By: Gabriella Pasolli
Editor | Economics and Policy
On April 20th, the whole world witnessed an unprecedented phenomenon wherein US oil prices came crashing down into negative territory for the first time in history.
Amidst the chaos of COVID-19, the energy sector is far from the only industry that has suffered; however, given that it constitutes over 10 percent of the Canadian economy, such a drastic dip is very relevant for all Canadians.
It is important to remember, however, while frightening, this is not an apocalypse, and there are ways to mitigate the impact of this drastic downturn.
This drop was caused, in simple terms, by a lack of demand and a shortage of storage space. The decline of the global and Canadian economy has drastically lowered the domestic and international needs for oil, which led many traders to offload their holdings in an attempt to avoid incurring steep storage costs.
While thus far, only May’s futures contracts have been affected, so long as the lockdown continues, there is no guarantee that June’s contracts will meet a more favourable fate.
To address the threat to June’s futures contracts, leading exporters, such as OPEC and Russia, have agreed to cut production to lessen the surplus. If this is successful and suppliers continue to decrease production until the surplus is eliminated, a new balance will be established, and oil prices will eventually stabilize.
However, this is far more easily said than done, and there may be far-reaching consequences for those employed by the oil industry, namely unemployment. The more that suppliers cut production, the lower is the need for jobs in Alberta.
Beyond this, oil-dependent countries will feel the acute hurt of intentionally decreasing oil production in the short term, even if it is to increase the price and revitalize the market in the long run.
Thus, it is crucial that when the lockdown is over, these employees will actually have jobs to return to.
The precipitous oil crash in 2014-2015 led to over 100,000 Canadian oil patch employees being laid off; however, the initial downsizing that companies underwent to withstand the crash was not the only point of concern. Years later, even as the price of oil increased, many workers were still unable to find employment.
Following COVID-19, it is crucial the Canadian government does not allow the same tragedy to occur.
Even before the pandemic began, the Albertan oil and gas industry faced a tumultuous landscape, primarily in the form of pipeline protests and environmental activists. Thus, the pandemic has only magnified pre-existing issues within the industry itself, making this drop in the oil price potentially even more difficult to mitigate than the 2014-2015 crash.
Furthermore, because the effects of COVID-19 are so far-reaching, the government is forced to contend not only with the struggles of the oil and gas industry but with the struggles of the entire country.
This said, the Canadian government has taken steps to help mitigate the effect that the COVID-19-induced lockdown will have on the energy industry. Primarily, the government has stated that they will be taking targeted actions, totalling over $2 billion to protect and create both jobs and environmental programs.
These actions are expected to retain and create approximately 10,000 well-paying jobs in the sector. While this is a strong start, it is important to note that when the oil and gas industry employed over 130,000 people in 2016, 10,000 jobs may not be enough.
Rather, the government must be prepared to take bigger steps to create new jobs for those who lost their employment throughout the crisis. Feasibly, the Trudeau government could additionally utilize the time-honoured tradition of creating jobs through commissioning public works, or, they could focus on creating jobs in the renewable energy industry, as has often been suggested by climate activists.
Conversely, Trudeau’s government could look to Japan, where policymakers have adopted a relief package worth ¥117.1 trillion or 21.1 percent of GDP. This package dedicated 0.3 percent of GDP to enhance readiness for the future and 1.6 percent of GDP towards regaining economic activities after containment through concessional loans and social security contributions, amongst other measures.
Although Canada would need to adapt such a plan to suit a resource economy, policymakers would be well-served to follow suit and dedicate resources to prepare Canada’s economy for the end of the lockdown.
As well, Canadian policymakers could look to Norway for ways to avoid long-term unemployment in the oil sector. Like Canada, Norway relies heavily on the oil and gas sector as it is also a top crude-oil exporter. Since the pandemic has started, one of Norway’s notable measures has been a proposed change to the petroleum taxation, primarily by allowing companies to deduct investments, including uplift, from the special tax base immediately.
These changes would improve Norwegian oil companies’ liquidity, possibly freeing up as much as NOK 100 billion for investment, with the goal of curbing the inevitable decline of the industry to retain jobs.
This taxation-based policy could prove to be promising as it would encourage companies to continue investing rather than simply making cuts to survive.
Regardless of the means, though, policymakers must be forward-looking and focus on how Canada will go on after the lockdown ends and the economy begins to open up. While this is the first-time prices have fallen into the negatives, it is far from the first time that the oil industry has faltered, and it will not be the last.
Although these times offer a new set of difficulties, humankind has fallen into countless situations that were, at the time, “era-defining,” “once-in-a-lifetime,” or “the first time in history.”
After these challenges, humanity has never once failed to recover and to create a world in which they move forward to greater successes than ever before.
In times like this, it is more important than ever that we look back on humanity’s greatest triumphs.
Consider that hundreds of years ago, the idea that there would be a man on the moon would have been ludicrous, the idea that someone would scale Mount Everest impossible, and the existence of the internet a fantastical joke. Only fifty years ago, the notion that polio would be all-but eradicated, would have seemed like a fairy tale, and someday, humanity will look back on this crisis as further proof of the resilient nature of humankind.
It will be the decisions of policymakers moving forward that largely shape humanity’s ability to recover. Canadian citizens and policymakers must remain forward-focused and prepared to do what it takes to allow the energy sector to not only survive the pandemic but thrive once it is over.
After all, the sky is not falling, and so long as we move forward with this sentiment in mind, we will once again see the sunrise of human progress.