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With oil demand cooling and supply on the rise, the idea that Saudi Arabia would open the floodgates anytime soon might seem unlikely.

Yet some economists say the odds are rising and such a ramp-up could cut crude prices in half and have repercussions for higher-cost producers such as Canada’s oilsands.

Capital Economics says Saudi Arabia has the means, motive and opportunity to reverse its oil policy as it did in the price wars of 1985 and 2015.

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The economists now see a 30 per cent of Saudi ramping up production by the end of next year, and will be watching the December OPEC+ meeting as a potential flashpoint.

“One of the lessons from 2014 and 2020 was that a breakdown of negotiations around these meetings led to Saudi shifting tack,” said Kieran Tompkins, Capital’s climate and commodities economist.

In September, the OPEC+ alliance, which includes Saudi Arabia and Russia, two of the world’s top three oil producers, agreed to extend output cuts until December, and then gradually increase production.

If Saudi Arabia changes tack and rapidly ramps up supply oil prices could drop even lower than they did in 2016 because now the kingdom has even greater spare capacity, he said.

Historically, other members of OPEC have tended to follow suit when the Saudis increased production, which would add another million barrels a day to the Saudis’ 3.5 million barrels of spare capacity.

United States oil production has also changed. In the last Saudi “price war” U.S. oil output initially fell as producers buckled under unsustainable prices.

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The U.S. producers that survived are leaner, more efficient and able to withstand lower oil prices, said Tompkins.

“So, while the last time Saudi flooded the market breakeven prices were between $70-90 pb, now they are roughly $40-50 pb in key regions,” he said.

Another important factor that separates today from the past is weakening demand growth.

In a report this month, the International Energy Agency forecast that fossil fuel demand would peak by the end of the decade.

Capital says while lower prices might spur some pickup in demand, it would not be enough to fully absorb “the tide of oil” coming onto the market.

“In short, considerable spare capacity in OPEC and more resilient producers in the U.S. mean that prices could easily halve, to around US$30-40 per barrel, if Saudi Arabia quickly ramped up output towards its capacity,” said Tompkins.

“At that sort of level of prices, the viability of higher cost projects yet to be developed, such as those in Canada’s Oil Sands region, could be curtailed, and have macroeconomic impacts.”

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Canadians are looking downright thrifty compared to their neighbours down south in today’s chart brought to us by BMO Capital Markets.

While per-capita retail sales in the United States have steamed steadily upwards, they have been declining in Canada since early 2022, right about the time when the Bank of Canada began hiking interest rates, says Robert Kavcic, BMO senior economist.

Kavcic says one of the reasons is that Canadians carry more household debt relative to disposable income than their neighbours. After the financial crisis, Americans spent the next decade deleveraging while we continued to borrow. In the United States, the household debt-to-disposable income has declined from about 170 per cent in 2008 to 127 per cent today. Canada’s ratio has gone in the opposite direction, climbing from 135 per cent in 2008 to a record high 170 per cent in 2022. It’s at 160 per cent today.

The shorter terms of mortgages here also makes Canadians more sensitive to higher interest rates.

“Canadians are going to pay that mortgage first, leaving potentially fewer trips to the mall/restaurant/travel agent,” he said.

• Earnings: TFI International Inc

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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