International markets have been in turmoil over the last two weeks with the prices of stocks, bonds and commodities fluctuating wildly, with the exception of one particular item: oil. The price of oil has been in a steady and consistent downtrend for some time and speculative theories on why this could be happening abound.
There are those who say that the US and Saudi Arabia, world’s largest exporter of crude oil, are in collusion, waging a price war in order to put both economic and political pressure on the world’s two other major producers, Russia and Iran, with the hope that the leaders of those countries will bow to political pressures as they lose substantial oil revenues, become weak and lose the support of their internal powerbase.
Then there are others who claim the US and Saudi Arabia are not in collusion but in collision because the House of Saud is furious with Washington’s efforts to mend fences with Tehran, allowing the Shia clerics in the Islamic Republic to exert more influence on their proxies in the whole region; so by reducing the price of oil, Riyadh is actually trying to take a few bites at the cherry: Expand its international market share, force the high-tech, high-cost shale oil production in the US to shut down (this relates to Canada as well) and put an end to the rapprochement between the Obama administration and the Tehran government.
There is yet another theory which claims that there is nothing political in what is going on in the oil markets and that the decline in price is simply a function of supply going way beyond the demand given the snail pace growth of the global economy and the resulting decrease in energy needs.
Whatever the reason, the omens are not good for Canada, whose economy has grown so dependent on oil over the last decade.
Canada has been a commodity economy for many decades with exports of raw materials and industrial commodities always contributing a lot more to GDP than manufacturing, agriculture or service sectors.
But with rapidly rising oil prices over the last several years encouraging huge investments in Alberta’s oil sands, it seems it hasn’t taken much time for both the federal and provincial governments to fall into the trap of complacency and bet all their stakes on a single horse, which may now be faltering.
In addition to the declining price, new oil reserves keep popping up as new drilling technologies are developed and new areas become available for exploration. Just two weeks ago, Russia’s state oil company announced the discovery of a huge oil reserve at the bottom of the Kara Sea in the Arctic with some 750 million barrels of recoverable light crude in addition to 340 billion cubic meters of natural gas.
Although this may seem like news far and away with little to do with our everyday lives, everything about oil has the potential to impact our way of live, not only because of its importance as a strategic commodity, but also because how much our provincial and federal governments became dependent on the revenues from oil filed royalties.
If the price of oil per barrel goes below $75 for an extended period, much of the production in the oil sands will have to stop because of lack of profitability and the oil royalties may simply dry up.
But there is another question that needs a proper answer: When the price of oil was hovering in 2010 in the same range as today, the price of the gas at the pump was fluctuating between 80 and 90 cents per liter.
Why are we paying 20 cents more for it these days?