What was the biggest storm or crisis in your lifetime? Was it Hurricane Katrina? Was it the 2008 Financial crisis?
Was it AIDS? Perhaps you may think it is COVID-19? Or perhaps you may believe it is the climate crisis?
If you believe it is the climate crisis- you may be partially correct.
A storm is brewing that will impact Canada, North America, and the world dramatically, and Mother Nature has little to do with its creation.
A developing economic storm- Deja vu?
I recently sat down for a very sobering conversation with Dan McTeague, President of Canadians for Affordable Energy, energy analyst and previous Member of Parliament.
As an analyst of energy prices, government policy, and global energy trends, he has serious warnings about a developing economic storm that North America and the world have seen before.
You may be of a vintage to be able to remember events of the 1970s? If you are not, read on… if only for the simple reason that those who do not know or remember history, are doomed to repeat it.
The 1970s and early 1980s are relevant to our discussion because it was an era of two energy crises- one in 1973 and another in 1979. Both were man-made energy crises resulting from over-dependence on OPEC oil supply.
The 1973 energy crisis occurred due to an OPEC embargo of oil sales to Canada, the U.S, the UK, Japan, and the Netherlands. The disruptions of oil supplies from the embargo created an energy crisis for the nations that relied on energy exports from OPEC and created large shortages in petroleum supplies. As a result, they suffered high prices- a rapid doubling of the price of oil in fact.
As industrial centers in the world economy which had a large demand for cheap oil exports from the Middle-east, the economies of Canada, the U.S, the UK, Japan, and the Netherlands were hit hard. The embargo was a shift in global political and economic power through which the OPEC countries could influence powerful nations by manipulating oil supplies and causing shortages.
The monopoly threshold- Over 50%
It is important to note that OPEC did not have a huge monopoly over the oil market in 1973. They had 56% of the oil market, according to energyeducation.ca -meeting the US Department of Justice‘s monopoly threshold which is defined as a market share of greater than 50 percent. It was enough to manipulate prices to shock the oil market and create a shortage in global supply. Currently, OPEC (less Russia) will produce 33.7 million barrels a day in 2021, while Russia- according to Interfax International Information Group- produces 10.2 million barrels a day. That leaves OECD countries producing 43.9 m/bd – so currently OPEC plus appears to control about 54% of the market. Dan McTeague warns that currently “OPEC and Russia produce nearly half the world’s oil needs. That’s quite a powerful block at a time when western nations seem intent on killing this vital resource.” It’s interesting that a similar price shock occurred in 1979, as the Iranian Revolution and the subsequent Iran-Iraq War (1980-1988) restricted the supply of oil from Iran and once again created a shortage in global supply and doubled oil prices.
In both 1973 and 1979, Canada, the U.S, the UK, Japan, and the Netherlands experienced stagnant economic growth and price inflation which led to recessions. In the case of North America, 1973-75 was the worst period for the United States and Canada with generally weak economies until the 1980s The recessions were different from previous recessions and were described as periods of stagflation, where high unemployment coincided with high inflation and economic recession. There were other contributing factors to the U.S. recession, but it was characterized by a 1973-74 stock market crash in the U.S and Canada with the TSX experiencing a 48 percent drop in the bear market of 1973-74. The recession also lasted from 1973 to 1975 in the UK. It was characterized by high unemployment until the end of 1982.
After the 1973 crisis, non-OPEC nations began a process to stabilize oil supplies by developing other oil sources in Canada, Alaska, the Gulf of Mexico, Siberia, and the North Sea
Countries had begun to shift away from dependence on OPEC oil as an energy source to avoid supply and price shock-replacing oil with other fuel sources such as coal, nuclear power, and natural gas. Coal for electrical generation was a simple, cost-effective change. In addition, more research was done and emphasis was placed on the use of nuclear power to encourage the switch from oil.
The Oilsands as a solution to OPEC dependence
The Canadian government responded to the 1973 oil crisis by setting consumer pricing limits, creating Petro-Canada and creating Syncrude-the largest single-source producer of oil in Canada. It is ironic that a strong recognition of the value of developing the oil sands in Canada began in response to the 1973 energy crisis as the Canadian federal government began to perceive that energy security and self-sufficiency were of strategic economic importance. In addition, the foundations for the controversial 1980 National Energy Program, were laid in the federal government’s response to the 1973 oil crisis.
In additional response to the 1973 crisis, nations created strategic petroleum reserves (SPRs)-crude oil inventories held by the governments or private industry. They were intended to be 90 days of net oil imports to provide economic and national security. The International Energy Agency was also formed -currently 29 countries are members. SPRs are so effective that recently, other non-IEA countries have created their own SPRs, with China having the second largest SPR and being the largest non-IEA country to have created one.
And what does 1970’s history have to do with 2021?
A lot according to Dan McTeague. He points out that Canada and IEA countries are dismantling the supply protections that they had built into their economies post-1973-79.
On one hand, oil production has declined in areas that were new in the 1970s and fueled economic recovery-Canada, Alaska, the Gulf of Mexico, and the North Sea. North Sea oil production for example peaked in 1999 and has steadily declined since. Production of North Sea oil which at its peak was nearly 950,000 m³ (6 million barrels) per day, has fallen to one-third of its peak in 2020. Norwegian crude oil production as of 2013 is 1.4 mbpd. This is a more than 50% decline since the peak in 2001 of 3.2 mbpd. Production of crude oil in the Gulf of Mexico is in decline and in August 2020 was at its lowest production rate in nearly seven years at 1.2 million b/d according to the EIA. Also as reported by the EIA, oil production in Alaska has reached its lowest level in more than 40 years. In Canada, production is threatened by lack of egress with the cancellation of five or more pipeline projects over the last 6 years – the most recent being the cancellation of the Keystone XL pipeline. This has increased the reliance of IEA countries on OPEC+ oil.
OPEC+ Supply Constraints
OPEC + countries were to meet and agree on output increases at the beginning of July to resolve disagreement within the group. Historically, OPEC has often had trouble cooperating as the 12 countries are not always able to coordinate policies. By Monday July 5, the group was at an impasse.
McTeague points even before the impasse, OPEC +’s planned output increases were insufficient.
“OPEC + had discussed and more or less agreed to 400,000 barrels increasing every month from August to December. So over 4 months – August, September, October, November- that would amount to almost a 2 million barrels per day increase. But that is just not enough to meet the rising demand. They needed to come out with a 1 million-barrel increase immediately. They had planned to spread it out so painfully slow that the markets are reacting with $75 a barrel prices. Everyone was expecting 1 million barrels and some analysts had suggested 2 million barrels. But they proposed only 400,000 barrels raised every month beginning in August- that’s not enough to meet surging demand. We are too short by my estimates, leaving the world short at least 5 million barrels a month. That’s a problem- especially for the US. It’s too little too late.”
McTeague points out that the issue isn’t that OPEC+ is cutting supply. The issue is they are just not increasing it enough.
The largest string of U.S inventory drops in 40 years
He points out that the U.S. is experiencing six straight weeks of U.S. oil inventory drop. This is the single largest string of inventory drops since the U.S. Energy Information Agency began calculating inventory over 40 years ago. He sees definite signs that Canada is headed for an energy crisis with the markets being complacent in anticipation of an increase in Iranian oil supply. He says that increase won’t happen due to political tensions. In addition, he sees IEA prescriptions to achieve “Net Zero by 2050” as further dismantling the mechanisms that weaned countries off OPEC supply dependence.
After, 1973, countries replaced OPEC oil with other fuel sources such as coal, nuclear power, and natural gas. Coal for electrical generation was a cost-effective change as well as natural gas. However, with coal identified as the most carbon-intensive fossil fuel, phasing it out is perceived as key to achieving the emissions reductions needed to limit global warming. This is as directed by the IEA in their report “Net Zero by 2050”. Developed countries are being pressured to abandon low-cost hydrocarbons despite the fact that analysts report regularly that global coal consumption is being driven by developing countries who have no intentions to wean themselves off coal. For example, China, currently operates 1,058 coal plants – roughly half of all coal plants worldwide. In 2020, Asia had 350 coal-fired power plants under construction. They include 7 in South Korea, 13 in Japan, 52 in India, and 184 in China with the rest underway in other parts of the world. China is also building and financing hundreds of other coal-fired power plants in countries such as Turkey, Vietnam, Indonesia, the Philippines, Egypt, and Bangladesh.
A recipie for energy shortages
Clearly, China understands the lessons from the 1973 energy crisis and is leveraging coal to power their prosperity while most OECD countries risk energy shortages. McTeague notes the demand destruction created by Covid 19 is obscuring the rapid return of dramatic demand increase, the return of price shocks to the oil market, and a looming shortage of global oil supply.
“Covid can only go on so long. You can only trot out the excuse of demand destruction so many times. All the aspirational changes to energy strategy such as “Build back better” are not happening. What is happening immediately is that global demand for oil is skyrocketing.” It’s amazing that the Greens think it’s important to de-invest in oil but are not aware (of the impact) of supply shortages on global economies. It is completely unreported by media.”
If the IEA is to be leading their 29 member countries with sound guidance, they seem to have a poor grasp of the immensity of the collapse of energy security they are recommending according to McTeague. IEA messaging has become contradictory, preaching reduced fossil fuel use to create “millions of jobs, lift economic growth and keep net zero in reach” in their May 2021 report. Then, just a few weeks after preaching that oil production must decline, the IEA called for OPEC+ to boost output to meet demand recovery and avoid a sharp oil price increase stating: “OPEC+ needs to open the taps to keep the world oil markets adequately supplied,” in their June 2021 report.
Canada has removed itself from solutions to a looming energy crisis
McTeague points out that in this discussion, Canada has excluded itself from coming to the world and the U.S.’s rescue and supplying oil to markets. He acknowledges that the number of rigs now operating in the United States drilling for oil is less than half of what it was pre-pandemic, while demand has pretty much risen to where it was pre-pandemic. He estimates the supply/demand gap at about 6 million barrels a day. He notes:
”The U.S. has to get it from somewhere. Little wonder that May 2021 data shows that the US had to import 22 million barrels from ….you guessed it… Russia. Americans worked very hard for energy independence and now they’re seeing it slip away. Before the pandemic they had energy independence – they were producing more than they were consuming on the whole. They were achieving something that they had worked toward for 30 to 40 years- to restore, recover and become energy independent from the rest of the world.”
McTeague warns that the world is headed for an energy crisis, which he says is music to the ears of Russia and OPEC+ members because they now know that they are the swing producers. He says $100 oil is coming, and strategic petroleum reserves are not enough to cushion the impact. The U.S. has been drawing down on its SPR but it’s still not enough. Global demand and domestic demand are surpassing injection rates as other countries are drawing on their inventories as well. U.S inventories are now 6% below the five-year average and they’re probably going to be 8% below soon. He sees the current focus of IEA member countries as misguided.
“Along with this strategy of fossil fuel divestment, you now have the very rapid emergence of an oil shortage. We’re seeing the full effect of the collision of ignorance of energy realities and obliviousness by the markets to what is really happening with demand. All these aspirational statements butt up against reality- they’re going to leave the world with less energy. The transition timeline is leaving the world dangerously low on the fossil fuels necessary to maintain economic momentum- it will stunt growth even while demand shoots up. I think you have to develop your policies based on practical evidence, not just trendy-speak or groupthink. It could very well turn the world into a situation where the global economy and average Canadians and average OECD citizens will be seeing stagnation on a level not seen since the Albanians in the early 1980s.”
A repeat of the need for energy security with Canadian-sourced oil and gas
“History never repeats itself, but it does often rhyme.” Mark Twain
As recorded in the CBC news segment from 1973 below, there was an eerie prediction that unless there were increased incentives to find oil and natural gas in Canada, Canadians “will be paying the (higher) price demanded by foreign nations.” made by then Alberta premier, Peter Lougheed as he warned of “energy shortage arbitrarily imposed by foreign governments.”
Maureen McCall is an energy professional who writes on issues affecting the energy industry