The world oil market and what is means for the residents of our region

Connect Council – Public Letter

Cr Vinnni-CONNECTINGCOUNCIL

Councillor Allan Vinni

Dear Citizens of the Regional Municipality of Wood Buffalo,

It is my pleasure to be the first to participate in what will be a monthly open letter in this publication from each Councillor to the citizens our fair region. I get to go first because we are doing it alphabetically by first name.

What I would like to talk about is my understanding of what is going on in the world oil market and what that means for us here in the Regional Municipality of Wood Buffalo (RMWB).

I do have a Master’s Degree in Economics, but one of the most important things I learned in economics was that we are all economists. We all have an interest in what goes on in the economy and we all spend some of our time trying to figure out what makes the economic world work. So, this is really just my effort to try to understand the world oil industry. I’ll be very pleased to receive feedback from readers with their assessment of what I am about to describe.

To me, there has technically never been a shortage of oil; intermittent shortages have occurred based on wars and producers’ efforts to control the price of oil. The evidence for this is pretty obvious starting with the 1973 Arab oil embargo targeting the United States of America, but demonstrated again in 1979 due to political instability in the Middle East.

Most recently, a run-up to very high oil prices peaking on July 11, 2007, at $147 a barrel appears to have been based on speculation, some supply constraint by producers and a spike in demand from the developing world, most notably China and India.

My concern has been whether there is something new going on in the oil industry that is causing the current low price of oil other than just a continuation of the wars, supply constraints and speculation or lack thereof in oil markets.

My conclusion is that if there is something new, what it would be is that oil producers, whether you categorize them by region, country or by company, have entered into a market reality that can best be explained by an economist as a perfectly competitive industry. No particular producer or group of producers, such as OPEC, appears to have any interest in, or ability to, control the price of oil by using the historic technique of controlling their supply of oil to the market. All producers are behaving like they are in a business where they are simply price takers and are trying to make their money by selling as much oil as they can at the market price.

Given relatively soft demand for oil in the current world economy, the effect of all producers simply acting as price takers on the market and attempting to produce as much oils as they can is a behaviour that increases world oil supply. At a time when world oil demand is down, you have the inevitable result that many of us learned in Economics 101: demand down, supply up means more product in the market at a lower price. This analysis at least has the benefit of its conclusion matching the reality that we see in the world today concerning the oil industry.

We can expect world demand to go up in the future, low oil prices themselves ultimately stimulate higher prices as more oil is consumed at lower prices, and national economies do improve at some point, thereby increasing oil demand.

So what does this mean for us in the RMWB? Well, to me it means that were in a fight for our economic lives, competing against all the other oil producing countries and regions around the world. We can expect world demand to go up in the future, low oil prices themselves ultimately stimulate higher prices as more oil is consumed at lower prices, and national economies do improve at some point, thereby increasing oil demand.

However, we cannot simply wait for oil production to become more profitable. As an industry and a region we have to do all the things that anybody producing in a competitive marketplace would do and that is to become more efficient. Efficiency means doing more with less; it means layoffs, it means lower wages and those unfortunately are also things we are seeing in this region.

The complication that arises in economic theory when there is a downturn in the economy is that when there are tough times there is a natural inclination for people to mirror the necessary response of businesses to the new reality.

That response is for people to also cut back. What I mean by this is that the quietness of our restaurants, our shops and our entertainment facilities is caused by people who naturally believe that in tough times we all have to cut back. Of course those that have lost their job have cut back, dramatically in many cases, which is inescapable.

But what I am talking about are the people who have not lost their jobs, who still have the same income and expenses they had one or two years ago. Unfortunately, all of us cutting back is not the best response for the regional economy overall. For those fortunate to be more or less in the same economic position, their continued spending will support the economic viability of the region and when we continue to go to the restaurants, the shops and the entertainment facilities, we will assist in saving jobs that would otherwise be unnecessarily lost.

Finally, there is a role for government to play when an economy is under duress. Government’s role is to spend money on goods and services to stimulate the economy that would otherwise continue to spiral downwards.

In the early 1930s, once the United States got rid of President Hoover and President Roosevelt came in with the New Deal, ultimately over 30,000 government projects were initiated by the American government to stimulate their moribund economy. Some projects were big, like the ironically named Hoover Dam and the Tennessee Valley Authority, but others were very small local stimulus projects. In Canada a similar approach was taken and that is when Maple Leaf Gardens was built as a public stimulus project.

I feel quite confident in saying to you that the role the RMWB has and will continue to play is spending money on necessary goods and services. This will not only maintain the standard of living, which we have all worked so hard to have, but will keep our economy stimulated to some extent to keep people employed.

We have no plans to embark upon unrealistic or extravagant projects but this is the time when we must and we shall continue on the path to prosperity by providing goods and services and infrastructure projects that this region needs, at a time when we can do it more economically than we could in the past, or will be able to do in the future.

In doing so, we will lessen the negative impact of this economic war we are party to and will lay the foundation for economic growth in the future. I believe in this region and I am all in to see that it thrives; please do the same.

We need to support one another; we need to support this region. We need to do that by looking locally for goods and services, and we need to have our goods and services suppliers supply us with what we need at a fair price.

We need to support one another; we need to support this region. We need to do that by looking locally for goods and services, and we need to have our goods and services suppliers supply us with what we need at a fair price.

I do not think I have to tell any of you that we do not have a lot of friends outside our borders, so we will have to rely on each other as we work through this most unfortunate economic situation we find ourselves in.

Thank you,

Allan Vinni

Councillor, Regional Municipality of Wood Buffalo

Allan Vinni is a RMWB Councillor for Ward 3, and has submitted an open letter to the public as part of Connect Weekly’s Connecting Council feature. On behalf of the Mayor and Council, more letters will be published on a weekly basis. Councillor Vinni can be reached by email at vinni@rmwb.ca or by phone at 780-791-5458.

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