Declines in the dollar are often closely correlated with a drop in the price of oil. On Monday, December 7, oil lost $2.38 a barrel for WTI crude. The price of $37.59 a barrel is the lowest level reached since 2009. In February of that year, the price of a barrel of crude bottomed out at $33.98 a barrel. The sharp decline in oil prices followed on the announcement by OPEC over the weekend that the cap of 30 million barrels a day was being abandoned. At present, OPEC members are pumping about 31.5 million barrels a day. There will be no talk of a production cap until at least the next OPEC meeting not scheduled until next June.
In the past OPEC has had sufficient power to influence prices by capping the amount of oil its members have produced. However, with increasing oil production by non-OPEC-members and the increase in production through fracking in the U.S., the influence of OPEC has declined. Although OPEC members produce about a third of the market still, countries such as Saudi Arabia worry about losing their market share. As they have low production costs, they can survive low oil prices while higher cost producers such as frackers in the U.S. and many operating in the oil sands in Alberta will lose money at present prices. The low-price strategy will no doubt help the Saudis retain their market share. Other OPEC members such as Venezuela, whose economy is now in ruins in part because of the low oil prices, may be badly hurt by the OPEC policy. It is possible some countries might leave the cartel — one that is less and less able to control prices or is unwilling to do so may be of little use to many members.
The Iraqi oil minister, Adel Mahdi set out part of the rationale for OPEC deciding not to have a cap: The non-OPEC oil market “doesn’t have any ceiling. Americans don’t have any ceiling. Russians don’t have any ceiling. Why should OPEC have a ceiling?”
The precipitous drop in the price of oil sent the main Canadian stock index the S&P/TSX down a whopping 316 points to close at 13,043. U.S. stock indices tumbled as well but not to the same degree as the TSX. The DOW dropped 117.12 points to 17730.51. The NASDAQ declined 40.46 to 5101.81 and the S&P 500 to 2077.07 a drop of 14.62.
While the declining oil prices will aid some industries such as airlines and provide cheaper gas for drivers, in areas such as Alberta the drop will be a further blow to the oil industry and the NDP government, already facing economic problems. Federal Finance Minister, Bill Morneau, said the lower oil prices were hurting not just the loonie but the economy in general. He said:“As we face up to an oil price that is lower than we might have expected, we recognize that our economy’s going to be challenged…We are obviously paying very close attention to the price of oil. It has an important impact on the Canadian economy.”
The decline in the dollar should help Canadian export industries as our goods will be relatively cheap especially in the important US market where the US dollar is soaring. More Americans may come north as well with our cheaper dollar, while Canadian businesses especially on the border may see more Canadians shop at home rather than going to the U.S. to shop. Perhaps many Canadian snow birds will decide to winter over in Canada as the costs for the winter stay in the south soars.
