Yesterday, the Organization of Petroleum Exporting Countries decided to maintain current levels of oil production. And its decision is hammering major energy companies in the U.S. and abroad.
Many energy experts had expected the group of oil producing countries, which met in Vienna this week, to act to halt a free fall in the price of crude oil since this summer.
A barrel of benchmark U.S. crude, which cost well above $100 as recently as June, has fallen to about $73 as of this week.
Yet, OPEC announced it would not cut production in hopes of hurting producers in the U.S. and elsewhere that are flooding the market with crude and natural gas.
The effect of the decision was immediate: crude prices tumbled more than 6% early Friday, and were within $2 of hitting levels not seen since September 2009—that’s when the U.S. was sliding into an economic crisis.
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Following the OPEC meeting, shares of large energy companies including Chevron Corp., ConocoPhillips, Exxon Mobil Corp. and Marathon Oil Corp. all fell around 4%. Britain’s BP Plc. fell 6%.
On the upside, the pain being felt by energy producers is proving to be a big gain for consumers and businesses that are heavily reliant on energy.
Cheap energy has already been cited for lifting the spirits on Main Street as people spend less at the pump and put more goodies into their shopping bags.
Also riding high are the airlines, package delivery services and cruise lines, which are spending less on fuel. For instance, Delta Air Lines rose 4% before the opening bell Friday, as did United Continental Holdings Inc. and American Airlines Group Inc.
Effect on Canada
Oil prices are also sliding in Canada, reports Canadian Press, where crude for January delivery dropped below US$70 per barrel on Thursday, down 6% on news that the Organization of Petroleum Exporting Countries would maintain its output of 30 million barrels per day.
There were hopes OPEC would move to put a floor under prices that have fallen about 30% since mid-summer.
On that hope, the Alberta government predicted on Wednesday that crude prices would hover at around $75 for the remainder of the fiscal year, and warned of “tough decisions” if oil stays at that level.
Still, the chief economist at one of Western Canada’s biggest financial institutions is not raising the alarm just yet.
At the time, however, ATB Financial’s Todd Hirsch cautions, “A lot of business services, [and] a lot of personal services aren’t really captured by Statistics Canada as [part of] the energy sector. But they really are quite often times heavily dependent on energy spending and investment.”
So Hirsch expects the recent price drop may lead to some pullback in Calgary, the white-collar heart of Alberta’s oil patch, when it comes to luxury retail items, discretionary travel and corporate expense accounts.
When it comes to corporate events, for example, event planner David Howard has noticed a dip in business already. But while business is down about 10% this year, it doesn’t compare to the financial crisis of four or five years ago, he notes, when oil prices plunged to half of what they are today, and when business was off 50%.
“I don’t think that the panic button has been pressed yet,” says Howard, president of The Event Group in Calgary.
On the other hand, Howard is already seeing an impact when it comes to events he’s planning for next year’s Calgary Stampede, the 10-day celebration of cowboy culture that dominates the city every July.
“We’ve had actually one [client] that cancelled altogether, and we’ve had another that cut [their] budget in half.”
Meanwhile, the drop in oil prices has been more positive than negative for Ralph’s Motor Sports, which has been selling snowmobiles and all-terrain vehicles in Calgary for more than four decades.
It’s less expensive these days to haul the machines to the Rockies and fuel them up, said sales manager Rick Stewart.
“Our sales have increased about 35% I would say for our mountain machines and I think it’s because the price of gas is down,” he says.
It all adds up to what ATB’s Hirsch expects will be a bit of a economic pause in 2015, rather than a bust.
“A little bit of recalibrating of our expectations might be just what we need,” he suggests, adding it may bring a “bit of reality” back to a province that often overestimates oil profits.