Oil and the Economy

March 29, 2015

By: Curtis Wharin

Thursday November 27th the Organization of the Petroleum Exporting Countries (OPEC) was faced with a decision; to scale back oil production or not? They chose the latter.

To scale back oil production would be a strategic move to counter-act the declining oil prices we have seen the last few months, and to not act, means allowing prices to continue on their downward trend. OPEC’s decision to maintain production of approximately 30 million barrels of oil per day, combined with new production in North America and less overall demand around the world has led to an imbalance of the oil supply and demand equilibrium. “Citibank analysts wrote in a report Thursday that global supplies exceed demand by about 700,000 barrels a day.”

Those of us who commute on a daily basis or enjoy going on vacation, may initially see these declining prices as a good thing; cheaper gas! Well yes, but cheaper prices at the pumps have much greater effects on our economy than just that. With oil prices falling below $70 a barrel, massive industries are going to take a hit. New projects in oil production that relied on higher oil prices will now be questioned, expensive extraction techniques (such as those used in North America), will need to be scaled back, and companies heavily invested in oil exploration who anticipated higher returns, could face bankruptcy.

Taking all of these factors into consideration there are two trains of thought in regards to our economic direction in wake of declining oil prices. One, production here in North American will slow, people will lose jobs, unemployment will rise and overall spending will decrease. Two, at the opposite end of the spectrum; people will save money on fuel and vacations, giving them excess money to spend, which will in turn stimulate our economy and create growth in other sectors. Deciding which option to go with and speculate on, that is up to you.

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