We have all witnessed the effect of the dramatic price decline in oil. The gas pump tells us each time we visit a gas station. And that is positive for a lot of us consumers.
Many might ask: what is going on?
Contrary to the many conspiracy theories that arise at such times as these, the answer is really very simple and shows starkly the role of supply and demand. Right now, there is more oil on the market than there is demand for it. This has happened because of three main events:
1. New supplies of oil from the shale revolution in the U.S.
2. The decision by OPEC, led by Saudi Arabia, to refuse to reduce supply.
3. Demand is shaky as a result of a slow down in the increase of economic activity in China, anemic growth in Europe, and the U.S. having access to shale oil in its own country, as well as a constant supply from our country.
Saudi Arabia has the largest oil reserves in the world. It has developed a lot of cheap oil with substantial markets. It sees shale oil as a threat to its markets (and perhaps some other emerging sources like the Gulf of Mexico) and is willing to take some short term pain (its own budget needs at least $60-80 barrels of oil to be balanced) for what it sees as longer term security for its markets.
It remains to be seen whether they will hold to this strategy or whether there is a price that will trigger some change to this policy. Other OPEC nations, like Iran, Iraq and Venezuela, with higher costs to produce oil, will be negatively affected. As will Russia, a big producer.
The effects have already been felt in Canada. Offshore Newfoundland has already seen a delay to one project and the number of exploration rigs being used is slowing down in both Alberta and the U.S.
And US Steel has just closed two steel plants that manufacture parts for oil exploration.
Alberta and Newfoundland budgets will take a hit this year and jobs (some from Vancouver Island) will be lost and new ones put on hold. This will affect all of Canada.
How long this will last? No one really knows.
— The Honorable A. Brian Peckford P. C. is a former energy consultant (1989-2001), former Energy Minister for Newfoundland (1976-1979) and former premier of Newfoundland (1979-1989). He lives in Qualicum Beach. E-mail: brianpeckford@gmail.com