Conflict-driven oil price spikes not sustainable: Report
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Continued geopolitical instability is unlikely to drive oil prices high enough for long enough to drive new investment into Canada's oil industry, according to a new report from the Royal Bank of Canada (RBC).
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RBC economists Nathan Janzen and Claire Fan co-authored the paper Crude calculations: Assessing Canada's vulnerability to oil prices, which was published on Tuesday.
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It cites the renewed conflict in the Middle East as leading oil prices to fluctuate. The price of West Texas Intermediate (WTI) has swung over the past month from as low as US$61 per barrel at the end of May to a high of near US$74 last Friday.
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The authors note any high prices that come amid future instability are unlikely to last long enough to convince investors to put new money into the industry.
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'Price volatility driven by geopolitical events are unlikely to be viewed as persistent enough to change business investment plans,' the report states.
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'Any spikes in prices due to geopolitical instability will not be seen as durable enough to warrant the kind of large capital-intensive investments that have mostly been dormant over the last decade in the Canadian oilsands.'
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It notes while prices spiked soon after the first reports of military attacks, those prices still fell short of the year's peak price from January and were little unchanged from two weeks earlier. But, it also argues that continued uncertainty or renewed conflict could see prices spike once again.
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'Further escalation could push prices higher and create more uncertainty for Canada's already complex economic picture.'
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Higher oil prices have an overall neutral effect on Canada's gross domestic product, coincidentally boosting revenues in the oil and gas sector and provincial government royalties, while also raising costs for households, according to the report.
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As of Thursday afternoon, WTI was selling just above US$65 per barrel.
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The Alberta government's budget for the fiscal year that began on April 1 set a baseline WTI price of US$68 per barrel. It has previously said that $750 million in government revenue swings on every one-dollar change in the price of WTI.
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