ANALYSIS: Higher Oil Prices, Lack of Production Feeding ‘Endemic Inflation’: Expert

Oil was the best-performing asset in Q3.

Pumpjacks draw out oil and gas from wellheads near Calgary on April 28, 2023. As the price of oil falls, risks to the Canadian economy mount. The Canadian Press/Jeff McIntosh

As oil prices soared during the third quarter, the problem isn’t just what the Saudis and Russians are doing to curb supply, but also what North America isn’t doing to meet the stronger-than-expected demand—and thus spurring “endemic inflation,” according to a veteran energy analyst.

“I believe that the next round of inflation will be higher than what we saw in August simply because the difference in gasoline, diesel prices is about 6 to 7 percent higher than this time last year,” Dan McTeague, president of Canadians for Affordable Energy and former Liberal MP, told The Epoch Times on Oct. 3.

Statistics Canada reported that inflation in Canada accelerated in August mainly because of higher gas prices in the month, as a result of higher crude prices stemming from production cuts by major oil-producing countries.

“As long as central bankers continue to ignore the elephant in the room, which is the role governments are playing in no small way in driving up energy costs—whether that be through carbon taxes, second carbon taxes, regulations, or outright discouraging investments—then the world can continue to fight an inflationary spiral,” Mr. McTeague said.

Jackie Forrest, executive director at ARC Energy Research Institute, reported on the Sept. 26 ARC Energy Ideas Podcast some key takeaways from the World Petroleum Congress (WPC) held in Calgary from Sept. 17 to Sept. 21.

Shaikh Nawaf S. Al-Sabah, deputy chairman and CEO of Kuwait Petroleum Corporation, told Ms. Forrest: “What I’m really concerned about is supply going into the future because of lack of investment by other countries. OPEC countries in the Gulf have made the investments that we need to take to increase our production capacity.”

The International Energy Agency (IEA) said in a Sept. 26 report that global demand for fossil fuels would peak before the end of the decade because of the rollout of renewable energy.

Many attendees at the WPC disagreed with the agency’s forecast, Ms. Forrest reported. Mr. McTeague also took issue with the IEA and said he didn’t consider the agency to be very credible.

Oil Fundamentals

“It looks like the fundamental story remains very constructive for oil,” Helima Croft, head of global commodity strategy at RBC Capital Markets, said in an Oct. 2 interview with BNN Bloomberg.

Ms. Croft said the OPEC countries are maintaining their discipline by limiting supply and that even higher U.S. production can’t carry the market against a backdrop of demand that’s exceeding consensus expectations. She noted that Chinese demand has been holding up well, despite experiencing broader economic weakness.

“Certainly we see a path and momentum to $100 Brent,” she said, noting that she isn’t expecting a major release of supply from the U.S. strategic petroleum reserve.

Mr. McTeague said that according to most analysts, the world is short by about 2 million barrels per day—particularly with the biggest concern for the United States being a shortage of diesel—and Canada’s oilsands are a boon and could fill that void.

“There’s such a huge demand for the kind of oil that Canada has,” Mr. McTeague said. “There’s a number of other applications for heavier oil and diesel.”

Producing Clean Oil

Ms. Forrest said Canada faces stiff competition to produce the cleanest barrels of crude because other producers are beginning from an easier starting place, with lower emissions than those from the oilsands.

Thus there’s a lot of variation in the amount of emissions per barrel produced.

Mr. Al-Sabah told Ms. Forrest that Kuwait is aiming to have the lowest carbon intensity in the oil it produces by using renewable energy to power its oil production.

But Mr. McTeague touted Canada’s oil and gas as among the cleanest in the world, produced according to the highest standards and best practices.

“I’ll take us up against any Middle Eastern country, any producer. But let’s talk about it because the other countries are not subject to the same kind of rigorous scrutiny. They’re not open. They’re not transparent. They’re not environmentally friendly,” he said.

The podcast also brought up a couple other themes from the WPC. Although a lot of talking points were about decarbonization, there aren’t a lot of projects in operation currently, as they’re mainly in the planning stages.

It was recognized that there’s a need to continue to invest in oil and gas production for energy security purposes, which the Russian invasion of Ukraine emphasized.

The questions Mr. McTeague said he ponders are the following: What if Canada could increase its oil exports and would we have war and inflation?

Petrodollar No More

Deutsche Bank Research tallied up the performance of all major financial assets for the third quarter and determined that West Texas Intermediate (WTI) and Brent crude were the top two. WTI was up by 28.5 percent to $90.79 per barrel and Brent was up by 27.2 percent to $95.31 per barrel.

Deutsche Bank stated that Brent had its biggest quarterly increase since the first quarter of 2022, when Russia’s invasion of Ukraine began.

But as WTI strengthened, the Canadian dollar fell by 4.6 percent in the third quarter to US$0.74 on Sept. 29. It has moved even lower to start the fourth quarter.

“I don’t remember the Canadian dollar trading this low at a time in which energy prices are so high,” Mr. McTeague said.

BMO reported that for the third quarter, the energy sector on the Toronto Stock Exchange was up by 8.9 percent while the index itself was down by 3 percent. It was a similar story with the energy sector in the S&P 500 where energy was up by 11.3 percent, but the index was down by 3.6 percent.