Ultra-low oil prices will have long-lasting effects

Policymakers still need to do much more to reduce the chance that the recession in the first half of the year turns into a more prolonged slump, but there is little they can do to prevent a long-lasting hit to the energy sector. Last week, WTI dropped as low as $20 per barrel (pb) and the main benchmark for the oil sands, Western Canadian Select, finished the week below $10. That left it lower than during the early-2016 or late-2018 price crashes. While the hit to demand from the coronavirus outbreak is weighing heavily on prices, the falls also reflect a potentially seismic shift in the global oil market. After consistently losing market share to the US shale industry, some OPEC+ members have found output cuts too hard to stomach. It is too soon to call the death of OPEC, but if the group cannot agree to keep production limited then oil prices will remain lower than they would otherwise be, even once the global economy recovers. That is bad news for those producers with the highest production costs, such as the oil sands industry. Investment by oil and gas extraction firms has already fallen from 5% of GDP since the 2014/15 oil price crash to 2% in 2019, and firms have now announced cuts to their capital spending plans which are set to drag it down to 1.5% of GDP. There is little hope of energy investment rebounding if, as we expect, WTI remains below $50 pb for most of the next two years.