Oil free-fall a plus for drivers, but it has a downside
The price of oil is down, and filling up the car at the gas station has suddenly become a cheaper and more pleasant experience. At current prices, right now sitting at a seven-year low, we could expect to save on average more than $60 a month, which consumers will happily spend.
And prices will surely fall even more. So what’s not to like?
Indeed, most Canadians are smiling from ear to ear at the recent fall in prices. But celebrating may be premature. Anything this good must have a downside. And it does.
- Gas glut saving Manitoba drivers big at the pump
- Oil price collapse means lower gas prices for motorists
First, the fall in oil prices means lost revenues for the federal government (and some provincial governments as well). Estimated between $2 and $3 billion at current prices, the government faces some hard decisions in the very near future, indeed for the upcoming budget. Having been on a recent spending spree, the Harper government has left bare the federal coffers.
Obsessed with balancing the federal budget, the government will have to come up with ways to make up the revenue shortfall. If it does not succeed, Harper will face accusations of mismanagement: it would have spent all this money with total disregard of the impact of falling oil prices.
So imagine if the price of oil falls in the short-term to $40 a barrel, as some are predicting. It will translate into even bigger revenue losses, which the Harper government will have to make up somehow by either raising taxes or cutting spending, or a combination of both. So while Finance Minister Joe Oliver vowed recently to fulfill promises to cut taxes despite the drop in the price of oil, this just does not seem plausible any longer.
Second, the free fall in oil prices will certainly have implications for economic growth in Alberta, as oil producers cut back exploration, production and investment in the short run.
Last month, the governor of the Bank of Canada, Stephen Poloz, stated that falling crude prices could shave a quarter of a percentage point off expected economic growth rates in Canada. That many not seem like a lot, but at low and very fragile current levels, it is considerable. And as oil prices fall further, expect a bigger hit. This is enough to postpone any decisions to raise interest rates in the foreseeable future.
Finally, the oil collapse can wreak havoc on the world economy.
I believe we are on the verge of another world crisis, and the collapse in oil prices can be another ingredient that pushes us even further into crisis. The oil plunge creates uncertainty in several countries, like Russia and in the Middle East, and this can translate into political instability. Geo-political forces are already fragile in those parts of the world, and the oil collapse can be a tipping point.
There is possibly a silver lining. The fall in oil prices will drag down the Canadian dollar, which will translate into cheaper exports, benefiting Ontario manufacturing. This is the flip side of Dutch Disease: if it benefits Alberta, it hurts Ontario, but now, it will hurt Alberta and benefit Ontario. In fact, the Ontario government estimated in its last budget that when the price of oil falls by $10, this can potentially translate into between 0.1 and 0.3 per cent increase in the Ontario economy.
So while the fall in oil prices carries both positive and negative effects, it is often difficult to measure the precise and overall macroeconomic impact of such a scenario on the short, medium and longer terms. I would lean toward an overall negative impact. One thing is clear, however: after all is said and done, suddenly saving $60 at the pumps this month doesn’t seem to be such a great deal after all.
Louis-Philippe Rochon is an associate professor at Laurentian University and co-editor of the Review of Keynesian Economics.
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