Sunday, 8 December 2019

OPEC Rides to the Rescue

Although Albertans have always thought of their enviable wealth resulting from entrepreneurship, hard work and the free market, that isn't quite the case. We are an entrepreneurial place and we work hard, although no harder I suspect than other Canadians, but the free market hasn't had all that much to do with it. In fact for half a century or so our wealth has arrived primarily on the back of that nemesis of the free market, government interference in the marketplace. Specifically the governments that make up the Organization of the Petroleum Exporting Countries (OPEC). Back in the 1970s OPEC discovered its members controlled most of the world's oil reserves and if you control supply you control price. It's called a monopoly. They jacked up prices multi-fold and they, and Alberta, became very rich.

Ever since, they have been turning the taps off and on to optimize their revenues. With other large producers coming on line, such as Russia and more recently the U.S. with its booming shale oil, OPEC's clout has been considerably reduced but they can still bump prices up when necessary. Indeed, their aggressive management of supply has supported oil prices at $50-$75 U.S. per barrel this past year. OPEC and its allies, led by Russia, have been agreeing to supply cuts since 2017 to counter output from U.S. shale fields.

Last week they agreed to one of the deepest cuts this decade. The deal will apply for the first three months of 2020. According to Gary Ross, founder of Black Gold Investors, along with a weak U.S. dollar and improving economic data, "this should ensure a $60-$65 Brent oil price in the seasonally weak period of next year."

Alberta, as always riding the coattails of unethical oil, can expect its tar sands producers to make money at those prices. Once again, we bow to the sheikhs.

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