preamble: when it comes to Alberta oil and pipelines you often hear those in favour – especially in the U.S. – saying it’s important to they get their oil from a friendly government rather than relying on those in the Middle East. If you ever wanted proof of that, take a look at what OPEC (Organization of the Petroleum Exporting Countries) is doing now regarding oil prices. It is a key factor in why they have plummeted in recent weeks and while that may be good for us at the pumps the amount if money it is costing the government is substantial. That could affect a number of things from services (health care etc) to infrastructure to jobs. Below is an editorial comment regarding the current situation.
Chances are you’ve been feeling a bit better about the economy in the last couple of months — and that optimism may have nothing to do with the stock market. Instead, you can thank lower prices at the gas pumps, a welcome boost to consumer spending power.
Despite increasing tensions in the Middle East, the nationwide average in the U.S. for a gallon of gas stands below $3 for the first time in four years — a roughly 20% drop from June levels. (In Canada the national average for a litre of gas has fallen from $1.40 in July to $1.10 in November – down 22%) And OPEC, the oil-producing group that controls an estimated 40% of world supply and aims to keep oil prices as high as it can, seems to be just fine with that.
In fact, OPEC is apparently so comfortable with falling prices that investors expect its leaders to leave production unchanged, keeping plenty of supply in the markets.
So, why would a cartel that aims to defend $100-a-barrel oil and depends on high prices for the success of its economies, allow oil to slip into the $80s — or even below $80?
Simple. America’s energy alternatives are becoming far too good.
In recent years, the energy renaissance in the U.S. has emerged as a growing threat to Middle East oil production. Shale oil, or “tight oil” as it’s known, is oil secured from the ground by a process known as hydraulic fracking. U.S. drilling companies have become so adept at fracking that the U.S. is expected to become energy independent by 2020. Energy independence would diminish the importance of the Middle East. Understandably, OPEC isn’t such a fan of tight oil.
For investors, the biggest problem with fracking is its high cost; oil prices need to stay above $85 a barrel in order for new fracking investment to be worthwhile.
OPEC knows that.
OPEC’s Secretary-general Abdullah al-Badri said recently, “If prices stay at $85, we will see a lot of investment going out of the market. About 65% of the producers, they have high costs. Not OPEC.”
True. Oil is cheap to secure in the Middle East. And, therein may lie the primary reason OPEC won’t budge on production.
In a pre-fracking world, lower oil would have been met by a restriction in supply by OPEC, in an effort to drive up prices.
This time around, should OPEC maintain current production levels, we should assume it is more interested in its long-term survival than in a current influx of cash.
So, as much as lower oil prices are good for consumers as we head into the winter months, it’s critical we maintain investment in all forms of alternative energy, including renewables. If we hope to continue with low prices at the pumps, allowing OPEC to regain control of the energy markets is not an option.
(Source: by Trish Regan, Bloomberg TV for USA Today.)