Plummeting Oil Prices

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Plummeting Oil Prices
Psst – want a good deal? Oil is
really cheap these days. The price
has dropped about 60 percent since
the summer! Hurry, though. Prices
are good only while supplies last.
Okay, a barrel of crude oil might
not be high on your wish list. Still,
it’s a good time to stock up on this
global commodity. Oil prices have
fallen from $107 U.S. per barrel in
June, 2014 to less than $50 in midJanuary.
Why The Price Drop?
The price of oil is largely
determined by supply and demand.
If there is a shortage and many
customers want to buy it, the price
will go up. On the other hand, too
much oil and lower demand is a
recipe for prices to fall.
Developing countries, such as
China and India, have kept demand
for oil – and prices – high in recent
years. But these markets are losing
steam. At the same time, despite
this weaker global demand, oilexporting countries haven’t slowed
their production.
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This is especially true of the
Organization of Petroleum
Exporting Countries (OPEC).
OPEC is a cartel made up of 12
Middle Eastern, African and South
American nations. Together, they
own about 80 percent of proven oil
reserves. They produce about onethird of the 90 million barrels of
oil that are used each and every
day – and they’re continuing to
pump out this much despite the
current surplus.
Meanwhile, the United States is
seeing a boom in fracking. That’s a
method of extracting gas and oil
from underground shale. Tens of
thousands of new wells in North
Dakota, Texas and other states
have upped oil production in the
U.S. by one-third.
Canada Wins... And Loses
Who gains or loses when oil prices
drop? That depends on whether
you’re a buyer or a seller. Canada
is both, so the impact will vary
across the country.
The good news: most Canadians
What in the World? • Level 1
will pay less to heat their homes
and drive their cars. That extra
cash will boost the economy when
it is used to buy goods and
services.
Cheaper oil will also lower
electricity, transportation and
heating costs for Canadian firms.
So the manufacturing regions of
Ontario and Quebec will be able to
produce and sell goods for less.
What’s more, cheap oil brings
down the value of the Canadian
dollar. That helps Canadian
exporters. How? It makes our
goods less expensive for other
countries to buy.
On The Other Hand
The picture is less rosy for Alberta,
Saskatchewan, and Newfoundland
and Labrador because their
economies count on oil.
Energy producers in Alberta have
already slashed over $5 billion in
planned investments. Suncor also
said it would cut 1,000 jobs in that
province.
Meanwhile, oil companies that
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make less money will also pay
lower taxes. That means that the
provincial and federal
governments will bring in less
revenue – and that will have a
negative effect on all Canadians.
Why? Because this money helps
pay for social programs, health
care, education, military spending,
and upgrades to roads and bridges.
Cutbacks in those areas will touch
everyone.
Environmental Impact
How will low oil prices affect the
environment? Cheaper oil could
entice people to use more fuel,
boosting greenhouse gas
emissions. Lower prices could also
delay the development of cleaner
energy sources because it will be
harder for green energy products to
compete.
However, the low prices may also
have a positive effect on the
environment. It costs between $60
and $100 to produce a barrel of oil
from Alberta’s oil sands. That
means that at current selling prices,
there’s no profit to be made. The
result? Production will slow.
That’s good news, because
extracting oil from the oil sands
creates a lot of pollution.
Beyond Our Borders
In the global context, countries that
import a lot of oil, such as China,
Japan, India, Turkey and the
Eurozone, will all benefit from
lower prices. But oil-producing
nations are the big losers,
especially Russia. The price drop
has deeply devalued its currency,
the ruble.
Venezuela, Iran, Iraq and Nigeria
also depend heavily on oil
revenues. They will face economic
challenges if the price doesn’t rise
soon.
Saudi Arabia, however, is an
exception. It’s the world’s largest
supplier of oil. Yet it is wealthy, so
it’s not likely to be as affected by
the dropping prices. In fact, this
OPEC member seems intent on
waiting out the low prices it helped
to create. If prices stay low, highcost producers will be forced out
of business. The overall oil supply
will drop and the companies that
survive will benefit when prices
rise again.
How Low Can You Go?
After five years of high prices,
$100-per-barrel oil seemed the
norm – but now many people are
wondering what the future will
hold.
Will oil rebound in 2015? Will this
return to long lost values hold?
Or will oil prices plummet even
further?
Did You Know?
Canada is the 5th largest producer of crude oil in the world. We consume
about 1.5 million barrels per day and export about 2.55 million.
cartel: an association of manufacturers or suppliers with the
purpose of maintaining high prices and restricting competition
commodity: a raw material or primary agricultural product
that can be bought and sold, such as copper or coffee
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Suncor: a large Canadian energy company with some 13,000
employees based in Calgary that specializes in production of
synthetic crude from oil sands
What in the World? • Level 1
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On The Lines
Answer the following questions in complete sentences:
1. Explain how supply and demand affects the price of oil.
2. Describe what has happened to the price of oil in recent months.
3. Why have oil prices declined so rapidly?
4. What does OPEC stand for?
5. How many countries belong to this cartel?
6. Describe how much oil OPEC controls.
7. List at least three advantages of low oil prices.
8. List at least three disadvantages of low oil prices. .
On-Line
Visit our student website at www.news4youth.com and click on the What in the World? tab to:
1. See an infographic that details the many factors involved in determining the price of oil (or
visit http://www.cmegroup.com/trading/energy/the-facts-behind-oil-prices.html). || Google
Image search: “Oil Prices Infographic.”
2. Listen to an interview with a recruiting expert as he discusses the slowdown in Alberta’s oil
patch (or visit https://www.youtube.com/watch?v=sbr7ObsE3Xs). || YouTube title: “Hiring
Slowdown in Alberta’s Oil Patch.”
2014/2015 • Issue 5
What in the World? • Level 1
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