Crude Oil Prices
At the start of 2007, crude oil prices reflected a steady decline that had begun the previous July. The benchmark crude West Texas Intermediate (WTI) had lost almost one-third of its value, decreasing from a high of slightly more than $75 US per barrel to about $51 US per barrel – a level not seen in almost two years.
A number of factors contributed to the decline. These included mild weather in North America going into the 2007 winter heating season, rising crude inventories in the United States, relative calm in the Middle East and rising heating oil inventories in Germany.
This downward trend was further compounded by continued mild weather and rising heating oil and gasoline inventories in the United States. Some commodity traders were concerned that economic recession, in part fueled by high crude oil prices, was a distinct possibility. If this occurred, lowering demand would create excess supply. As sellers then competed for available markets, prices would plummet.
However, by mid-January 2007, OPEC had implemented production cuts of 1.2 million barrels per day. Combined with growing global demand, tensions in the Middle East and violence in Nigeria, the reduction in crude output put upward pressure on crude prices. By the end of the month, colder weather in the northeast United States pushed crude prices over $55 US per barrel, almost 10 percent higher than the $49.90 US low reach earlier in the month.
Following two more reductions in OPEC production of 500,000 barrels per day in February and 195,000 barrels per day in March, continued cold weather in North America, more violence in Nigeria and growing tension in the Middle East, crude oil prices rose to more than $63 US.
These factors, along with falling world crude oil inventories, continued to push crude oil prices up for the rest of the year. In July, production from Angola, an OPEC member since January 2007, was constrained by electrical problems in one of their major fields, and a fire at an oil terminal in Saudi Arabia drove crude oil prices to more than $75 US per barrel.
Reduced refinery capacity in North America throughout 2007 may have had a psychological impact on crude oil prices. Although refinery interruptions would normally result in surplus crude oil, and therefore a decrease in crude oil prices, any uncertainty in crude markets could cause an increase.
By November 2007, crude prices were testing the $100 US per barrel mark, peaking at $99.29 US in the third week of November. Two weeks later, on December 6, prices had dropped to about $87 US a barrel in response to rising inventories at Cushing, Oklahoma and speculation that OPEC would boost production. At year end, experts predicted that crude oil prices would remain volatile through 2008 due to geopolitical risks, Organization for Economic Cooperation and Development inventory tightness, and worldwide refining bottlenecks.
The impact on Canada
The impact of higher prices on Canada involves many factors.
On the positive side, Canada’s growing importance as a source of crude oil supply means that higher-priced crude oil has become an increasingly important economic asset. For example, expensive crude oil means investment in oilsands and heavy oil will continue, and this has ripple effects across the country. Crude oil is the biggest contributor to Canada’s positive trade balances, which are a measure of how much more we export than import into the country.
Because of those trade balances, the Canadian dollar has strengthened considerably compared to the U.S. dollar – the currency usually used to price benchmark oil. This has greatly mitigated the impact of higher crude oil prices on Canada. In the chart, blue shows the price of crude oil in Canadian dollars, while red is the price in the U.S. currency. Since 2002, the price of crude oil has doubled for Canadians, from about $41 Cdn per barrel. For Americans – our most important trading partner and a major competitor in many areas – it has more than tripled, from about $26 U.S.
On the negative side, Canada is experiencing inflation, and it may continue to increase. Higher crude oil prices mean higher costs for travel and transportation: Our cars need gasoline, and railways, ships and air travel need their own oil-based fuels. The prices of fertilizers, plastics and other petrochemical products – carpets, for example – are rising. Many other goods and services are also ramping up in price, since virtually all forms of commercial activity – from mining to farming to manufacturing and home construction – require energy.