Will We See New Oil Ghost Towns Soon?

chekohler (70)in #money • 5 years ago

Hey Jessieconomists

In years gone by precious metal, deposits were a defining part of the economy that created many of the cities we have today. Some cities have a history of being gold towns, like Johannesburg and areas in California to name a few.

They used those resources to pivot into other economic activities and diversified to become successful cities. While those that failed to do so became ghost towns as the resources dried up and people left in search of new opportunities.

As the industrial revolution continued we required more energy and oil and gas became the new rush and built some powerful economies, we can look at places like Norway and OPEC countries used this to build their economies.

Oil Towns

Image source: - slackdavis.com

Oil in decline

As the coronavirus rages on and countries shut down and movement and production grinds to a halt the need for energy decreases and puts pressure on oil prices. Couple that with Russia and Saudi Arabia pushing one another in a price war we're seeing oil prices tumble to prices we haven't seen in years and putting huge pressure on the leveraged businesses in the region and cities built around this commodity.

Price drops like these are not always factored into all parts of the supply chain and while futures contracts and insurance and mitigate some of the reduction in income there will be a knock-on effect and we will see the most expensive/inefficient producers go out of business.

Ghost towns

If we look at some oil production costs by country we can see nations like the UK, Canada, Brazil and Australia have some of the highest costs in the world when it comes to oil production and this puts them at a distinct disadvantage. While these nations do have other exports and ways of producing value there are certain parts of the nation that is not as diversified.

We can look at examples like Alberta in Canada or Perth in Australia that rely on oil more than many other cities. These large cities may see an exodus as jobs in oil and ancillary services dry up and smaller towns in the region completely become ghost towns as there simply isn't enough income to warrant a town being there.

The knock-on effect

This won't be the first time in history resource-based towns dry up and it surely won't be the last. As humans, we don't know how to form an equilibrium and build sustainable behaviours in the places we live and are all about exploiting resources for as long and as profitable as possible.

This mass migration could put a serious strain on cities and job markets and drag down wages as an influx of workers move to areas where they can find opportunities.