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?

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It’s easy to assume the plummet in energy prices will be a boon for the fight against climate change as emissions-intensive oilsands projects are cancelled or put on hold, but experts say that will only be the case if we learn some lessons from the current downturn.

Here are the four key factors that will determine whether Canada cuts emissions during this downturn or simply moves from “heroin to methadone,” as one expert puts it.

1. Cutting oilsands emissions

Suncor, one of the biggest players in the oilsands, recently announced that it expects its emissions to increase by 28 per cent within five years.

To be sure, oilsands production — which the Pembina Institute dubs as the fastest growing source of emissions in Canada — is certainly suffering as of late: the Canadian Association of Petroleum Producers slashed 1.1 million barrels/day from its 2030 projection, while Goldman Sachs forecasts that conventional crude prices won’t breach $50/barrel for a decade-and-a-half.

And as Bloomberg reports, oilsands producers require $60/barrel to build a new in-situ project and $100/barrel for a new mining project (which helps explain why oilsands operations accounted for three-quarters of the barrels Goldman cut from its prediction).

But Amin Asadollahi, oilsands program director at Pembina, says the challenge of meeting national emissions targets (611 Mt in 2020 and 515 Mt by 2030) will remain unless the sector is “decarbonized” with the implementation of emissions-intensity improvements (vacuum insulated tubing or flow control devices for in-situ sites).

Despite cuts to projections, the sector is still anticipated to grow by close to one million barrels by 2030 (and many megatonnes of emissions with it).

Even though the per-barrel emissions have declined by close to one-third between 1990 and 2013, the overall increase in oilsands production pretty much cancels out those reductions.

Allan Fogwill, president and CEO of the Canadian Energy Research Institute (CERI), says technological innovations such as using solvents instead of water for heating bitumen prior to extraction could dramatically reduce emissions over the next 35 years, with the caveat that CERI hasn’t yet explored how many of those technologies are economically feasible.

“There’s a significant amount of opportunity to reduce emissions in the oilsands and maintain or in fact increase production,” Fogwill says.

1. Cleaning up transport

While emissions from the industry will likely be cut due a temporary drop in oilsands-related emissions, pollution from other sectors — transportation, most notably — may neutralize such gains given that car usage increases with lower gasoline prices, which also boosts sales of vehicles like SUVs and Hummers.

But Anthony Perl, director of the urban studies program at Simon Fraser University (SFU), notes that record-low interest rates may be improperly harnessed to construct or repair car-centric infrastructure such as bridges or highways, pointing to the replacement of Vancouver’s George Massey Tunnel as an example.

Perl, who co-authored Transport Revolutions: Moving People and Freight Without Oil, calls for the “future proofing” of such investments, which would require looking 50 or 60 years in the future and anticipating technologies like shared or autonomous vehicles, electric buses and better rail systems while avoiding investments in “stranded assets” like new highways, airport runway expansions and coal port infrastructure.

After all, Canada has committed to become a “post-carbon” society by 2100, which will require an array of new infrastructure.

Perl says: “Right now, that investment is not going into the oil infrastructure — which is not a bad thing — but it’s also not going into the alternative infrastructure because people say ‘oh well, that’s expensive and oil is cheap so let’s just party on.’ This would be the time for real leadership to factor the cost of future energy and collect the money that’s needed to build that green infrastructure going forward. But that requires policy leadership: some places have more of that than others, let’s say.”

Perl argues transport projects like Vancouver’s massive Port Mann Bridge will depreciate over time, unlike green infrastructure like rail and other forms of public transit projects.

1. Making energy renewable

Prime Minister Stephen Harper has frequently taken credit for a two per cent decline in emissions between 2006 (when the Conservatives first assumed leadership) and 2013.

However, the only two years emissions dropped were in 2008 and 2009, during the worst portions of the Great Recession, and have increased since (commentators have noted the brief decline may have been entirely neutralized if Ontario hadn’t phased out coal-fired power).

The United States experienced a similar recession-led trend with a 9.9 per cent drop in emissions between 2007 and 2009. But while the replacement of coal-fired power plants with natural gas for electricity generation has historically been credited for the decline, a Nature Communications study published in July found that per-capita consumption played a far larger role.

Klaus Hubacek, an ecological economist at the University of Maryland and co-author of the study, says that he and the three other writers have since re-analyzed the data, breaking the “fuel mix” segment into individual parts to find out which source of electricity generation contributed most to the decline in emissions.

One of the biggest findings they’ve encountered, Hubacek says, is that renewables accounted for far more of the emissions decline than originally thought and that the rise of natural gas may have actually crowded out the growth of renewables.

“If you translate it into CO2 emissions then you see renewables has a much more important role, as renewables have low CO2 emissions — almost zero — versus gas which has some CO2 emissions,” he says.

A March 2015 report published by Sustainable Canada Dialogues predicted that Canada could achieve 100 per cent low-carbon electricity generation by 2035, which would result in significant emissions reductions. A Clean Energy Canada study noted investments in renewables rose by 88 per cent in 2014, but that the federal government needs to do far more to promote the sector that it currently is.

1. Pricing carbon

The very first policy recommendation listed by the Sustainable Canada Dialogues report, which featured contributions from 60 scholars, was the adoption of a carbon tax or cap-and-trade program. It’s an idea that Pembina’s Asadollahi and SFU’s Perl both support.

In a recent poll conducted by EKOS Research on behalf of Pembina, it was found that half of Albertans would also support an economy-wide carbon tax (in contrast to the levy the province currently features, which only taxes large emitters).

“Part of the reason oilsands emissions are high is because of high energy use,” Asadollahi says. “When you price carbon, it will automatically incentivize more efficient and more lean management and practices, making operations become more competitive.”

Perl adds that now is the time to be deploying such mechanisms, suggests politicians should take the ongoing oil price plunge as a lesson, one that shows we need to consider more moving parts — from carbon pricing to alternative infrastructure projects to renewable technology — to plan ahead.

Similarly, economist Margaret Walls argued in an April article for the Wall Street Journal that now’s the time for such action as “a carbon tax might help to avert some capital investment decisions that would lock in higher emissions.”

“The volatility is becoming greater,” Perl says. “If you think of it in relative terms, the spiking of oil prices and then the collapse of oil prices is a sign to me that the system is becoming less sustainable. We should expect that to continue. Right now, even if we don’t do anything else for sustainable development in the future, we’re laying the groundwork inadvertently for an even bigger spike the next time.”

Prime Minister Stephen Harper has adamantly refused the option. NDP leader Thomas Mulcair and Liberal leader Justin Trudeau have both committed to emissions regulations.

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.