As US President Donald Trump pressed Saudi Arabia, before last week’s meeting of the Organization of Petroleum Exporting Countries, to keep oil production high and prices low, the government of Alberta moved the opposite way. At this writing, OPEC had not yet met, and Trump had not yet tweeted disparagingly about Alberta Premier Rachel Notley. Maybe he didn’t notice.
“Oil prices getting lower. Great!” Trump tweeted on Nov. 21. “Like a big Tax Cut for Americans and the World. Enjoy! $54, was just $82. Thank you, Saudi Arabia, but let’s go lower!”
Reasons to cringe
In response, oil and gas producers should cringe for three reasons. The most obvious yet least important of them is that the president is trying to jawbone down the value of oil. This is annoying but not especially important because, ultimately, market forces and not presidents with Twitter accounts determine the crude price. Trump will need reminding of his claim to control over markets the next time oil demand outruns supply, which it will.
A more important reason to regret Trump’s nagging is the apparent exploitation of a murderous misstep by Saudi leadership. After operatives linked to Crown Prince Mohammad bin Salman killed journalist Jamal Khashoggi in Saudi Arabia’s consulate in Istanbul on Oct. 2, Riyadh tried, unconvincingly, to shed accountability with trial-and-error explanation. Trump seems ready to forgive and forget if only the Saudis will not cut oil production. Behavior on both sides is regrettable. Riyadh is too important and too valuable an ally for the US to shun altogether but not so important or valuable that it cannot be called to account for atrocity. The US must treat the Khashoggi murder as more than a lever in public deal-making over oil prices.
Alberta’s decision to do what Trump wants Saudi Arabia not to do, meanwhile, illuminates the third and main reason for the oil and gas industry to regret the president’s oil-price bullying: When governments blunder into oil markets, they make messes.
In defense of her intrusion, Notley legitimately can plead desperation. Alberta needs new pipeline capacity to connect production from the oil sands with international markets. Her government estimates output of raw crude and bitumen exceeds transport capacity of all types by 190,000 b/d. Inventories are rising at record rates and approaching physical limits. The bottleneck has pulled the price of Western Canadian Select crude recently to $30-50/bbl below that of West Texas Intermediate. The normal WCS location and quality discount is $12-20/bbl.
In a press release announcing the production cut, the Alberta government said the lost value costs all of Canada $80 million/day. It therefore will make producers trim output, beginning in January, enough to lower aggregate production by 325,000 b/d “until we have enough shipping space to clear the current glut and improve prices.” The government estimates 3 months of curtailment will be needed. After that, it expects to ease the production cut to 95,000 b/d through yearend 2019, when new pipeline capacity should be online.
Alberta’s drastic move follows the federal government’s takeover earlier this year of the Trans Mountain Pipeline between Alberta and coastal British Columbia, which is due a major expansion opposed by the transit province. Ottawa approved the expansion in exchange for Alberta’s agreement to tax emissions of carbon dioxide. Now, Albertans are stinging from imposed increases in retail energy costs, and the industry crucial to their economy still has insufficient pipeline capacity to tidewater.
What to control
These events connect in subtle but instructive ways. Shirking broader responsibilities of foreign policy-making, Trump presumes to be able to control markets by tweet even as the adjustments of markets misshapen by governments elsewhere undermine his agenda. The paradox emerges, as always, from governmental attempts to control the uncontrollable.
It makes especially interesting the question what Saudi Arabia, with its outsize endowment of natural resources and growing embrace of modernity, might become if its leaders were not driven by control at any cost.