Oil Prices Down: Funny at First, Difficult Later

Gasoline Prices

The price of crude is down, which comes with many interesting possibilities… but not all pleasant. In fact, the challenge exceeds, by far, the mere impact on consumers.

As a fact of the matter, the oil prices have seen a nearly 25 percent slide since the summer for both West Texas Intermediate and for Brent North Sea variety that feeds for a while the two Quebec refineries. There was a short break at the pump and transport costs begun to decline. We can already assume that inflation, estimated at 2 percent for all of Canada in September, will decline over the next few months, since it is largely the costs associated with food, as much as their transformation transport, which has fueled the increase.

By the way, it will be instructive to see when the air companies always quick to add “fuel surcharge” shall put an end to that practice, since the price of oil comes down to more reasonable levels.

But rejoicing would be premature, since one should not forget that this slump in prices is caused by the weakness in the global economy, as well as demand, while supply does not stop to increase. This imbalance inevitably affects prices.

One should not rely on producers’ withdrawal to curb the slide, at least, not yet. The world’s largest producer (to date), Saudi Arabia, announced before that it would tolerate a drop in prices to $80 per gallon of crude to reduce its own production. Canada is still a few dollars this threshold. At the same time, the International Energy Agency has again cut its demand forecast for 2015, in other words, the downward trend in prices is not about to fall over.

If the winter is particularly cold, especially in the Northeast, demand could temporarily leap, even if for power plants only. But this will be a short-lived phenomenon.

For Canada, it’s an awkward position.

Alberta, Saskatchewan and Newfoundland have exported $70 billion of oil over the last 12 months. Provincial governments, as well as the federal, benefited greatly because of royalties and other tax revenues.

At the same time, functioning of the Alberta locomotive has been found particularly hampered. At $80 a barrel, the development of the oil sands becomes problematic. Large producers can absorb the impact, but for smaller, the margin is thin and may not be sufficient to justify the investment. It is said that a quarter of current production would become vulnerable if this lethargy continues.

Quebec would be an inevitable part of the collateral damage, since a slowdown in the Alberta economy would affect the amounts available for equalization. Last year, those reached $9 billion. Any reduction would hurt given the precarious state of public finances.

At least the bills at service stations are now lighter, even if the margins of retailers and refiners have strangely increased in recent weeks. There is always someone, somewhere, to take advantage of a situation.

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