In most cases when we are socializing and having conversation with friends and family the oil situation is really not a topic at that most of us want to discuss. Basically we all realize that the price of oil has gone down although we really don’t understand why. We look at the quick benefits of this as it pertains to us personally. In most cases it means that we are capitalizing here in Ontario on the lower cost of heating our homes and commuting. So it does have a direct effect on our personal finances. Many of us don’t care why this is happening, however for some provinces this is devastating. While we may feel compassion for those provinces many of us are just happy that it’s not us. If we look back at the oil industry a year and a half ago oil was selling at $110 US a barrel and at the end of 2015 it was selling for just a little under $37 percentage wise this is a 67% drop.
The cause of all of this turmoil with the oil is a fight taking a place with OPEC which is the organization for petroleum exporting countries. Saudi Arabia is the leader in this organization. What has taken place is China had such a great need for this resource that it left no option but to look for cheaper supplies. This lead to new technology which was comprised of drilling into shale formations which caused the rock to fracture and release the oil. This a fracking technology which has placed the US as being energy self-sufficient while at the same time the economy in China is slowing so their demand for oil is less. Iran has come into the scene by contributing two million barrels of oil to the world markets.
Saudi Arabia is concerned about this threat as they see it as losing their power over the oil industry. Their hope is to be able to get rid of the fracking industry. The projection for the future is that around the year 2020 oil will sell for around $70 a barrel.
How does this affect us it is playing a big factor in the low value of the loonie and if oil goes back to where it was then the dollar will increase as well. For those that have no dealings with the US they’re not too concerned about the exchange rate but there are many people and businesses that are.
It also affects the Canadian stocks where energy stocks make up about 10% of the TSX. The oil situation has a big impact on our banks because they are big lenders to the oil industry. It will have a direct effect on our inflation rate and it could also effect our interest rates. If inflation increases then the Bank of Canada will have no choice but to increase their rates even though this is a step they don’t want to take.
If this happens then the housing industry is going to be affected as there will be less buyers due to the higher interest rates. There are a lot of speculations and what if’s taking place. For the average individual that has to be responsible for their own home personal finances keeping a basic eye on what is happening in the world in regards to major industries such as the oil industry, will give us some idea as to where were headed in the future. Knowing this helps you with your financial planning.
