We’ve had quite a few people asking why oil prices aren't considerably higher, considering all the tension and conflict in the Middle East. At first look, it is puzzling why oil prices have not taken off. Oil bulls would suggest that there are many reasons prices should be higher:

 

• China has just implemented stimulus package
• US inventories are at record lows
• Demand for oil is at the highest level in history and is expected to grow 2.5% more in 2025
• Houthi drones have been striking British oil tankers
• Iranian production is grinding to a halt, with significant potential disruptions if Israel targets production facilities

 

All of these points would lead you to believe that oil should be higher than where it is, especially considering that geopolitical tensions in the Middle East have triggered significant price spikes in the past. The differences this time around are: OPEC still holds significant spare capacity, China demand is in a slump, and perhaps most significantly, the US shale boom has allowed energy independence for North America. As you can see from the chart below, US oil production has more than doubled since 2010. This has allowed the US to not only be energy independent, but a net exporter as well. In the end, the US does not depend on OPEC for its oil, it can produce what it needs right here in North America. This should take some of the volatility out of the price regardless of what happens around the world.

 

On a side note, you may find it a little ironic that here in Canada we are hindering our oil and gas production while US oil and gas production skyrockets.

 

 

I have also included a report from our CIBC Economics team entitled “No love of labor”.

 

As always, if you have any questions, please feel free to give us a call at any time.

 

Have a great long weekend.

 

Milan