Just lifted off for a quick trip to Fort McMurray, Alberta. What takes me to Fort McMurray? Well, like everyone else on this plane, opportunity. My fellow passengers are all predominately male, big lads, and there’s no doubt there off to do some heavy work. I suspect when the beverage cart comes out no one will be ordering brie with a white wine spritzer. I was just thinking the last time I was in Fort McMurray was, well, never. I may have visited some 15 years ago, but it’s all blur now for me so I’ll go with never. My knowledge of Fort McMurray is fairly limited but here’s what I know; oil and natural gas has created a boom town. Salaries are well above average, and the work is hard, and home prices would be more suited in the Vancouver market place. I was also surprised to find out that Air Canada has two direct flights from Toronto to Fort McMurray, daily. That’s not to accommodate investment bankers but rather the men and women who do the real work, and a good number of them come from Eastern Canada. It’s a long commute to work.
The natural resource sector makes a significant contribution to our economy, and not unlike the real estate industry in Canada, disruptions would adversely affect our economic growth. Bank of Canada Governor Stephen Poloz stated that plunging prices for crude oil could reduce our economic growth by a quarter percent. Anything below $90 a barrel could cause job loss in the oil sector, and ultimately impact the real estate market. So clearly the oil and gas sector is important to all of us. We will always mumble and grumble when filling up. Not unlike mortgages. Everyone hates debt, but some debt helps to create personal wealth and is a job creator.
I really wish I understood what causes oil prices to fluctuate. I get why interests rates go up and down. But the price of oil seems to be a market on to its own. Setting aside the oil industries P.R. explanation of why prices are where they are, what’s the real reason? The price for a barrel of oil today has hit a two and half year low. Why? Has the insatiable urge for crude by emerging markets waned? Don’t recall reading anywhere that China and India have said, “we got enough oil…we’re good”. Have we changed our personal habits to such an extent that it would cause the price of oil to fall? Has fracking in North America dramatically affected the price of oil in such a short period of time? Everything I read is that there’s a glut of oil on the market today, supply outpaces demand, and logic would dictate that if oil industry slowed down the supply eventually the price would go up. But the supply has not slowed down, so the question is why?
Today’s Oil Supply
I came across an interesting theory, and if it’s true, today’s oil supply has nothing to do with economics but rather geopolitical reasons. In short, here’s the theory. Russia cast its wondering eye to the Ukraine, and annexed a portion of another sovereign nations land. NATO wasn’t prepared come to Ukraine’s defense but steps had to be taken to ensure Putin thinks twice about expanding his reach elsewhere. It’s been well documented that the price of oil helps to sustain Russia. Close to 50% of Russia’s budget depends on oil being priced at $100 a barrel. So how does the west punish Russia for it’s illegal occupation of the Ukraine? You glut the market with oil. Does the U.S. still have enough influence over oil producing countries to manipulate the market? Who knows for sure – but what is known is it happened once before. The fall of communism was credited to Ronald Reagan, the Pope, Lech Walesa and Gorbachev. All key players, but was not widely reported was that the U.S. convinced Saudi Arabia to glut the market with oil at that time. This played a key role in almost bankrupting Russia, and forcing them to say “we surrender, communism nyet“. What did Saudi Arabia get in return? A promise from the U.S. that they would always have their back, and they would never have reason to fear their neighbors.
What does this all mean for us? The U.S. and Canadian Central Banks continue to say exactly what they’ve been saying for what seems like forever. Overnight lending rate will not increase until data unequivocally supports full economic recovery. Key data with the price of oil, and its impact to the Canadian economy. Same old-same old. Interest rates are not going up in the foreseeable future. Oh, and one more thing…we’re all pawns in a geopolitical game of chess.
Until next time
Cheers.
Len Lane @@Brokers4life Website