July 3, 2008
Economic Snapshot - July 4, 2008
Following rapid rise, oil prices should fall as demand softens
Based on the assumption that the law of supply and demand has not been repealed, we are going to see two things happen to the energy market generally and to oil prices in particular over the near term.
First, assuming that there are no catastrophic supply interruptions due to terrorism between now and the end of the year, oil prices are likely to retreat. This forecast takes into account the widening slowdown in global economic growth triggered by the collapse of the U.S. housing market.
The slowdown will be exacerbated by a price-induced reduction in oil and gas consumption as consumers cut back or shift to less-expensive alternatives.
The second development ,which will have a much more significant impact on Canada, will be a significant acceleration in energy investment generally and in oil and gas extraction in particular. Indeed, the recent large natural gas discovery in British Columbia’s Horn River Basin suggests this process is already underway.
In contrast to previous oil and gas price upswings, the current one is likely to stimulate significantly more investment in oil substitutes such as bio fuels, coal gasification and electric power generation facilities.
In addition to direct investment in oil and gas extraction, the outlook for companies in the oil and gas extraction service industry has seldom looked as positive as it does right now.
While wind and solar are likely to make a more significant contribution to the total energy supply in the future, both face considerable challenges.
In the case of wind generation, Canada has a relatively limited number of sites in non-coastal locations that are windy on a consistent basis during periods of peak electrical demand.
In the case of solar, the comparatively short days and lack of sun during Canada’s peak winter heating season reduce its value relative to sunnier locations in the southern United States.
John Clinkard has over 30 years experience as an Economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Oil Price and Investment in Oil and Gas Extraction in Canada
Data sources: Statistics Canada and U.S. Energy
Information Agency/Chart: Reed Construction Data - CanaData.
