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At Issue
Oil Prices Continue to Push the Canadian Economy
Tuesday, August 16, 2005
It was only back in April when I asked you the same question. At that time we were dealing with $58 dollar crude prices. Last week, crude broke through the $67 dollar mark only to retreat later that day. Where will it go next? That's anybody's guess.
I think I'm on record as saying it may go down as fast as it went up. That reality seems so far away. In the past year, oil has broken through $40, then $50 and now $60. When it spiked last week at $67, it had gone up 7% in one week. It was partly blamed on problems with refinery capacity.
I know. For some of you that is very hard to believe. It galls North Americans that they spend so much on gas. Our American friends have much lower prices, but still a $2.50 US per gallon gas price seems out of this world. Here in Canada most retailers don't even have signs that show up four digits. Somebody is making the money. For most consumers, it's like a giant energy financial black hole.
I feel the same way. However, I run a business, which has a lot of high-powered heavy machinery. As the energy price goes up, it's hard to imagine continuing to operate like I've always had. Something has got to give. With oil prices as they are, it'll probably be me.
The effects of these high prices will surely start taking their toll on the greater economy. In Canada we have been blessed with some solid economic numbers. We've got low inflation (1.7%), super low unemployment (about 6%) and solid economic growth of about 3.2%.
When you add in the Bank of Canada's low interest rate policy, the economic life for many Canadians is very good.
Yes, that is the reality of where we are in our Canadian economy. We've got here almost by accident, although Prime Minister Martin and Finance Minister Goodale would surely disagree with that. As it is, everything is in balance. That is until the latest oil price shocks. I don't think we can get away with the latest price gyrations. Surely these new higher oil prices are going to shake our government fiscal projections.
Case in point is the province of Alberta. Last week Ian Urquhart documented the Alberta government's windfall from oil and gas prices in his column, entitled, "Alberta awash in oil, gas money"
According to Urquhart, every $1 hike in the price of a barrel of oil translates into an additional $99 million for the Alberta treasury. Each 10-cent rise in the price of a gigajoule of natural gas brings in another $99 million.
Urquhart goes on to say this windfall is coming to a province that is already debt-free with no sales tax, the lowest corporate and personal income taxes in the country, and a budget that includes whopping increases in spending on post-secondary education (30 per cent over three years) and health (11.3 per cent this year alone).
For the Alberta treasury, that increase — and the related hike in the price of natural gas — means an additional $2.5 billion in unexpected revenues.
All of these numbers Urquhart gives are based on an oil price of $36 a barrel. At $65 dollars these windfalls are just that much more. Alberta based on its oil and gas economy has simply become Canada's nirvana.
Our federal government is not immune from this. Our federal surplus is sure to grow, maybe topping over $10 billion for fiscal 2005-06. That might be a bit of a stretch but as gas prices rise, our federal government makes more money. That too, will have to be
factored into our monetary policy when David Dodge sets interest rates. These oil prices sure make things interesting.
But when you are paying over $1 litre for gas in Chatham-Kent, I bet you don't think of it as "interesting." Yes, I know. Keep in mind that although oil prices have gone up 46% since last year and almost $10 over the last three weeks, we are still a long way from
record "inflation adjusted" prices. When you calculate inflation adjusted dollars oil prices were higher in 1980. To surpass the 1980 prices, we'd need oil to go past $90/barrel.
I know we don't even want to think about that. A good way to fight back is to cut your consumption any way you can. A new 2005 version of the old "National Energy Policy" we don't need. Let's just let the market take care of it. Maybe then, there will be a new technology come down the road to render the whole concept of oil prices obsolete.
Philip Shaw, farms 830 acres near Dresden, Ontario. He holds a Masters of Agricultural Economics and Business Degree from the University of Guelph and is a well-known commentator on agricultural issues in print, on radio and over satellite in Canada and the United States. In the Chatham-Kent Times, Phil will use his frank and forthright writing style to address political and economic issues from the local to the international stage. He is a keen observer of political life at all levels, reads widely and has travelled the world to gather fodder for his column. See what's At Issue this week.
