OPEC and the Effects of oil prices on our Economy
Global Business Team
As a born and raised Montrealer, I have recently been appointed to work for the Global Team at BFL CANADA in Calgary. Calgary is a city that is directly affected by the volatility in oil pricing that, as an Easterner, led me repeatedly to question myself on the economic impact of oil prices on the Canadian economy…and not just Alberta.
When oil prices are too high, most people start cutting back on filling their tanks with gas and watching their energy use at home. When the price of oil suddenly drops, employers from the energy sector reduce their workforce as well as their capital spending. So when many Canadians find themselves going back to their home provinces, jobless and in debt, we realize that the fluctuation in oil prices affects all of us. In that light, would there be an optimal point for oil pricing and if so, why are we so far from attaining it? This is an open-ended question…
Who is OPEC and what do they do?
OPEC (Organization of the Petroleum Exporting Countries) is an organization created in Baghdad in 1960 in order to coordinate the oil output of its worldwide members. This cartel, originally founded by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, currently consists of twelve nations, excluding Canada and the U.S.. According to the organization’s website, the mission of OPEC is to “coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry”. [Interesting fact: In December 2014 some of the oil men of OPEC were named in the top 10 most influential people in the shipping industry at Lloyd’s of London.] However, with the current level of production in the U.S. and Canada, it seems more difficult to see how OPEC can continue to control worldwide trading.
Must OPEC now find a new strategy?
Over the years we have seen oil prices change dramatically. For as long as most of us can remember, oil prices were increasing at a constant rate. The price gradually self-adjusted to an average of $100 a barrel until the economic recession hit in 2008, but recovery was swift leading to new record highs.
So here we are in 2015, facing yet again the threat of a major financial crisis while oil prices keep sliding to their lowest since 2008 and OPEC attempts to stabilize pricing. Canada, reputable for its stable and reliable economy, finds itself under pressure due to these uncertain economic grounds. The Bank of Canada warns that “The decline in Canada’s terms of trade will also reduce the country’s wealth”. On top of that, Canada’s GDP is shrinking for the first time since 2011 according to a recent examination by Statistics Canada.
As the value of oil stays suppressed, there is a simultaneous effect on clients’ revenues and, therefore, insurance premiums. As output and revenues decrease, the oil industry’s exposures are also changing, implying that the time has come for premium adjustments, capital project withdrawal (approx. $7 billion) and social spending reductions. CIBC World Markets recently predicted that the unemployment rate in Alberta would climb 2.5 percentage points to 6.8 per cent this year only — translating into more than 60,000 lost jobs. The Alberta energy market layoffs are one example of the economic shock to Canada. With these massive layoffs, unemployed people are collecting more unemployment insurance and spending less in the economy, all while worldwide insurance capacity is at its highest.
In the past, OPEC responded to price fluctuations with output adjustments. This was until Saudi Arabia announced that it would increase its production level (until the decline in 2014). So with Canada and U.S. (producers outside the cartel) oversupplying, Saudi Arabia’s exports and market share have decreased. As opposed to responding the way they have done in the past, a temporary solution for OPEC could be to choose “self-sufficiency” from member states – a market strategy aimed at focusing on themselves rather than on price setting.
I leave you to draw your own conclusions on this matter, but there are many more questions to fuel your reflection: Is it time for us to get used to a new regulatory system? When OPEC meets in December, what is expected to happen? How much do Canada and the U.S. rely on exporting and importing oil production…and how does that affect us all?
 Timothy Lane (2015, January 13). Drilling Down – Understanding Oil Prices and Their Economic Impact. Bank of Canada. http://www.bankofcanada.ca/2015/01/drilling-down-understanding-oil-prices/ (accessed June 2015).
 Greg Quinn (2015, 31 May). Canada’s GDP Shrinks. Enterprise. http://enterprise.vnews.com/2015/05/31/canadas-gdp-shrinks/ (accessed June 2015).
 Stephen Ewart (2015, February 13). Oil Woes Driving Alberta’s Downward Economic Spira. The Calgary Herald. http://calgaryherald.com/business/energy/ewart-oil-woes-driving-albertas-downward-economic-spiral (accessed June 2015).