Shocks to global oil industry keep hitting home

It’s interesting times, all right.

First and largest, there’s the overall disruption to the oil industry and oil prices caused by U.S. President Donald Trump’s joint attack with Israel on Iran and the closure of the Strait of Hormuz. There’s also the embargos against the sale of Russian oil due to Russia’s attack on Ukraine.

And now, there’s another kind of disruption, something that, in the long-term, could move oil prices in a completely different direction.

The United Arab Emirates (UAE) is withdrawing from OPEC, the Organization of the Petroleum Exporting Countries, and from OPEC+, a broader coalition of oil producing countries, as of May 1. It’s been an OPEC member since 1969, and is the cartel’s third-largest oil producer behind Saudi Arabia and Iraq. It’s withdrawing, in part, because of a lack of support from its neighbours during direct attacks against it in the U.S. and Israeli conflict with Iran.

OPEC’s stranglehold on a large portion of the world’s oil supply — and its ability to arbitrarily cut back production to keep oil prices high — has given its members considerable global power.

If the cartel decays beyond the UAE’s departure, the structure that keeps oil prices steady could undergo significant shocks. Without the united ability to force supply constrictions to drive price increases, individual oil producing countries would only be able to increase returns by increasing their share of global production, risking an oil glut that could further drive down prices.

The UAE says it doesn’t expect the move to have much effect on oil prices as long as the Strait of Hormuz is closed, but the UAE is also refurbishing its production systems to allow it to produce five million barrels of oil a day, a dramatic increase over its current OPEC production cap of around 3.2 million barrels a day. Simply put, even if the UAE was to up production immediately, it couldn’t get that oil to market.

But that will eventually change.

In other words, interesting times ahead in the oil business and trying times for future planning around oil prices: businesses in general prefer stability because it allows for accurate investment planning, whether that’s planning for expansion or planning for costs.

Volatility makes businesses scale back their plans, at least until they get enough clarity to make sound decisions.

Continued oil price volatility has other far-reaching impacts as well — on food production and costs, on the tourism sector, on transportation generally and family budgets in particular. It often seems as if high oil prices make costs rise immediately, but if those prices fall again, corresponding declines in prices come much, much more slowly — if at all.

It’s also food for thought for oil-dependent provinces such as Alberta, currently weighing a separation referendum.

Over the past decade, oil revenues in Alberta have accounted for anywhere from eight per cent to 30 per cent of the province’s total revenues, the variation depending almost entirely on the price of oil. A snapshot of five years of that province’s non-renewable resource revenue, going back to 2018/19 from 2022/23, looks like this: 2022/23 — $25.2 billion; 2021/22 — $16.2 billion; 2020/21 — $3.1 billion; 2019/20 — $5.9 billion; and 2018/19 — $5.4 billion.

All in all, the knock-on effects of the current Middle Eastern war don’t seem to be slowing down — and the potential financial winners and losers seem like they’re going to be harder to predict than ever.

That old saying about living in interesting times? Enough already. The current state of the world — triggered by the actions of a man who describes himself as America’s favourite president — has got a lot of Canadians wishing for some good old boring times again.

So much winning.