“…what do I get? A one-way ticket to Palooka-ville!…I coulda had class. I coulda been a contender. I coulda been somebody, instead of a bum, which is what I am. Let’s face it.”
- On the Waterfront, 1954
Well, that quote fits Canada’s hydrocarbon sector like a glove, despite the fact that it implies we’re all bums. We’re not quite there yet. But we will be soon. Oddly enough, the bums that are left standing may be very rich bums, and I don’t know what that means existentially, but hear me out.
In the near future, the oil world is going to look a lot different than it has over the past decade. I don’t think I need to tell you the past five years have been ugly; even the bright spots like US shale have been pounded on the rocks like a dinghy in a hurricane. And the world’s loudest are digging the industry’s grave. According to most media channels, things are only going to get worse for the petroleum sector. “Oil is dead,” declared Elizabeth May, who is to energy what Queen Elizabeth is to rap music. But the world listens to her rather than those who do the work, because she is on the right side of the fence.
Before you get too despondent and head to the pub to sit between two plexiglass shields and drink yourself silly through your favourite mask, consider these data points that are quietly telling a different story.
To properly ingest what’s coming, consider a few facts. Let’s look at consumption first. Currently, North America and western Europe are the energy hogs and the poster children for overconsumption. But within another half-decade, those rich regions may be a consumption afterthought. The reason? China and South Asia, including India, are what really matter, looking forward. Yes, the rest of the world will consume a lot, and even places like Africa will be notable and rising. But China and India, and a few surrounding smaller countries, have about 3 billion people that are on an arrow-straight trajectory to get even with our standard of living. Consider that North America has 500 million people, and western Europe has about 200 million, and we consume stuff in quantities that make one’s head spin. We demand supermarkets full of everything, we demand every conceivable electronic gadget in the latest version, we demand fresh sushi in the middle of our continents. And in combination, these rich regions have about a quarter of the combined population of China and India. If we add Africa to the equation, and why shouldn’t we, then the expectations of future consumption become even higher. They don’t even have to match our prodigious appetite; even if they only get halfway their consumption will dwarf the west’s.
You may have heard that COVID has decimated hydrocarbon consumption, further proof that “fossil fuels are dead”. Running counter to that Maysian theorem are the following facts: China’s oil consumption is at record levels during the summer, eclipsing those of pre-COVID 2019. Yes, they were bargain hunting and picking up cheap oil, but even after the buying binge settled down, purchases have exceeded the prior year. India is in a similar situation; oil consumption in October was up nearly 3 percent from October 2019, even as the country remains somewhat gripped by Covid related slowdowns. Demand is strong not just from transportation but from petrochemical activities. (And we’re not even going to get into natural gas, demand for which appears to be more sustainable than oil in coming decades as coal exits stage left and is replaced by its cleaner-burning cousin.)
Demand may flatline here in North America and western Europe, regions where ethnocentric elites look out the window at protests and conclude that, yep, it’s over for oil, look at all those signs and people gluing themselves to buildings. Weather forecasting by looking out the window went out of style some centuries ago, yet we seem ok with it here in the industrial commentary realm. At any rate, we in the west should remember that we may be Kings of the World when it comes to current consumption and lifestyle demands, but that that fact does not necessarily mean that the rest of the world is willing to self-immolate as we are over a heavy conscience. Place your bets. And yes, China and India will install a lot of renewable capacity. The issue is that they will require a lot more of all sorts of energy. That’s what happens when people start to live as we do. Air conditioning, anyone?
Now, if one can accept that petroleum demand will remain strong for quite some time – and even if you don’t, the following is relevant – where will [whatever quantity you want to pencil in] come from? For the Maysian crowd, we have to once again point out that production declines steadily without new oil fields being developed. Global hydrocarbon investments have fallen massively since the 2014 oil price crash. On top of that, the movement to divest hydrocarbon investments remains strong, and green investment is so incentivized that any mobile dollar goes there first. But neither of these circumstances are doing a whole lot to dent oil consumption (the first factor has nothing at all to do with oil consumption; the second theoretically can but, for the trillions invested so far, it seems only to be offsetting some of the growth in energy demand, not wiping out hydrocarbon usage).
So, who will produce all that oil the world is going to consume?
Not, for the most part, the US, or Canada, or big oil of western Europe. US shale is going to have trouble attracting capital after showing all the capital discipline of trust fund kids. Canada can’t attract any capital because we seem to be working very hard to chase it away. European oil majors are caught in a PR/public market crossfire that demands they run away from oil production. We are seeing North America and western Europe decimate their production bases, on purpose.
And lost in the bowels of energy news, where political-agenda-activists don’t care to look, are stark statements about who will be providing all that future oil. Russia, as noted in the decidedly-not-mainstream Moscow Times, recently announced a new arctic investment plan worth up to $231 billion (while the activist west works feverishly to outlaw any arctic exploration), Saudi Arabia confirmed plans to increase its production capability to 13 million barrels per day (no cost estimate disclosed), and Abu Dhabi announced $122 billion in new hydrocarbon capital to increase production.
That’s who’s going to be supplying the world with oil, and at much higher prices. Canada will be left in a peculiar position, should the likely event of much higher oil prices come to pass: existing fields will spew out a lot of money, the oil sands will generate it by the truckload, but there will be few places to reinvest it because Canada’s urban power centres will resist any further development to the extreme. If oil prices spike, Montney/Duvernay activity will go into overdrive, which will cause the usual mayhem by glutting the natural gas market in that weird cycle we’ve seen before. The more valuable oil gets (especially as condensate), the less valuable solution gas gets because it can economically be dumped for nothing (or less) if the higher netback of oil dictates. Quite the weird market we’ve built up.
We will likely, therefore, have an environment (no pun intended) in Canada where the money is gushing again, but there will be not much for a corresponding boom. It will be a peculiar time; the cycle won’t see the historical round of corporate sales/startups, and though drilling activity may return the pipes to take it away may not be there. We could therefore see an odd cash flow boom, with nowhere for the cash to go except clean up orphan wells. That will be the time to do it though, there may not be another chance.
Russia/Abu Dhabi/Saudi Arabia/whoever else will reap the benefits in a major way; they will be increasing production right into a potentially significant shortage. We in the west will be handing them power, wealth, and control of the world’s future energy supplies. In hindsight, these current decisions will go down in history as some of the dumbest in geopolitical history. We coulda been contenders.