known as the price differential — the discount Alberta crude is sold at compared to the common North American benchmark, West Texas Intermediate (WTI).

So while West Texas Intermediate trades at around US$20 per barrel, Western Canadian Select can dip much lower — even to under US$4 per barrel.

Work is expected to slow down in the Alberta oilsands, due to a plunge in world oil prices. Photo: Alex MacLean

5. Under US$4 per barrel of oil is less than a bottle of maple syrup. How low can oil prices go?

Very low. 

Oil prices depend on a lot of things — and it’s important to remember that benchmarks like Western Canadian Select are just that: benchmarks. But with so much oil flooding the market right now, prices are being driven down dramatically, to the point that a barrel of oil can be “functionally worthless” once production and transportation costs are factored into the equation.

And in some areas, that could even mean the oil price could be negative.

6. What on earth is a negative oil price?

Last week, Bloomberg reported that some “producers are actually paying consumers to take away the black stuff.”

That was after another benchmark oil price, Wyoming Asphalt Sour, a type of oil blend used to make paving bitumen, was reportedly trading at -19 cents U.S. per barrel.

As CBC pointed out, Wyoming is not unlike Alberta — in that it is landlocked — leaving some to wonder if Western Canadian Select is also going to be pushed close to a valuation of zero … or less.

These fears aren’t just held by oil price analysts — Alberta Premier Jason Kenney has reportedly speculated that the price of Western Canadian Select could drop into the negatives in a matter of weeks.

7. Why are we still paying 60 cents per litre for gas in Alberta if oil is worth basically nothing these days?

Gasoline prices in Alberta have fallen to roughly half of what they were at this time a year ago, with some gas stations in the province reporting prices in the 55-cent range, according to Gasbuddy.com.

But don’t expect gas prices to be negative anytime soon.

The stuff we put in our cars is very different from the thick molasses pulled out of the ground at an oilsands mine. Refinery and transportation costs play a big role in gas prices, as do taxes. And don’t forget the gas station itself wants to make a few bucks, too. 

It’s a bit like buying a loaf of sourdough from the bakery. Yes, we have wheat growing next door, but that doesn’t do most of us a lot of good when we want to make a sandwich.

We can, however, likely expect to see gas prices stay low as the price of crude oil stays down.

8. Can’t companies just store oil until prices go back up?

You’d think companies could just hold on to their oil if the prices they’re fetching aren’t worth it.

But too much oversupply around the world can mean storage options simply run out. 

There are serious concerns right now this might already be happening. As CNN put it, we’re in the midst of “a supply glut so epic that the world will soon run out of room to store all the unneeded barrels of oil.”

And according to reports from The Financial Post, “by June there’ll be no place left to put the unwanted crude.” 

This has led to a new kind of crude: “homeless crude” — oil that has no place to go. 

No one wants to sell it at such low prices, but increasingly they can’t find anywhere to store it, either.

That means companies are thinking of creative ways to store their excess supply, including buying tankers to use as floating storage. One energy analyst has suggested 20 per cent of the global fleet of what are known as “very large crude carriers” could be used as floating storage — but even that wouldn’t offer enough space to store all the unwanted oil. 

And in the meantime, the cost to store oil on a supertanker has skyrocketed.

But with so much excess supply and so little (affordable) storage, the only option for many producers is to sell their oil. That means even lower prices. 

Eventually, producers are forced to stop producing.

9. So can’t Alberta just turn off the taps for a while?

Not really — especially not in the oilsands, where huge mining operations can’t simply be turned off with ease. 

“It’s not nimble,” Rubin said of the oilsands industry, noting that the huge staff and capital investment make it more difficult and expensive to halt production at an oilsands mine than at more conventional wells or U.S. shale production, which can be temporarily suspended at a lower cost.

In other types of oilsands production that involve steam, there are added concerns that turning off production can hinder the ability of a well to produce oil in the future.

Then there are the economic worries.

“Alberta can’t just afford to shut it all down,” Rubin told The Narwhal. “There are consequences for people, not just who work in the oil industry, but who require the spending of people who work in the industry. So let’s try to salvage what we can.”

This is what has governments nervous — figuring out a way to prevent a total economic collapse, while taking into account the long-term challenges the industry already faces, including serious concerns about climate impacts.

10. Will more pipelines solve this problem?

As Rubin put it to The Narwhal last month, he believes completion of the Trans Mountain pipeline expansion project would be a “lifeline,” not a panacea, for the struggling oil and gas industry.

“The notion that Asia is desperately waiting for Canadian bitumen is a fantasy,” he said, adding that he believes while more pipeline capacity would ease some of the pressures on the price for Alberta’s crude, it would by no means make the high-cost product into something high value, especially when compared to what’s available in the rest of the world.

So that leaves the question on the table — what is the future of Alberta’s oilsands industry and the thousands of workers employed within it?

Like what you’re reading? Sign up for The Narwhal’s weekly newsletter.

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.

This is a guest piece by James Rowe, an Assistant Professor of Environmental Studies at the University of Victoria in British Columbia and a member of the Corporate Mapping Project, a research alliance investigating the power of the fossil fuel industry in Western Canada. This piece originally appeared on openDemocracy.

The world’s largest producers of oil, Saudi Arabia and Russia, agreed to a production freeze in February 2016. This deal holds production at the near-record highs that were reached in January in an effort to stop the plunge in world oil prices. But even if other key producers like Iran and Iraq agree, it won’t address the supply glut that has been driving prices into the ground.   Saudi Arabia could be doing more to orchestrate a production cut, and the Saudis would certainly benefit from a price bounce—the Kingdom ran a budget deficit last year of nearly US$98 billion. So why is the House of Saud content to keep the world swimming in cheap oil?   The motivation for Saudi Arabia’s passive response to the price crunch is the source of much speculation, but the consensus is that the Saudis are working to protect market share—primarily by driving high cost ‘unconventional’ production like US shale oil out of the market. There is a larger force, however, that has not received enough attention in efforts to divine Saudi intentions: the ‘carbon bubble.’

What is the Carbon Bubble?

The carbon bubble refers to the overvaluation of fossil fuel companies and petrostate treasuries given the need to rapidly reduce C02 emissions if catastrophic climate change is to be averted. “Catastrophic” is the technical term for predicted climate change if global warming cannot be limited to at least 2 degrees above its present level.   The International Energy Agency estimates that 60 per cent of known fossil fuels need to stay in the ground to avoid breaching that limit (even more if the 1.5-degree target codified in Paris is used). The earth’s carbon budget (or what can safely be burned) is much smaller than the fossil fuel reserves that are available for extraction and combustion.   According to the Carbon Tracker Initiative we have five times more reserves than can be burned.    However, these unburnable reserves are already factored into company share prices and budget projections for petrostates like Saudi Arabia. When policy making catches up with ecological necessity and scientific advice, these reserves will become financially worthless and the carbon bubble will burst.   Recent climate policy deals in Alberta and Paris are only the beginning of a tightening policy environment for fossil fuel producers.   Given the massive wealth and influence of fossil fuel companies it would be naive to count on political and economic institutions to legislate for planetary liveability without massive popular pressure. Thankfully that pressure is growing daily. Powerful examples include proliferating divestment campaigns, Indigenous-led resistance to pipeline construction in Canada, and 350.org’s campaign against the Keystone XL pipeline.   The existential threat posed by climate change is giving these activist efforts an urgency that it would be risky to bet against. “We are not defending nature, we are nature defending itself” was a slogan popularized on the streets of Paris during recent United Nations climate negotiations.   In this context of accelerating climate change and mounting popular protest, the hands of legislators are likely to be forced. When legislation aligned with a 1.5-degree world comes into effect, the carbon bubble will drop back down to earth.

Peak Demand and the Carbon Bubble

Traditionally, the Organization of Petroleum Exporting Countries (OPEC) has coordinated production levels to stabilize oil prices. But in this case Saudi Arabia, OPEC’s most powerful player, has resisted calls for cuts and has convinced its Persian Gulf allies to do the same (the United Arab Emirates, Kuwait and Qatar).   The evidence suggests that the carbon bubble is central to Saudi Arabia’s decision making.   U.S. State Department cables released by WikiLeaks reveal a Saudi regime that is worried about the impact of climate legislation on national income. Eighty per cent of the Kingdom’s budget is derived from the petroleum sector, so the prospect of not being able to sell the country’s vast oil reserves due to global emission limits poses a massive economic and political threat to the ruling monarchy.

Like what you're reading? Sign up for our email newsletter!

“Saudi officials are very concerned that a climate change treaty would significantly reduce their income,” wrote the U.S. ambassador to Saudi Arabia in a memo in 2010. As global concern over climate change intensifies, the Saudis have begun factoring in the reality of “peak demand.”   In 2013, before oil prices started tumbling, Ali al-Naimi, Saudi Arabia’s petroleum minister, told reporters “demand will peak way ahead of supply.” In the lead up to climate negotiations in Paris, he acknowledged that “in Saudi Arabia, we recognize that eventually, one of these days, we are not going to need fossil fuels. I don’t know when, in 2040, 2050, or thereafter.”   This admission is aligned with the scientific consensus on climate change. What makes it remarkable is that the comment comes from the oil minister of the world’s preeminent petrostate. The Saudis have snapped out of denial and are actively working to diversify their economy and plan for a post-carbon world. According to Naimi, the Kingdom plans to become a “global power in solar and wind energy.”   Saudi Arabia does not, however, deserve congratulations. Like corporate producers of oil such as Exxon, the Saudis have played a dangerous and obstructionist role in climate negotiations. Saudi Arabia has been a regular winner of the “fossil of the day” award from civil society groups at UN negotiations. The leaked cables from the U.S. State Department reveal frustration over the Saudis’ “schizophrenic” approach to climate change: aggressively pursuing market share in renewable energy while simultaneously blocking international negotiations.   It is in Saudi self-interest to extend the age of oil. Given the ecological necessity and political plausibility of a massive energy transition, however, the Saudis appear to be positioning themselves for the next best option: gobbling up as much of the earth’s remaining carbon budget for themselves before the bubble bursts. Isn’t it better to sell at a lower price than to receive nothing at all from vast unburnable reserves?

Cutting a Big Slice of Carbon Pie by Keeping Oil Prices Low

The production cost for a barrel of Saudi oil is approximately US$10. ‘Unconventional’ sources like tar sand oil cost approximately US$40 to produce. With oil currently trading at around US$35 per barrel, Saudi Arabia is much better positioned to manage the downturn than unconventional producers. With large financial reserves the Kingdom can sustain short-term losses in revenue. Moreover, Saudi efforts to pursue large budget cuts show a commitment to a low price environment (though popular unrest over austerity budgets may change this calculus).    By keeping prices relatively low and outcompeting higher-cost producers, the Saudis not only protect short-term market share. They also ensure that by the time demand shocks arrive, the Kingdom will have sold what it could while its reserves were still burnable. And if Minister Ali al-Naimi’s surprising vision comes to pass, by midcentury the Saudis will diversify into competitive producers of solar and wind power.   The current downturn in oil prices does not appear to be slowing growth in renewable energy. Increasing cost-competitiveness and the different markets served by renewables have been key buffering factors during the petroleum price crash. In the long run, according to Naimi, solar is “more economic than fossil fuels.”   Government legislation that forces producers to keep fossil fuels in the ground is supposed be the needle that bursts the carbon bubble. The looming threat of that legislation, however, may have been enough to start the bubble’s deflation already. All commentary on Saudi motivations during the current price plunge is speculative, but Saudi Arabia’s concern over peaking demand due to climate change, along with its heavy investments in renewables, points to a strong link between a low oil price and a deflating carbon bubble.    

What a Deflating Carbon Bubble Means for Citizens, Governments and Investors 

If “peak demand” is a central part of the Saudi calculus, then a big rebound in oil price is unlikely anytime soon. The implications of this prospect are enormous. For example, with persistently low oil prices, regions betting on Liquified Natural Gas (LNG) and shale oil as economic drivers will lose out.   Similarly, new pipelines for transporting Alberta tar sands oil to market (like Energy East) may become unnecessary due to slower growth. The economic argument against unconventional oil and gas development just got supercharged.   On the financial front, low oil prices mean that falling share prices among fossil fuel companies are unlikely to rally over the long term. When the carbon bubble collapses completely these investments will fall still further. By betting on a post-carbon future and initiating the carbon bubble’s deflation, the world’s primary petrostate has fortified the economic case for fossil fuel divestment. Institutional investors like the Rockefellers Brothers Fund that have recently divested their portfolios of fossil fuel companies have already benefitted from the move.   Working to avoid catastrophic climate change can feel hopeless in the face of corporate-funded denial and obstruction. But the collective efforts of activists, climate scientists, and educators appear to have convinced the world’s largest producer of oil that fossil fuels have no future. The post-carbon world is fast emerging from the shell of the old.  Those still in denial about this transformation are in danger of becoming fossilized themselves.

Image: Bryan Burke

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.