Despite a decent rise in stocks on
Friday, which coincided with a recovery in other commodity prices, oil
continues to fall. Nothing, it seems, can influence anything other than a
reduction in the black gold. Not geopolitical tensions in many parts of the
world, not rising economic wellbeing, which should increase energy demand, not
the decisions by a number of governments, most notably Germany, to ban nuclear
power stations and fall back on fossil fuels and not the onset of winter in the
Northern Hemisphere.
The main explanation for this state
of affairs lies in the US, and to some extent in Mexico. Both of these
countries are on the verge of liberalising their oil drilling policies by for
the first time allowing exploration to take place on the near-offshore continental
shelf, in arctic regions that were previously off-limits because of wildlife
safety concerns and on Federal lands, which comprise of natural parks and other
similar facilities. And then, of course there is the popularity of fracking in
the US, or the use of high pressure water on a grand scale to allow the extraction
of oil and gas from previously inaccessible reservoirs, mainly because of their
depth.
Now the USA is projected to pass
Saudi Arabia in terms of oil production, and this mainly on the strength of
fracking. Thus, the ending of exploration moratoria will only add to the supply
side, further weakening oil prices for some time to come.
Sauce
for the goose is not always sauce for the gander
What is happening to oil prices is
good for the US economy because it is so diverse. Even the fact of low fuel
prices, particularly for transport, and the prospect of more reductions to come
provide a very real and important psychological boost to American consumers. It
is probably no accident that Consumer Confidence stateside hit its highest
level in more than seven years last Friday.
In the case of countries like Canada,
however, things are just a little different. Certainly, Canadians will benefit
from the same low energy costs as those living south of the border. But the
Canadian dollar is one of the so-called commodity currencies, so lower oil
prices can be expected to involve a reduction in its value, all other things
being equal, and most especially interest rates.
And as the chart above shows, the
long term tendency is for the value of the Canadian to indeed fall relative to
the greenback (A rise in USDCAD indicates a weakening of the Canadian dollar).
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