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Saeid Fard is a blogger and digital designer in Vancouver.
When the United States and much of world entered into a recession following the global financial collapse of 2008, Canadians escaped relatively unscathed, thanks in part to a well-regulated banking system that had greater reserve requirements and was less entangled in the global financial web than its U.S. and European counterparts.
But an unfortunate consequence of our insulation from global ills was that we did not subject ourselves to the kind of economic self-examination forced on other countries. Instead, consumer debt continued to rise, real estate prices continued to escalate and our economy grew worryingly reliant on just two industries: petroleum and housing.
Off the backs of those industries, Canada’s gross domestic product (GDP) grew by 19 per cent between 2010 and 2014. But most of that growth was driven by factors outside Canada’s control. China’s economy was booming and, with it, its insatiable need for resources.
Oil prices were fixed artificially high by the Organization of Petroleum Exporting Countries (OPEC), Iranian petroleum supply was cut owing to sanctions, millionaires from precarious economies, including China’s, increasingly sheltered their wealth in havens such as Canadian housing, and “fracking” technology unlocked new petroleum resources in Western Canada.
Many remain optimistic that petroleum prices will recover, but there is strong reason to believe low prices are here to stay. Unlike previous price vacillations that were created by shocks in supply or demand, the price-setting regime of oil has changed.
In the past, prices were set monopolistically by OPEC; they’re now set competitively. Low-cost producers, such as Saudi Arabia, used to intentionally lower output to create artificial shortages that boosted prices. With such high prices, more expensive resources such as oil sands and shale oil became viable.
Realizing that high prices would eventually lead to OPEC’s demise, the cartel stopped price fixing. The world is now sitting on massive inventories of oil that will take years to consume. On top of that, Iranian oil sanctions are being lifted, adding to cheap supply. Barring some geopolitical catastrophe, the new prices are here to stay.
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