Oil prices have fallen 25 per cent since the summer, leaving investors worried – and drivers rejoicing. The price drop is largely due to the forecast that supply is outpacing demand. To escalate this further, Goldman Sachs has cut its forecast for oil to $75 a barrel. Currently oil is trading around $80 a barrel and most experts now say these lower prices will remain well into 2015. It’s good news for those paying to fill up – but poses a real risk for oil-rich Canada. Lower oil prices mean slower economic activity here at home – and could be a true crisis. Let’s take a look at the pros and cons that come with cheaper oil prices in Canada.
The Bright Side of Lower Oil Prices
Drivers are the most obvious winners when it comes to lower oil prices, but the benefits snowball to other parts of the economy. Lower oil prices help boost auto sales; more Canadians feel encouraged to drive because fueling up is cheaper at the gas pumps. Saving money on everyday expenses, like gasoline, means there’s more cash left over for families to spend and more money for entertainment. Generally speaking, the lower cost of living encourages more big ticket purchases, which in turn helps stimulate the economy.
The Dark Side of Lower Oil Prices
Oil sector investors are the immediate and biggest losers when crude prices fall, especially those that did not forecast they could so quickly over a six-month time period. Canada is a resource-rich nation, and our economy depends on strong oil and gas sales to grow the economy. If you’ve invested in oil companies you can expect prices to remain volatile and suppressed until at least mid-2015. It’s expected the U.S. will produce more crude oil this month than Saudi Arabia, but that could slow as the price of oil falls. That’s because Saudi oil is cheaper to produce and can withstand wider swings in prices than any North American produces.
OPEC Urges Calm
Abdullah al-Badr, the secretary general of Organization of the Petroleum Exporting Countries (OPEC), is urging investors not to panic, pointing out that lower prices mean the demand for oil could actually grow as consumers can afford more. He also stated that OPEC countries should feel comfortable knowing their cheaper-produced oil will be more in demand stating low prices would curb competing supplies and require the group to pump far more by the end of the decade. But this only applies to OPEC whose members which, except for Venezuela, are all based in the Middle East.
Canada Has a Lot to Lose
For the first time since the financial crisis, Canada could be facing a dramatic economic slowdown due to the steep drop in oil prices. Canada will continue to produce oil, but as margins grow smaller it is difficult to encourage aggressive production, especially in places like Alberta. Canada has successfully weathered the housing crisis, the meltdown of financial institutionss and bankruptcy within the automobile industry. This oil crisis might be the first time Canada’s economy takes front and centre as a country most affected by a global slowdown.