Drop in oil prices has pros and cons

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December 16, 2014 9:00 AM

With the recent drop in oil prices there are probably many people wondering how it will impact their day-to-day lives. Though different sectors will be effected, the obvious places to start with are the oil companies.

“You’ll see less investment in oil projects that have been announced in the area, they’ll probably be shelved or rolled back,” explained Brad Onofrychuk, Lakeland College’s chair of business. “I think the first place you’ll see the influence of low oil prices is in the reduction of contractors being used.”

Private contractors who work with oil companies are at risk because if the companies start cutting costs, any outsourcing will be first to get the axe. After that, the next step would be to reduce or cut off overtime for employees, and if things still don’t pick up, layoffs maybe the next anticipated move. That’s when the hit will really be felt in the economy. In the event of layoffs there will be people buying less from retailers, car dealerships and other merchants around town.

“Whether it’s transportation or merchandise sales, you don’t have as many people either working or earning as much as they use to,” Onofrychuck said. “And typically, the luxuries go first, luxury purchases fall off very quickly during a period like this.”

Then there’s the government side of things. With both Saskatchewan and Alberta having based their yearly budgets on oil being around $100 per barrel, and with the current price hovering at the $60 mark, there’s going to be some concerns with governmental services.

“I think at this point they’re talking about a freeze in funding to services and they are hinting that there maybe cuts at some point, but they need to take the current oil price, and how low it might go, and then make decisions based on that.”

The governments haven’t announced anything concrete in terms of cuts but if they do, Onofrychuck said health services are usually the last thing they’d look at, but other than that it will be pretty much “fair game.”

That’s not to say all the effects will be negative for everybody. Certain industries may feel a boost from the low costs of fuel and the resulting cheaper Canadian dollar. Exporting companies will benefit from the lower transportation costs and their products will be more attractive to foreign buyers with the automatic discount they get from the drop in currency value.

Also, if oil prices stay low into next year the housing market may feel a softening, making renting and buying less expensive. Onofrychuck said if oil companies put a halt on hiring, and possibly start doing layoffs, this will cause homes to come up for sale.

“So, as more houses become available, that’s also an increase of in-supply and can depress the value of houses,” he said. “It’s probably not until summer that we would see that effect and I think it would just be a softening, I don’t think it would be a drastic crash of the house prices.”

Onofrychuck explained the reason oil dropped in the first place is because it is being produced at a substantial rate across the world, especially in the U.S. and Saudi Arabia. The inventories have built up to the point where it’s forcing the price down and the only way to raise the prices again is to reduce production.

“So the only way at this point to increase oil prices back to where they were is a reduction in production, and that can either be a forced reduction or it can be where companies purposefully choose to produce less than they used to and that’s typically not the way industry likes to work.”

If companies choose not to cut back, the low prices may force them to a point where they’re hiring less, slowing down projects, and stopping new exploration.

This is a more natural reduction in the volume of oil that enters the market but it can take a little longer than a conscious decision to cut back made by the oil companies.

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