The Sky is Falling – Or Maybe it Isn’t
Momentum Public Relations
In the famous children’s fable, the excitable “Chicken Little” runs around declaring that the sky is falling. This tale provokes a shared belief by other characters in the story that a disaster of epic proportions is imminent. The story, and the character, both have a rich history, one that goes back more than 20 centuries. The very memorable phrase that heralds pending doom has become a statement that is part of the idiom of our culture.
Crude oil prices have tanked! Is the sky falling? Are we about to experience the end of the world? Will this take down the Canadian economy? Will it shake the nations of the world to their core?
Let’s begin with some perspective and a reality check. The current price of oil is close to its 40-year average when adjustments for inflation are factored in. Perhaps we need to re-frame the issue and temper the concern. The data suggests that we may have returned to a well-calibrated price level after a temporary period of extraordinarily high prices. Is it possible that this is the new normal and the alarmist commentators are misguided?
Still, there has been a steep decline in the wellhead price of oil, and it is important to assess how the short-term fallout from lower prices will impact the economy in the medium term. Additionally, and more importantly, the lower price of oil may provide the impetus for a recalibration of some previously unchallenged assumptions. A further consideration is that the current oil price might open up avenues and options that will include some shifting of relevant government policies in the energy sector.
Everyone is aware that in June 2014 the price of a barrel of oil was around $110 USD and in January 2016 it is below $30 USD. What happened? Why has the world experienced such a price decline for an essential commodity like crude oil? The explanation is rather simple and doesn’t require an advanced degree in economics to understand. The law of supply and demand is at work in the marketplace. The details that provide the long list of reasons why supply vastly exceeds demand are more complicated, but surprisingly easy to digest. For more information on the factors that are contributing to the declining price of oil, the link below provides an analysis of the situation as of January 2016.
http://www.vox.com/2016/1/12/10755754/crude-oil-prices-falling
Assuming that low crude oil prices are a medium-term fact of life, what options exist to address the situation? We’ll begin with the premise that the world economy is arguably very resilient and multi-dimensional. Principles of supply and demand function effectively in most cases, and people come to grips with reality and adjust their expectations all the time. Naturally, some parts of the world rely so heavily on oil money that they won’t be able to avoid spiraling into decline. Places like Russia, Venezuela or Nigeria come quickly to mind. There is little doubt that there will be a greater impact on the economies of countries that have placed all of their bets on selling oil at $100 per barrel. Places like Saudi Arabia will have less money to invest and will need to diversify their overall economy but may not have as much time to do so as they might prefer.
What about oil-rich Canada? While Canada has a high dependency on revenues related to oil in some regions, the latest economic numbers show that, on balance, the overall economy is stable. Two lagging indicators are particularly interesting. In Q3 of 2015, while oil was in freefall, Canada’s employment grew by 1{92d3d6fd85a76c012ea375328005e518e768e12ace6b1722b71965c2a02ea7ce} and GDP grew by 2.3{92d3d6fd85a76c012ea375328005e518e768e12ace6b1722b71965c2a02ea7ce}. There is considerable financial fallout, much of it well documented, in places like Fort McMurray, Alberta as oil companies delay projects and mothball equipment. The non-negotiable law that dictates “what goes up must come down” is having its effect on real people, and financial hardship at a personal level isn’t pleasant and never seems fair. Nonetheless, if we embrace the rewards that are inherent in a market-based economy, there is an argument to be made for being prepared to accept the downside that can come when the market takes a dive.
So what options and alternatives do we face? We’d like to suggest two radically different options, each with some merits.
- Escalate “green” incentives
When prices of traditional fuels are relatively inexpensive, it may be time for governments to set incentives in place to accelerate the development of alternative forms of energy. These could include policy initiatives like subsidies for wholesale energy conversions by major consumers of oil and gas. It could also include the adoption of carbon taxes. Many influential voices have begun advocating in favour of revenue neutral carbon taxation. The suggestion is that, with the lower price of oil, the impact of moving forward with a tax now will not be as significant compared to what it might have been 18 months ago. This line of thinking includes the premise that the economy will adjust to the new normal of taxed carbon emissions, and the reduction of overall greenhouse gas will begin to diminish independent of fossil fuel price fluctuations.
- Encourage business to lead the way – publicize successes
When companies become change agents, there is progress on social issues. What company today wouldn’t claim to an equal opportunity employer? It is socially unacceptable to suggest that equality is unimportant. The same social pressure is emerging in relation to the stewardship of the environment. Those who advocate for a free market driven approach point to a combination of social acceptability, necessity, market conditions and anticipated ROI that will guide in the conservation of precious resources. In many cases, subsidy-free advances in technology have contributed to the existence of a number of new energy alternatives. In addition, just a few simple steps, like those described in the link below, can increase profits by saving money while having the benefit of appealing to the need to “think green”, a desire that most people in the western world believe essential.
http://www.sustainablebusinesstoolkit.com/going-green-tips-for-the-office/
Whatever policy option, or the combination of options, our policy makers follow, it might be wise to consider the ultimate lesson in the story of “Chicken Little.” As the fearful group assembles around “Chicken Little” and is urged to tell the lion about the terrible news that the sky is about to fall, they are lured into the fox’s den, never to be seen again! The moral for investors? There is always a fox that is waiting to take advantage of those who don’t assess the situation accurately and fail to respond sensibly.