Oil prices have finally slumped and waves of investors now seem wrought with worry but are you really that surprised? Many people seem to be forgetting that, in the richest of countries, demand for oil has been falling steadily since 2005. Our world is finally leaning towards cleaner energy and as long as green technology continues to improve, our need for the non-renewable will continue to decline.
Even developing countries could easily by-pass the inefficient age of oil and head straight for an environmentally friendly economy. Solar panels are cheaper, electric cars are more accessible and we all have a greater awareness of environmental health. So why wouldn’t they?
In Australia, the Bureau of Resources and Energy Economics (BREE) found that, by 2020, wind and solar power will be cheaper than oil or gas and by 2030, they’ll be the cheapest of all the available energy options. Not to mention promising new developments in nuclear fusion that could change the world within just ten years.
It’s time Canada’s economy braced itself for a more permanent plunge in oil prices because even if this current dive is temporary, it’s likely to get even deeper before returning to the surface.
Why? Because capital intensive companies like oil producers have momentous fixed costs so they keep pumping oil even as prices plummet. It might seem counterintuitive but if they stopped pumping, the fixed costs would cripple any company so businesses have to turn to loss minimization tactics – selling oil at a loss to at least cover some of the unavoidable fixed costs which in turn contributes to the decline of oil prices.