PT: My view is that oil prices above $80 were already forcing changes in demand, especially in OECD countries. So these higher prices only encourage societies to seek ways to get off the stuff even faster. Price spikes like this will strengthen the resolve of consuming countries to "get off oil". Just wait until people start screaming and governments get involved in response. History shows that government responses to high energy prices produce dramatic results within five years.
Yes, a slowing economy due to high oil prices will slow oil demand growth, but that's only a cyclical dynamic. On the other hand, policy implementations, technological advances and societal shifts engender permanent demand mitigation. In fact, technological advances and societal changes are already showing signs of mitigating oil demand growth.
DP: For a country like Canada, with lots of oil production and an equity market overweight in energy stocks, high oil prices are not a bad thing, all other things being equal. In this instance, should Canadians fear the rising oil price, or cheer it?
NM: In the short term, a spike in oil prices would benefit the TSX and its energy stocks. However, one better hope that the spike is temporary and doesn't last beyond a few weeks/couple of months. Otherwise, there will be demand destruction, since the higher oil price would contribute to slower global economic growth. This would be particularly evident in the faster-growing, more energy-intensive economies such as China. A slowdown there would also have broader detrimental implications for other cyclical sectors of our TSX index, through the negative impact on the price of copper and metallurgical coal, for example.
Longer term, I think the events of the last while in North Africa and the Middle East are a strong plus for our economy, our currency and our TSX. Why? Canada is by far the most important source of crude oil supply to the U.S. (23 per cent of their total imports). After Canada, the next 14 exporters in descending order of importance are: Mexico, Saudi Arabia, Venezuela, Nigeria, Columbia,, Algeria, Iraq, Angola, Ecuador, Brazil, Kuwait, Russia, the U.K. and Indonesia. All of these countries except Mexico (despite its drug problems), the U.K. and possibly Brazil have had their share of political problems/terrorism over the last number of years.
In the face of such instability, the risk of which has only increased in the MENA countries since the popular uprisings in Tunisia, Egypt and Libya, It is inevitable, in our view, that Canada will be looked upon increasingly as a reliable, consistent source of crude oil to the U.S. Already, U.S. refineries have been displacing Mexican, Venezuelan and Saudi Arabian heavy oil in favour of Canadian production. Despite the complaints/pleas of the environmentalists in the U.S., we think it is almost inevitable that this trend accelerates over the next few years. In our opinion, the MENA crisis can only add further momentum to what is already a clear trend. This bodes well for the many Canadian oil sands projects that are slated to come on stream over the next number of years. If the transportation of oil to the West Coast becomes a reality in future through the Trans Mountain oil pipeline or a Gateway pipeline and in the interim via CN and CP rail cars, that will only increase the U.S. appetite for Canadian oil imports.
PT: Nobody in Canada's oil industry should be cheering this event. In the longer run, rapidly rising oil prices today will serve to price our commodity out of a transportation market that is quickly growing richer with all sorts of potential alternatives. The higher the price oil goes, the faster it's going to come down.
Also, the higher the price goes the more silly money will come flooding in, driving up the price of labour and services. We are already among the world's highest-cost producers of oil; we don't need to go higher.
While it is true that Canada has displaced Venezuelan and Mexican oil, there is rapidly growing Columbian oil of high quality that is increasingly competing with us in the U.S. market. And it's much lower cost than ours. Cheering high oil prices is not an appropriate corporate strategy for competing in the future.
NM: Just to be clear, I am not cheering higher oil prices. I think the ideal is if they were to ultimately (i.e. if, as and when the MENA situation calms down) stay in the $75 to $85 area, as you will get less long-term substitution globally. However, I do think the U.S. politicians (and the equity markets through valuation) will definitely recognize the long-term reliability of Canadian supply. Currently, the U.S. administration in place has shown little realistic resolve to wean the economy off oil.