Saudi Arabia has announced it will make a cut to its oil output to limit supply as the Organization of the Petroleum Exporting Countries (OPEC) tries to boost drooping oil prices.
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The news is being analyzed closely in Alberta where Budget 2023 forecasted oil prices to be at around $79 USD a barrel for the upcoming fiscal year.
The decision to hold down oil production came during an OPEC meeting with its partners — the group made up of the 13 OPEC members and 11 non-members is called OPEC+.
Oil prices have fallen even after OPEC+ slashed two million barrels per day in October.
Saudi Arabia said it will cut production by one million barrels per day starting July to prop up the sagging price of crude oil.
“That means Alberta should be a little worried,” said Paul Kellogg, professor at the Centre for Interdisciplinary Studies at Athabasca University.
He said the message the cuts sends is about uncertainty in the oil industry.
“Production cuts can mean that prices will go up, but the fact that they feel that they need to make production cuts means that they are worried about the price of oil going down so,” Kellogg said.
As of Sunday, West Texas Intermediate (WTI) was selling below Budget 2023’s projected $79 USD a barrel at around $71 USD.
“Technically we’re OK, but the catch is putting into perspective how long this sustains. My view is that we are going to see $70, $75 on average accounting for some sort of slow down,” said Vijay Muralidharan, fuel market expert and director of R Cube Economic Consulting.
“I don’t see a big concern yet. Even if oil goes down, let’s say there’s a recession setting in, which I think is very highly likely. If interest rates are staying at this level, you would see prices pull back, but then supply will adjust and it could be a few months that it’s lower but it will come back to these levels eventually,” Muralidharan said.
History shows that high oil prices can fuel inflation, which could prompt central banks to continue increasing interest rates, leading to a slowing of the global economy and oil demand.
“There is no forecast that I’ve seen that’s credible that says we will have robust prices of oil for the next five or 10 or 15 years. That should be of some concern to a province like Alberta that is so dependent on oil royalties,” Kellogg said.
Suncor Energy told staff this week 1,500 jobs will be cut by the end of the year.
Kellogg said it’s part of a continuing trend in the decline in employment in the oil and gas sector because of automation.
“There will be more layoffs. If you want to have a good employment strategy, don’t bank everything on the oil industry. Even if the oil industry is healthy, there will be fewer workers involved in it,” Kellogg said.
The low Canadian dollar has been in Alberta’s favour.
Budget 2023 pegged the exchange rate at 76 cents, while it currently sits closer to 74 cents.
Alberta drivers continue to save the 13-cent provincial fuel tax when they fill up their vehicles. The Fuel Tax Relief Program runs until June 30.