Industry watcher Robert Skinner on dropping oil prices

Let's start by going back to 2008. The price of a barrel of West Texas Intermediate (WTI) spent most of the year above $100 U.S. even hitting $147.

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Those were heady days for energy producers, butthe price had collapsed by the end of 2008. The economic meltdown and resulting malaise in the global economy sent oil down to about $60. The slide would continue into the following year before recovering.

Fast forward to 2014. The mood in the energy sector has been, once again, buoyant. That's because the price of aWTI barrel sat around $100 for the first part of the year.

Butthe price has dropped to the mid-$60 rangein the past few months.It fell to around the $63 mark on Monday. At least one major investment firm says we're nowhere near the bottom yet, which doesn't bode well forindustry and government coffers.

CBC Calgary asked Robert Skinner to offer his insights on the slippery slope for oil.

His career in the energy industry has spanned more than four decades.He has worked for Canada's Energy Department as well as the Organisation for Economic Co-operation and Development (OECD).

He has advised energy giants such as Total and Statoilon its oilsands investments. Skinner is currently an executive fellow with the University of Calgary's School of Public Policy.

Q: Can you compare the drop in oil prices we're seeing now to the drop in 2008?

First of all, a major difference is the speed of the price fall.After the same number of days (115), the price in 2008 had dropped by over 70 per centversus 40 per centtoday.

Todays drop reflects the markets perception of too many barrels against lower demand than expected.

The 2008 crash accompanied a financial crash. Thus, we had complications like the evaporation of credit for oil buyers.

In 2008, spare capacity was tight and demand had been rising so the price had been on a steady upward path. Today, there is spare capacity but demand has softened.

Ultimatelyeverything depends on demand, of course, so the perception by the market that China was not consuming as much as expected was a significant factor in the oil price decline since June.

Q: What's behind the drop in demand globally?

A year ago in November, the International Energy Agency expected global oil demand to grow by 1.1 million barrels a day in 2014.

Last month it lowered this prediction by nearly half after Chinas and Indias demand growth fell short of market expectation.

The tightening of credit in China is partly behind this, but also the general softening of the export market for Chinese industrial products.

Q: But the Chinese are importing more crude oil, not less. In November, the increase was nineper cent over October. What gives?

That is why I emphasis the word perception.Yes, China is buying cargoes on an opportunistic basis, partly to fill their reserves.

It is not the first time that the market andprice seems to run contrary to fundamentals. I think the market is putting more emphasis on whats behind the recent decision by OPEC to roll over its 30 million barrels per day output, and "over-cooking"this story and Saudi motives.

Q: What do you mean bySaudi motives?

There has been far too much myth draped around Saudi Arabias motives:using the "oil weapon"to "whack the U.S. shale oil industryto go after the Iraniansto fight for market share, etc.

Saudi Arabia has a long memory.

In 1985, it propped up OPEC by cutting Saudi production by over sevenmillion barrels a day as North Sea and Alaskan oil swamped the market.

In late 1985, the Saudis decided to price their crude to match the value of the petroleum products in the various markets.

This so-called net-back pricing has been fundamental to Saudi pricing policies ever since.It is not a political game, but very much a market-based pricing system.

Q: U.S. investment bank Morgan Stanley says oil prices could fall as low as $43 US a barrelnext year. What do you think of that assessment?

I have no particular insight on the potential price next year, but the lower it goesthe shorter time it will stay at that level before rebounding. Financial firms and analysts are focused on the supply sidebecause thats where they make money.

The demand side is critical.The price of crude oil acts like a tax on the global economyamounting to some $4trilliona year for the last fouryears.Do we really expect nothing to happen when this "tax"is reduced by 30 to 40 per cent?

Q: Could Canada drip into a recession if the energy sector weakens significantly?

I dont think so. The U.S. economy is coming back.

Housing starts, new vehicle sales, employment and consumer spending are all positive. That is always a good sign for Canada.

Of course, the Canadian oil sector has taken a hit and that was reflected in the Bank of Canadas growth figures for the third quarter, but the softer Canadian dollar has offset some of the pain.This time around, we could see a fairly quick correction in the perceived market imbalance.