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Randy Powell, president and chief executive officer of Armstrong Group Ltd., which owns the Rocky Mountaineer train touring company.

Rocky Mountaineer

Like most other Canadians, Randy Powell has been watching fuel prices drop, but he doesn't think the plunge will affect the luxury rail business he runs in the Rocky Mountains.

"It will come into play for our guests because most of them arrive by plane," concedes Mr. Powell, president and chief executive officer of Armstrong Group Ltd., which owns the Rocky Mountaineer train touring company. Rocky Mountaineer operates high-end tours between Banff, Vancouver and, next year, Seattle, for visitors who come from Britain, Germany and the United States, as well as Canada.

Yet he suspects his guests will be indifferent; while airlines may drop or eliminate fuel surcharges they imposed on tickets when oil prices climbed, most of Mr. Powell's customers are either well-off or have saved up for a dream vacation by rail.

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Nor is he certain that the company will benefit from lower fuel costs when Rocky Mountaineer's travel season opens in the spring.

"The thing is, we won't buy a significant amount of fuel until April. Who knows what the price will look like then?" Mr. Powell says.

Mr. Powell's observations underscore one of the difficulties for companies of all sorts that do business in international markets: It's not as easy as it might seem to determine whether lower energy prices will be a boost or a bane for business.

Lower oil and natural gas prices don't necessarily translate immediately into an upturn for all parts of the economy. Even energy producers themselves stand to experience a mixture of benefits and setbacks from fluctuating prices.

"It would depend whether you're a purchaser or a producer," says Amina Beecroft, president of A2B2 Analytics and a part-time professor of investments and finance at Mount Royal University in Calgary.

The price of Brent crude oil, which was $115 (U.S.) a barrel in midsummer, has fallen to around the $85 mark in October. West Texas Intermediate (WTI) crude, the other benchmark, has fallen in parallel to Brent, dropping to just over $85 (U.S.) from $105 in June. Western Canada Select, the price received for Canadian production including from the Alberta Oil Sands, traded at $66.31 (U.S.) on Oct. 23.

Even in the energy sector itself, the effect of falling prices is mixed. Some analysts argue that low prices will hit hardest among the high-cost producers such as the oil sands and the shale oil producers in places such as the Bakken in southern Saskatchewan and North Dakota, a region that has been booming in recent years.

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Lower prices may strand the abundant reserves in such areas, Jeff Rubin, former CIBC chief economist, said recently.

"We're now in a different world. At the root of today's problem is global demand that is no longer growing quickly enough to support the prices necessary to keep expanding expensive unconventional sources of supply like the oil sands," he wrote in The Globe and Mail on Oct. 14.

Production will be affected if prices keep going down toward the $70-80 (U.S.) range, says Patricia Mohr, a vice-president at Bank of Nova Scotia and a commodities market specialist. "Light, tight oil from the U.S. shales has higher break-even costs and there would be a slowdown in drilling activity at that price."

Ms. Beecroft counters that while she concedes that the coming year could be "tough," the shrinking spread between Western Canada Select and WTI and Brent prices brings advantages, too.

"As I see it right now with Alberta, the Western Canadian Select price is remaining fairly strong, so that offsets any decline in WTI, at least for this fiscal year," she says.

"The weaker Canadian dollar is also helping."

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At the same time, falling prices may hurt transportation and oil services companies, including the railways that have invested heavily in new cars to transport oil and the pipeline companies eager for favourable decisions on projects such as the Keystone XL and the Northern Gateway lines.

"The rail sector has just invested in a bunch of cars that are going to be empty if there's falling demand," Ms. Beecroft says. According to the Canadian Association of Petroleum Producers (CAPP), rail loading capacity for Western Canadian crude is expected to more than triple by the end of 2015 to more than 1 million barrels per day, up from 300,000 barrels per day in the middle of this year.

The effect of dropping prices on the overall economy is not clear cut either, because it depends on whether prices are changing because of an increase in supply from new production or a drop in demand, as in a recession.

In the energy sector, falling prices may slow the demand for pipeline equipment (assuming there is less urgency for approval of pipeline projects). It could slow the demand for products from manufacturers of new fuel efficient engines for vehicles, locomotives and electricity turbines. It may not change the plans for turbines in the case of large electricity users, such as utilities and mines – these industries plan for years and decades ahead, when oil and gas may be less abundant and more costly.

"The outlook for oil prices in coming months depends mostly on Saudi Arabian policy, and Saudi Arabia is willing to cut output to shore up prices," says Scotiabank's Ms. Mohr. "There will be a meeting on Nov. 27, which will be key."

However, it is not clear yet whether this meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna will indeed lead to an agreement to cut output among the member countries, which still account for more than 80 per cent of the world's proven oil reserves. "If there is no OPEC cut, prices could move lower again, though I do not think prices will move to the high $70 level and stay there for long," Ms. Mohr says.

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This leaves the world in a wait-and-see situation as far as the price of oil is concerned, at a time when world supply exceeds demand by as much as 2 billion barrels a day. The Economist posited that a 25-per-cent price cut for oil would translate, if the cut sticks, to an increase in global GDP of about 0.5 per cent above what growth would otherwise be, but it's difficult for many companies to capitalize quickly on plunging prices.

"Oil prices are not really on our radar," says Robert Maguire, project director for Wood Wharf in London, a huge expansion of the city's Canary Wharf neighbourhood. "In London, much of the price pressure comes from the strong demand for labour and material in an industry [construction] which has lost considerable capacity since 2008. Oil prices may have slightly moderated price growth but, unfortunately, the pressure is price escalation."

Half a world away in the Rockies, it's not much different for Mr. Powell, though for different reasons.

"We structure our pricing on a rolling basis, at least 18 months in advance. With respect to our trade partners, I've already got 2015 pricing and even 2016 pricing out there," he says.

While energy prices may stay low for some time, "we look at the long-term trends," he adds, noting that, inevitably, energy prices will go up.

Winners and losers

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A drop in crude oil prices by more than 20 per cent since mid-June shuffles the deck for consumers, companies and countries, creating new winners and new losers. The winners and losers are not as obvious as it might seem.

There are conflicting reasons for the price shift. Demand dropped after the 2008 recession, and the chronically troubled recoveries in Europe and Japan are keeping it in check. The IMF has lowered its growth forecast to 0.8 per cent in the euro zone for this year and only 1.3 per cent for 2015.

Meanwhile, supply, particularly in North America, has grown. The shale oil boom has increased shale oil production by roughly four million barrels a day since 2008.

Producers face a glut, particularly in politically tense or unstable parts of the world, because the U.S. can continue to substitute domestic oil for imports; it has already stopped bringing in crude from Nigeria.

Countries that heavily subsidize domestic energy consumption also stand to lose, as well as the coffers of national governments that depend on oil revenues.

Winners, aside from ordinary consumers, include farmers, because farming is highly energy dependent, from fertilizer production to tilling to delivery.

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Airlines also benefit. Carriers slapped fuel surcharges on tickets when fuel costs were high and they're not necessarily going to come off now that it's cheaper. The average price airlines paid for fuel between 2000 and 2013 went up 272 per cent (adjusted for inflation).

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