Saturday, December 13, 2014 9:00 am ·  0 Comments
Okay, I’ll admit it: last time I filled up my car, I was happy to pay less rather than more. For a minute it was like I’d done something clever and found a way to be thrifty, like all the personal finance guides tell you to. After, all if giving up your Starbucks habit can save you hundreds of dollars a year, saving a bunch of money on gas has to be even better right? Well, sort of. Thing is, the falling price of oil ($60ish as I write, the lowest since 2009) that is pushing prices comes with so many caveats that it is hard to make the case that it is a good thing.
Let’s go back a step and talk about why oil prices (and hence prices at the pump) are declining. Given that oil prices are set on global markets, it is really a big-picture story.
One major issue, and one that is not going away, is the fact that the U.S. is now the world’s largest oil producer. That’s a big deal, and means that the country’s voracious appetite for imports is not what it was, and will not be over the long term either. The bigger demand factor right now – and one which we should all take note of – is the fact that the global economy is pretty sluggish. ‘Sluggish’ means less demand from factories and households, and hence a downward effect on prices. And by the way – things would actually be a lot worse if there was not a bit of bright spot in the fact that the U.S. economy is doing okay right now. If that changes, oil prices will fall more.
But wait, isn’t the problem with Saudi Arabia and OPEC? After all, OPEC produces 40 percent of the world’s oil, so if they just cut back supply a bit all would be good, right? Well, it might be good for Canada (a net oil exporter with a high production price) but would not actually make that much difference to Saudi Arabia, which produces oil very cheaply. Oil prices at $60 vs. $115 a barrel (which was the barrel price as recently as May) are not really life or death for them, so they can afford to wait and not bail out other countries.
So let’s talk about the bad things for Canada that go along with low oil prices.
It’s a long list, but I’d start with the fact that almost everyone’s next mutual fund statements are going to be painful to look at, thanks to some carnage on the TSX. Then there is the fact that Alberta and Saskatchewan have been Canada’s megawatt economic performers and have created jobs and demand. That’s going to unravel pretty fast. And then there’s the Canadian dollar, which at its five year low is going to buy us a lot less in terms of imports. Yes, that will hurt your cross-border Boxing Day trip, but more importantly it will also make it harder for Canadian companies to invest in much-needed productivity boosting equipment. Oh, and let’s not even talk about what all this means to government revenues, any shortfalls will have to be compensated for elsewhere (Hello taxes!).
My biggest worry right now is that lower oil prices destabilize the U.S. economy, which has also been boosted by its oil patch. If that happens – well, it will not be pretty.
It has been a kind of party really: Canada has done well by being an oil producer and having a ‘petro currency’ for a few years. We may eventually go back to those days, but in the near term the party is over.