The Falling Price of Gas

This week I bought gas for 81 cents per litre (or 2.765 USD per gallon). Ever since prices started to fall in October, consumers have rejoiced, politicians have promised to keep the prices low, and economists have battled to forecast the bottom. Needless to say, there has been a lot of talk about gas prices, but what are the larger ramifications of the falling price of oil?

To start, the rhetoric has pointed repeatedly to the fact that there will be more money in the pockets of consumers. Estimates vary, but in general the annual projected household savings is supposedly in the neighbourhood of about 1200 CAD. Consumer savings are always welcomed with open arms, especially when it comes to a staple like fuel. Gas prices have been labelled as excessive or unfair and the fall in prices is viewed as a reprieve, particularly for those who rely on fuel prices for their livlihood. Moreover, the price of fuel is built into the prices of many other goods, notably food.

This side of the equation has been covered relatively extensively, so I'll leave it at that. But what are the impacts beyond?

One of the most salient is with regard to Canada's economic performance. It's no surprise that during the last decade of Conservative governance, the tar sands have expanded signficantly both in terms of size and in terms of importance to the overall Canadian economy. Policies that have foresaken other areas of the economy, notably manufacture and the public sector, have hollowed out the Canadian economy by placing so much of our stock in one resource (otherwise known as Dutch Disease). The impact of falling gas prices, which had been foreshadowed for some time, has been painful. The Alberta government has already had to readjust its budget due to dramatic changes in royalties. All this compounds the pressure on Canada's monolithic oil economy (which was already bruised from pipeline politics). Canada has been focusing significant resources in the sector in the past decade; however, the benefit to Canadians has not been similar to other democracies in the same point, notably Norway.

Another signficant impact has been on the Canadian Dollar. In the time since the beginning of the fall the dollar has lost significant ground - from 90 cents to currently approximately 84 cents. This cascade, obviously, has an impact on the buying power of Canadian consumers, the same group who are supposedly the benefactors of falling gas prices. Here it's important to look at a basket of goods to decide whether or not the consumer is better off. Accord to the Consumer Price Index the impact is nominal, though the most recent data isn't new enough. The falling Canadian Dollar impacts more than consumers. Relationships amongst provinces have been strained over the tar sands - notably with Ontario struggling with the hollowing out of its traditional manufacturing sector as oil prices have been high since 2009. You don't have to look far to see examples of industries packing up and leaving Ontario, though the falling dollar now may lead to a reinvestment in Ontario as a place for manufacturers to set up shop. At least in some measure, Alberta's loss is Ontario's gain. This will be particularly interesting with the federal election scheduled for the fall.

The final element to consider is that driving is a heavily subsidised activity. That is to say that we don't pay the real price to drive. The falling price of gas doesn't change the huge costs of road design, construction, and maintenance. It does, however, reduce the amount that the federal government and provinces receive in excise taxes and sales taxes, much of which are earmarked for infrastructure spending or the provision of other social services. Surely we are going to need to find that money somewhere else or otherwise initiate further cuts. With the election forthcoming there will be some discussion of this, especially if oil prices continue to languish.

The larger picture of commidity prices is important and something that I feel is not accurately represented in the media or in public discourse. As 2015 goes on I hope that the conversation will move to examining some of the elements I`ve pointed out as well as others. Happy new year.