Thursday, June 21, 2012

UPDATE-1: $80 / barrel? Prepare yourself for the next Albertan epic fail.

Once upon a time, Alberta was in deficit. Their King at the time, Ralph, decided that this was completely unacceptable and from that moment forward (with the aid of an earlier oil boom and massive government cuts) the deficit would be no more. Ralph accomplished his goal, Albertans rejoiced, and in their deficit cutting glory they declared themselves the master deficit slashers of Canada.

That was then, and this is now. There will be no more oil booms, at least none that last long enough for Alberta to see any lasting growth and as the cheaper to produce conventional oil reserves continue to decline the oil companies operating within Alberta will have less of their own cash to subsidise the expenses of oilsand extraction.

Before the Alberta election occured, I asked a series of questions for the MLAs to address (none actually did address them completely however), but the most important question was the last question.
Finally, on oilsands. Budget expectations on the price of oil expect sustained higher prices, but gas prices are already on the frontpage around the world. In 2008 oil was at $147 / barrel when the mortgage & auto meltdowns occured. Often overlooked are facts such as people ditching their cars in favour of bikes or scooters. Mortgage payments couldn't be paid with such a high price of oil according to Jeff Rubin. Many economists expect a collapse in the price of oil similar to the collapse in price seen in 2008 due to a sudden lapse in demand due to price. What is your plan to balance Alberta's budget if oil isn't more than $80 / barrel?
By now you may be guessing that I didn't simply pull the number $80 out of a hat. You'll remember at the time of the election oil was in an upswing, and predictions were for higher prices, not lower ones. So how did I know? Glad you asked.

The biggest hint for you all should have been the numerous front-page articles in every newspaper known to man complaining about gas prices alongside "expert analysis" that gas prices would have no effect on global growth. If you haven't noticed, the "experts" were wrong, yet again. By now you should realize that "experts" quoted in mainstream media are being quoted not to tell you what is going on, but rather to sway opinion and maintain confidence.

It was obvious then that a collapse in oil price was right around the corner, and what do you know, it was. Of course now that it's actually happening Alberta's budget makes no sense at all, and on top of the oil spill propaganda the Alberta government is going to work extra hard to convince people that putting all of their eggs in the oilsands basket isn't actually costing them money. Of course the oilsands with their 3:1 EROEI ratio, massive subsidies, and huge environmental footprint are costing Canadians money. It's not just about direct subsidies either, take for instance the fact that companies can write off the gas they use to transport the very large equipment up to the oilsands. Or the numerous other "supportive" industries which are not themselves oilsands companies but of which the oilsands could not operate without. Make no mistake, we are paying them.

What about the money we do make? Well, it's all USD, isn't it? So let me ask you, what would you rather have as a long term asset. Oil in the ground? Or devaluing debt-ridden USD in your pocket? Backless paper which is quickly losing favour with emerging world players.

From this point of view we're not only paying them but are also getting nothing in return. The USD we do get must be spent as soon as we get it on tangible assets for the value to be held long-term. You can bet there will be a major shift away from the USD in the next 5 years as the $15 Trillion debt comes home to roost for the Americans and hyper-inflation follows an awful deflation. When this occurs the value stored in the USD Alberta/Canada receives will evaporate. Of course Harper knows this already, and I can only assume that Alison Redford must know as well.

Where will oil go from here?

I anticipate increasingly larger swings as economic stability crumbles. Oil will swing because growth projections will wildly swing. In the near future there will likely be a series of grandiose promises from leaders to string people along (more grandiose than the current) as desperation kicks in. This will pump and dump confidence like no one has seen before as the confused masses try to grasp and hedge for the economic losses and anomalies heading our way.

However, you won't see a price below $70 unless it's accompanied by an economic crash and below $80 will be relatively short term when it happens. With the Iran crisis currently settled and no current major disruptions to the supply chain otherwise I expect these swings to mostly stay between $80 and $100, with $80 triggering another confidence run on growth and $100 slapping it back down.

Update-1

Budget cuts keep coming at $80 oil

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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