Canada should start preparing for an era of $0-per-barrel oil, not because all need for the product will disappear anytime soon, but because supply will so vastly exceed demand, the Globe and Mail’s Doug Saunders concludes in a column published over the weekend.
Given that reality, “it may be just as well Canada’s pipeline projects have all become bogged down in political opposition,” Saunders notes. “If we had gone ahead with them, they might soon have turned out to be massively expensive stranded assets.”
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It isn’t that all oil demand will evaporate. “Surely, you might say, there will still be demand for fossil fuels for many decades. Electric motors with sufficient torque to power tractors, transport trucks, and other heavy equipment, to say nothing of jet engines, have not yet been invented,” he writes.
“The problem, as many energy investors know, is that the shift from mass to marginal use of petroleum will not be matched by a similar downward shift in levels of production and distribution. Quite the contrary: Producers will all want to try to recoup their existing exploration and development investments by fully pumping out their plays. Countries sitting on huge reserves will want to put them on the market while the market still exists.”
That dynamic will keep oil supplies high while demand weakens—a reality that many oil traders already seem to take for granted, given their muted response to OPEC’s failure last week to agree on production cuts that might have driven oil prices higher.
“For many people in the energy sector, this prediction is their daily reality,” Saunders writes. Now, “oil investors are calling on energy companies to start selling off their assets, paying out their investors through dividends, and preparing for the end. Oil executives insist that they have priced in the coming decline. Some experts say they have not come close.”
Analyst Paul Sankey of Wolfe Research is one of them. “Demand forecasts are way too positive,” he said last week. “Really, the essence of the opportunity for oil is to be dividend stocks to pay out. Not to attempt to grow, but actually to orderly liquidate.”
