27 September 2011

The Petroleum Trigger Point #nlpoli #nlvotes

West Texas Intermediate crude is hovering around a price that some analysts say puts some oil sands in doubt.

Meanwhile, North Sea Brent crude  - the price used to benchmark local crude -  is running about $25 a barrel higher.

Crude prices are tied to fears of a second recession following hot on the heels of the 2008 one. Regular readers of these e-scribblers will be familiar with that idea, plus the related notion that the American economy won’t recover with oil as high as it is. 

Notice a couple of things here. 

First of all, recognise the problems  any drop in oil prices will cause for the provincial Conservatives ongoing plans to spend and spend and spend.  Offshore production is headed downward anyway.  Provincial government revenues will go down as well and that will bring with it all sorts of other problems.

Second of all, notice the big difference between WTI and Brent.

Here’s a little thought likely no one had before. Recovery or no recovery, recession or no recession, we could see  a time in the not too distant future when WTI slips even further downward.

Like say, at or below US$50 a barrel.

That would be below the threshold for the so-called super-royalties that the provincial Conservatives stuck in a couple of offshore development deals.  They tied super-royalties to WTI even though local oil is sold based on Brent prices.

Forget that Brent would be trading well above that WTI price below US$50.  The provincial government would wind up losing out on huge gobs of cash in that scenario.

That’s one of the problems with linking what resource owners get for their resources with a single trigger point.  You get a set-up that only works when prices stay high.

And if they drop, as they likely will during a recovery or during a major recession, then the provincial government will have some very serious problems.

- srbp -