Oil optimism yes, but it's too early to bet the farm on a full-fledged recovery: Don Pittis
There are reasons Canadians shouldn't change too many plans in hope of a turnaround
For many ordinary Canadiansthe price of oil is muchmore thana financial play. Crude's two-year plunge to $26 US a barrelhas shattered lives. Its recent rebound above $40 has inevitably sparked real optimism.
But while oil speculators can make a killing from short-term sharprises and fallsin prices,workers, homeowners, oil-producing companiesand governmentsdependent on energy prices have reason to pausebefore altering their plans.
Short-term ups and downsin the price foroil have only a tenuous link to the world's long-term need for energy.
Speculating on a rise
Cynics have pointed out that energyprices tend to go upwhen it snows in New York because so manytraders therelook out the window and say, "Gosh, it'scold;it must be time to buy."
There remains an enormous glut of oil in the world, stored in ships and trains and gigantic underground salt caverns,and there is little evidence that is about to suddenly change.
There are only two ways to begin eating into that supply glut. Either the global economy needs to begin using significantly more oil, or oil producershave to start extracting a whole lot less.
The news that sparked the recent uptick in oil prices was talk of an agreement between oil-producing countries to freeze, not cut, worldwide production. According to the International Energy Association, there are reasons to be skeptical about such an agreement.
Waiting for a freeze
"Even if there was an agreement on the freeze or similar, it would be unexpected that it would have major implications, at least in the first half of 2016,"IEA executive director Fatih Birolsaid last week in an interview with BloombergNews.
In the current state of the global economy, it is hard to imagine struggling national governments from Venezuela to Nigeria placing loyalty to an even looser collective above their own political survival.
And keeping track is hard. According to the Wall Street Journal, oil, once pumped, is actually disappearing from the global account books.
Discouraging data
On the consumption side some other new data from the IEA was also discouraging for those hoping for a long-term jump in oil prices.
The association's data indicates that over the past two years, carbon dioxide output remained roughly constant. If CO2 emissions area proxy for fossil fuel use, that is a gloomy indicator for those hoping for a boost in consumption.
Spurred by international agreements at COP21 in Paris, the IEA data shows,the world's economies really are working out ways to live with less fossil fuel energy. And while general economic weakness has helped to stall oil demand, once economic growth picks upcarbon-efficient technology will be even more advanced and cheaper.
In fact, each time oil prices rise, low-carbon tech becomes more competitive. At thesame time, $40 a barrel oil puts manylarge world producersback into profit, reducing the economic needfor globalcuts in output.
Early rebound
While using historical comparisons may be an inexact tool because so many things are different, there are some indications this is too early for a major price rebound. For instance, thecrash of oil prices from theirpeak around 1980 was similar in magnitude to what we have seen in the last two years.
In those days, fear of climate change was a factor that just didn't play. But even with a few small spikes, including during the first Gulf War, oil prices did not bottom out for nearly 20 years before beginning their roar up to their most recent highs.
Canada's oil business is far from dead. The low looniecontinues to provide advantages over equivalent U.S. producers, although that advantage erodes asthe Canadian dollar rises.
Planes and automobiles
So far there is no obvious replacement for liquid fuel forthe airline industry. As one reader pointed out recently, farming also continues to require huge amounts of fossil fuelswith no commercialalternatives in sight.
While automobile fleets are replaced every 11 years, leaving room for a gradual transition to new technology,introducing carbon-saving tech in our housing stock will likely be a much slower process. There is no quick replacement for natural gas to keep Canadian houses warm during our long winters.
Society-wide transitions are inevitably slow, including the process of unwinding the hugeglobaloil and gas machine to its optimum size.
The industry wasbuiltwhen people thought oil was rare and expensive. While the recentprice surge istantalizingfor those who depend on that industry, the readjustment may take more time yet.
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