Why has the price of oil has fallen? This is how you can tell when someone has no clue on how the markets work.
This is a recent conversation with someone at work.
Me: Boss is worried about the price of oil and that it will cause layoffs.
Other person: I do not know why people are panicking for the price will go back up.
Me: If the price stays down low like this then there will be massive layoffs in the oil and gas industry. Schlumberger, one of the world's major oilfield services companies has announced they are laying off 9000.
Me: Saudis are able to withstand the lower price of oil for a while as it is cheap for them to get it out of the ground. The US and Canada are not members of OPEC. The price of oil helps determine the strength to the Alberta Economy as it costs a lost to get oil out of ground in Western Canada.
Other Person: OPEC doesn't control the price of oil. Countries determine the price of oil not OPEC. They want to start a war over oil.
Me: Oil works on supply and demand and what one is willing to pay for it. If OPEC increases production the price of oil will decrease there is less supply. If they cut production the price will increase as their is less supply to meet demand. There are other factors that determine the price of oil as well. OPEC is not one country but a group of exporting countries.
So this fellow employee does not invest in the markets obviously. Conversations like this are best just to walk away from.
Here is a some info what helps determine the price of oil.
But what causes the price of oil to go up and down? Why doesn't the cost of gasoline stay at a constant level? That's because crude oil is a "commodity," a product that is generally the same no matter who or what produces it. Other commodities include corn, coffee beans and raw materials like gold and copper.
The prices of commodities are always in flux because they depend on worldwide supply and demand. When ethanol fuel started becoming a popular alternative fuel option in vehicles, the price of corn -- from which ethanol can be produced -- spiked. As another example, you may hear on the news about an oil refinery explosion where a supply of crude oil is compromised. This will cause the price of oil to increase.
There's also the international commodities market, where investors hedge bets on how much they think the price of oil will increase or decrease down the road. Speculating over the price of oil also has a lot to do with how much it costs. (Source: How Stuff Works website ).
For full disclosure, I do not trade the commodity futures market and definitely am not an expert when it comes to commodities. I do , however, invest in companies in the oil industry such as Enerplus and Enbridge. Enerplus used to Royalty Land Trust, that is now operated as a corporation. Enbridge is involved in the transportation of energy such as through their pipelines, solar energy, wind energy etc.
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Disclosure: Long ERF , ENB
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should not be taken as investment or business advice.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.