Producers’ loss is consumers’ gain
‘What is saved at the pumps will be spent at the malls,’ economist says
The federal government isn’t fretting, just yet, over the drain on Canada’s finances caused by a seemingly endless weakening in oil prices, a situation aggravated by OPEC’s decision Thursday not to cut its production levels.
But there will be some obvious benefits to four-year-low oil prices — cheaper gasoline at the pumps, for one, and a possible knock-on buying effect for some consumer-dependent sectors of the economy.
“What is saved at the pumps will be spent at the malls,” said Avery Shenfeld, chief economist at CIBC World Markets.
Crude prices experienced the biggest single-day drop since May 2011 after the Organization of the Petroleum Exporting Countries kept production at current levels — a move widely telegraphed by the cartel — despite the current glut of oil and reduced global demand.
Finance Minister Joe Oliver played down the impact on the economy of the ongoing slide in oil prices.
“We’ve taken into account the bulk of the decline, which already occurred, and made the assumption, in fact, that the lower price would be sustained during the forecast period,” Oliver told reporters in Toronto.
“So we took $2.5 billion out of the surplus to arrive at the initial number that I talked about when we had our economic and fiscal update,” he said, adding that is “a relatively conservative assumption, and we’ll continue to monitor the level of prices.”
In his Nov. 12 economic and fiscal update, Oliver said crude oil trading at around $70 US a barrel would trim government revenues by $2.5 billion annually between 2015 — when the federal government plans to produce a long-awaited budget surplus — and 2019.
Pedro Antunes, deputy chief economist at the Conference Board of Canada, said lower oil prices are “going to be a huge boon for the U.S. consumer. That’s still the engine of growth for the global economy,” which means Canadians and our economy should benefit from the spinoff effect.
“When you’re spending on gasoline, or on energy in general, those are goods that are not elastic in their demand. In other words, we can consume the same amount week in, week out. We don’t adjust quickly to changes in the price for energy,” he said.
Randall Bartlett, senior economist at TD Economics, said he expects “to see a more robust holiday season this year. And part of that is the story of lower gas prices.”
The other part of the story is the negative impact of a long period of low oil prices.
For Canada, said Shenfeld at CIBC, “there are others whose jobs will be at risk if low oil prices persist — not only those working in the energy sector, but others, including those who benefit from public-sector spending in Western Canada, for example.
“All told, the impacts on the national economy are likely to be negative if (oil) prices persist at these levels.”