You may have noticed that financial markets around the world have been dramatically dropping this week. The major reason is the price of oil, which has reached a five-year low. Brent Crude, for example, is trading at less than $65 a barrel. Back in June that same barrel was worth $102.
Also read: Gas Prices: Why You’ll Pay More on the East Coast>
Now, the Organization of the Petroleum Exporting Countries (OPEC) is forecasting demand for oil will sink to levels not seen in more than 10 years. To preserve market share for their oil, in a meeting on November 27th OPEC voted to continue oil production at current levels, which stands at 30 million barrels a day. This means they are prepared to let prices drop and won’t cut supply to push prices higher. OPEC is still making money as their production costs are much lower than anywhere else in the world. But, in Canada this is worrying. Canadian oil and gas companies produce the commodity at a much higher cost. To make matters even worse, demand for oil has slowed in China, one of the industry’s biggest consumers.
Here’s how the situation can affect you as a consumer.
Markets Are Sliding
Financial markets have fallen to the point of correction territory, according to some experts. The resource company-rich TSX has erased all of its 2014 gains in a matter of weeks. Investors are worried, economists in Canada are nervous and Canada’s largest banks are concerned this will dramatically cut their profits going into 2015. Canada’s biggest banks earn more than 20 per cent of their revenue from doing business with Canadian oil and gas companies. That revenue comes through investment and corporate banking services the banks provide to the big oil and gas producers. With lower oil prices banks are expecting some of those services to be pared back.
Real Estate Values Could Be At Risk
Alberta, Canada’s biggest oil producer, could face a slumping housing market going into 2015. Jobs in that region are dependent on the price of oil and the demand from other countries. With that slowing down, homeowners in that region can expect their real estate values to soften. However, this comes after Alberta has enjoyed significant gains, especially in the province’s biggest city. “Calgary had a significant run-up over the last few years, so it’s becoming more of a balanced market as opposed to a slowing down of the market per se,” said Gurinder Sandhu, executive vice-president, Re/Max Ontario Atlantic.
It’s also speculated that the situation could alter the Bank of Canada’s plan for central interest rates, which economists widely expect to rise in the second half of 2015. However, BoC Governor Stephen Poloz has stated that oil’s decline will damper next year’s economic growth by one third of a per cent. He also stated that oil’s impact on Canada’s inflation rate will be a deciding factor in how the Bank handles monetary policy and economic stimulus.
Immediate Relief For Drivers
The situation has dire consequences for many – But there is a silver lining. The price at the pump in Toronto is around $1 a litre; it hasn’t been that low since September 2009. Drivers are feeling relief as they fill up for two thirds of what they were paying only a few months ago. Small businesses that sell their goods across the border are happy with lower oil prices as its cheaper for them to send their stuff long distances. The Canadian dollar is also lower because of oil and that is helping businesses with trade they do across the border.
Keep it in perspective
Despite what’s happening in the markets, investors should keep in perspective that stocks have seen an unprecedented bull run over the last four years. The correction that we are seeing now was expected, because prices can’t go up forever. If you’re an investor with a longer time horizon and are well diversified, all of this news about falling oil prices should just be noise for you. Keep your eyes on the long game and don’t get too wound up in the day-to-day swing of the markets.
As well, running a car is still expensive – costs go far beyond just fueling up. There are insurance, maintenance and financing costs to always consider. No matter how low the price of gas falls taking public transit or finding an alternate to your car to get around is always best. It’s important to follow news on the price of oil as it does have an impact on Canada’s economy, but from a personal finance perspective this should not raise alarms as long as you don’t try to play the market as it goes up and down.