It finally happened. Someone broke the free market and the NDP government has to fix it.
Albertans spent the last few weeks being whip-sawed between companies (Cenovus) who said the market was broken and companies (Imperial, Husky, Suncor) who said the market was just fine, thank you very much.
Cenovus wanted the government to mandate production cuts to increase oil prices. Imperial et al wanted the government to stay out of the market because they’d invested in refineries and upgraders in Alberta and have a built-in hedge against low oil prices. They can convert cheap oil into refined oil products. The lower the price, the better their profit margins.
Tonight, Notley announced a mandatory 8.7 per cent cut in production which will be adjusted as excess storage is drawn down. This measure is expected to increase oil prices and add $1.1 billion in government revenue.
Conservatives who rail against governments meddling in the free market and picking “winners” and “losers” are delighted with Notley’s plan, notwithstanding the fact that by their definition she’s turned Cenovus into a “winner” and Imperial, Husky and Suncor into “losers”. Progressives who are accustomed to being beaten up if the government so much as looks at the market sideways don’t know how to react.
Why did Notley do it?
She set out her reasons as follows:
- Alberta companies can’t move their oil because government after government in Ottawa failed to build pipelines and the existing pipelines are full. Yes, past and present federal governments could have done a better job, but we shouldn’t let industry off the hook. Had producers built upgraders and refineries in Alberta decades ago they’d be making money now just like Imperial, Husky, and Suncor. Also, they’d have neutralized the concern that pipelines carrying bitumen aren’t as safe as conventional pipelines and at least one of Trans Mountain, Energy East or Northern Gateway may have been approved by now. The industry shares responsibility with the federal government when it comes to “you broke it, you fix it”.
- Record amounts of oil are being shipped by rail, but it’s not enough to reduce the glut in storage which is driving down prices. Alberta is getting around $10 a barrel; oil sold on the global market gets five times as much. True, but this doesn’t address the fact that oil is a global commodity and the price of oil is influenced by everything from OPEC cutting production, burgeoning North American shale, uncertainty in US-Chinese trade relations, slowing global growth, changes in interest rates, and traders fiddling around in financial markets trying to anticipate what’s going to happen next.
- The long term solution is building more pipelines, the short term solution is acquiring more locomotives and rail cars. Okay, but why is it the Alberta government’s (read: taxpayers) responsibility to pay for crude-by-rail? Cenovus signed three-year rail car deals to ship 100,000 bbl/day to the US Gulf coast. It’s already moving oil on CN from the Bruderheim Energy Terminal. Other companies could have done the same.
- We need an immediate solution, the government had two choices: (1) do nothing and let the free market sort itself out as Husky, Suncor and Imperial had urged, or (2) listen to Cenovus (and other advisors) and impose mandatory, industry-wide production cuts until the storage glut is reduced and prices rise. What’s interesting about the second alternative is three weeks ago Cenovus was NOT demanding mandatory industry-wide production cuts, it was satisfied with voluntary cuts. In its third-quarter update to investors it said it expected price differentials to ease in the coming months as North American refineries came back onstream after scheduled maintenance, oil-by-rail ramped up and Enbridge’s Line 3 Replacement project went into service. One wonders what happened between then and now to cause Cenovus to dramatically change its tune?
Given the lack of consensus in the industry, Notley reframed the issue. She said the government must do what’s best for the 4.3 million Albertans who own the resource. It has an obligation to get the “most value possible” and this means the imposition of mandatory production cuts.
To put all this into context, the Notley and Trudeau governments have offered what some would call “corporate welfare” to the tune of:
- $4.5 billion (expected to rise to $12 billion) to buy Trans Mountain and expand it once the necessary approvals come through
- $350 million in capital costs and $2.6 billion in operating costs over three years to buy locomotives and rail cars for crude-by-rail transportation
This is on top of federal changes to capital cost write-down rules which will give oil companies immediate relief and provincial incentives–$2.1 billion to the petrochemical upgrading sector and an additional $1 billion investment in the petrochemical feedstock infrastructure program—to fund diversification.
Never mind. Ms Soapbox understands why Notley did it. The role of government is to act in the best interests of its citizens, Notley went with a utilitarian solution choosing the alternative expected to produce the greatest good for the greatest number. At this point we need to trust her judgment and support her decision.
But let’s not stop there.
Bailing out an industry should come with strings attached.
No more whining
Given that Alberta taxpayers are investing in infrastructure and propping up the market for industry players who were too short-sighted to invest in upgrading in Alberta, we are entitled to expect something in return, starting with no more whining.
Corporations must put real muscle into reclamation, particularly cleaning up abandoned and orphaned wells, they must enthusiastically support the government’s climate change plan and be willing to pay higher taxes and royalties so Albertans get their fair share when the good times roll.
Furthermore, all those executives who will be able to deliver value to their shareholders thanks to the Alberta government’s intervention, should be happy to pay slightly higher personal income taxes than the rest of us. (The target compensation for Cenovus CEO, Alex Pourbaix, is $6.5 million, he can afford it).
One final point, the UCP and Alberta Party supported Notley’s decision. It would be nice if they revisited their belief that the private sector is more efficient than the public sector because if the free market messed up energy markets this badly, heaven help us if we let them privatize education and healthcare.
If we’ve learned anything from this experience it’s this: sometimes the invisible hand doesn’t have a clue.