Bobby
McFerrin’s light-hearted lyric “Don’t Worry, Be Happy” seems perfectly suited
to Dr. Wade Locke’s analysis, as he explained it to James McLeod of the Telegram last week, on the future of oil. Dr. Locke is an Economist and Professor at Memorial University.
Indeed, why would we worry when the ass is coming out of the Provincial Budget!
Indeed, why would we worry when the ass is coming out of the Provincial Budget!
The slide in
the world price of Brent Crude, closing at US $86.16 per barrel on Friday
October 17th, is a significant event and not because people will save
money at the gas pumps.
Since oil’s decline
began just a few weeks ago, a host of oil producing nations including Saudi Arabia,
Iraq, Venezuela, and Russia among others, whose budgets rely on $100 plus oil, have
expressed concern that they will feel the sting of lower revenues. While none
could forecast the exact day or week that a major correction on the markets might
occur, all knew it was coming.
The fact that the
U.S. will become energy self-sufficient by 2030 or earlier is old news. Unlike
the Saudis, few oil producing nations have maintained a rainy day fund.
Newfoundland
and Labrador is just as reliant, on a relative basis, as many of the countries
mentioned. Oil directly generates 33% of
the Province’s budgetary revenues. The figure
does not reflect proceeds from corporate, personal taxes and HST associated
with offshore related jobs, construction and services. In fact, oil’s impact on
the Treasury may represent as much as 50% of revenue or more when the labour
pool doing the round trip to Fort McMurray is assessed.
In the
2014-15 fiscal-year, the Minister of Finance based forecast revenues on US $105/barrel.
Every dollar means roughly $30 million
to the Treasury. $85 oil represents a
revenue drop of $600 million dollars annually. The forecast deficit this
year was $537.9 million at the start. What will it be now?
Dr. Wade
Locke shrugged off the impact of the oil
price decline while acknowledging to the Telegram, he "didn't see this coming". He correctly notes the impact of “fracking” along with a weak European economy.
But he is right on little else.
Dr. Locke suggests fracking needs $100 oil to make a profit. Lower prices, he believes, will force some of
these projects to be stalled causing “less supply” followed by higher prices at
which point, ostensibly, everything will be in balance. He suggests, and I
quote: “oil prices will go back up…a hundred dollars is a reasonable number...”
The
Professor might have been correct a few years ago when commodity prices
responded predictably to cyclical trends in economic growth and recession or
squabbles among/with OPEC Members. But
much has changed within just a few years.
Locke's thinking is
the ‘don’t worry, be happy’ approach Nalcor used to justify
Muskrat Falls. Nalcor assumed $135-150/barrel oil giving the “Inter-Connected”
a $2.2 billion advantage over the “Isolated Island” Option. Where do you think that equation stands now?
Dr. Locke
seems frozen within Nalcor’s Muskrat paradigm; one for which he was a major
‘booster’.
Recent reports
suggest extra-long horizontal drilling—up to 2 miles - is improving oil production
rates by 50-100% with only a 20% increase in costs. In addition, fracking is
being carried out at a frenetic pace and getting more efficient.
Maria van
der Hoeven, executive director of the International Energy Agency (IEA), an organization
that advises governments and industry, has a different take than Locke. She is likely a person who knows. "Only a tiny minority of shale oil production would be affected by the slump in prices to near-four-year lows. Some 98 per
cent of crude oil and condensates from the United States have a breakeven price
of below $80 and 82 per cent had a breakeven price of $60 or lower,"
van der Hoeven told Reuters, a news agency.
The IEA's chief economist went a step further: "There's not one single drop of oil which cannot be produced for commercial reasons with today's price" said Fatih Birol in an interview with the Wall Street Journal.
The IEA's chief economist went a step further: "There's not one single drop of oil which cannot be produced for commercial reasons with today's price" said Fatih Birol in an interview with the Wall Street Journal.
Scotiabank Economist Patricia Mohr, writing in the Bank’s October 16, 2014 Global
Economics Newsletter, approaches the issue a little differently though the
impact of her numbers is equally unmistakeable. Writes Mohr: “While US$90 is
clearly too high to slow U.S. exploration & development, we believe that
prices at the US$80 mark (if sustained for more than 3-6 months) would have an
impact.”
$100 oil
again? Not even $90 oil, in many experts’ view.
Van der
Hoeven’s and Mohr’s statistics are frightening for this Province (unless you
drive a Hummer), but they are not the only ones that give rise to uncertainty
in future oil prices.
According to
the IEA, US output has been keeping pace with Saudi output at 11.5 million b/d
and is set to exceed it this fall, for the first time since 1991. American crude, prohibited from sale on the
international market since the Arab oil embargo of the 1970s, is now competing with
other producers.
A story in the Wall Street Journal on September 30th noted that an oil tanker out of Alaska is the first in what Citibank "expects to become an armada" remarking that Alaskan crude could reach 100,000 barrels a day. More export permits are expected to be approved by the U.S. Government as shale oil production continues to ramp up.
A story in the Wall Street Journal on September 30th noted that an oil tanker out of Alaska is the first in what Citibank "expects to become an armada" remarking that Alaskan crude could reach 100,000 barrels a day. More export permits are expected to be approved by the U.S. Government as shale oil production continues to ramp up.
America’s
shale oil revolution has arrived. Countries
and Provinces, like ours, that failed to prepare for this day now find
themselves in a pickle.
Can we rely
on Saudi Arabia to come to our collective rescue? The Saudis have stated they are no longer prepared to
play ‘swing’ producer, as other countries feed an oil market driven out of balance
by shale technology. The Saudis have "slashed" oil prices to Asia even as China's growth has slowed.
A Bloomberg story on Friday, October 17th reports that the Saudis and Kuwait have halted a jointly operated oil field, producing 300,000 barrels/day, ostensibly for environmental reasons. The move may help stabilize prices for now. But at the rate oil is entering the market, including from Libya and even from Iraq apart from the U.S., suggests, if the measure is intended to reduce supply, it will not work for long.
Citibank's Global Head of Energy Strategy, Seth Kleinman, told CNBC $50-60/barrel is really where you need to do damage. He says if the Saudis want to have a war with U.S. shale producers they can win it at that level but they will have to suffer a lot of pain in the process.
A Bloomberg story on Friday, October 17th reports that the Saudis and Kuwait have halted a jointly operated oil field, producing 300,000 barrels/day, ostensibly for environmental reasons. The move may help stabilize prices for now. But at the rate oil is entering the market, including from Libya and even from Iraq apart from the U.S., suggests, if the measure is intended to reduce supply, it will not work for long.
Citibank's Global Head of Energy Strategy, Seth Kleinman, told CNBC $50-60/barrel is really where you need to do damage. He says if the Saudis want to have a war with U.S. shale producers they can win it at that level but they will have to suffer a lot of pain in the process.
The plethora of international energy analysts who hold contrary views offer reason why we should worry about Dr. Locke’s forecasts and how they get used by the Government.
His 'everything will be fine' analysis may be suited to politicians willing to believe in the 'tooth fairy', as they contemplate a bare cupboard in advance of an election. But if it is typical of the advice Nalcor and the Province receive from him, it won’t do much for a public hoping for bare-fisted approaches to public spending even if they recoil at the pain of imposed fiscal prudence.
The new Finance Minister,
Ross Wiseman, has already warned, via the Telegram’s James McLeod, the Budget “is
a living document”. This, ostensibly, is
code for ‘a bigger deficit this year and forget any notion of a balanced Budget
next year’.
One thing is
clear: the fiscal ‘black swans’ are gathering, as expected.
The
Government has spent every cent it could get its hands on. Watch it borrow the money oil fails to
generate.
Dr. Locke’s comments seem perfectly timed to prepare the public for a Government all too
willing to postpone leadership. It's fine to enjoy the lyrics of Bobby McFerrin but, in this Province as elsewhere, Government revenues equate with oil, and that is too important to be left to spin.
So, I'm not about to sing Dr. Locke's tune “note for note”; but as for Bobby McFerrin....
So, I'm not about to sing Dr. Locke's tune “note for note”; but as for Bobby McFerrin....
In every life we have some
trouble
When you worry you make it
double
Don't worry, be happy
Ooh, ooh ooh ooh oo-ooh
ooh oo-ooh ooh ooh oo-ooh
(Don't
worry)
Ooh oo-ooh
ooh ooh oo-ooh
(Be happy).