Tarsands Will Continue Producing
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In a recent article by the Globe and Mail, an oil analyst explained it this way, “production of oil is how energy companies earn revenues, and revenues are what they need the most right now. Cutting production is death.” This simple, common sense logic seems lost on most people right now, who for some reason think oil companies will cut production because they’re operating at a loss. A loss can be covered for a long time if you have cash to pay the bills, and that’s exactly what producing provides, time.

This is obviously not ideal, but it’s the best of two bad options. This way, producers can gauge their chances of outlasting their competition, assuming they can simply outlast the highest cost producer. They don’t have to outlast Saudi Arabia, they only have to outlast the weakest producers. This strategy has no doubt been adopted among shale and tarsands players, who have been operating at a loss for months now. Problem is, they are the weakest players.

This doesn’t mean they’ll fold shop and quit though, human nature doesn’t work that way. People hold out hope even in the most desperate circumstances, defying all logic sometimes. Not one oil producer folded willingly, even though they saw their due date coming and knew they couldn’t last much longer, still they carried on right until the end. This is how things work in the real world, a stark contrast to what investors are betting on now, that producers will fold.

In Vancouver, where much of the financing occurs for energy companies, investors are desperate for good news, and are praying that the recent rally in oil prices will be the start of an upward trajectory. These investors aren’t objective, nor have they done research on the true state of the industry, they’re just terrified of losing their investments. Among professional traders and hedge funds, who have done their homework, the opinion is the opposite, they see no reason for oil prices to rise and are betting accordingly.

Tarsands players are stoic about the price drop, thinking this is a typical cyclical event, like every other oil crash. They too haven’t done their homework as to why oil is crashing, but because of their opinion, they’ll continue producing whatever it takes to pay the bills, assuming it’ll all blow over soon. The time may come when producers realize they must fold if they want to preserve whatever equity they have left, but all signs say that time isn’t now.

In Calgary, oil executives still spend on luxuries like expensive dinners and lunches, private planes, and expense accounts. Doesn’t sound like they’re preparing to cut, more like they assume nothing will change, so why even interrupt their lifestyle. This is what happens after a decade of easy money, people become complacent, that goes for investors too, who never calculate crashes into their forecasts. Vancouver financiers have taken a big hit in the commodities crash, and now they’re losing money on oil, it’s likely they might think twice about risk if they survive this crash.

So, oil producers will continue to produce, despite low prices, and maybe even more so, since you have to produce much more oil at $50 to pay the bills than you did at $100. Put yourself in their shoes, you want to survive, why would you purposefully reduce your revenues? Answer, you wouldn’t, even though you’re producing at a loss.

Tarsands oil is a hot topic among Vancouver business people, and on Vancouver blogs. Everyone sees the trouble Alberta is facing and some are figuring out it may spread across Canada. My Vancouver blog covers this story in detail, and with regular updates.


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