All Business

BRING ON THE $100 OIL

Or how I learned to stop worrying and love soaring energy prices

STEVE MAICH September 26 2005
All Business

BRING ON THE $100 OIL

Or how I learned to stop worrying and love soaring energy prices

STEVE MAICH September 26 2005

BRING ON THE $100 OIL

All Business

Or how I learned to stop worrying and love soaring energy prices

STEVE MAICH

IT IS AN INVIOLABLE rule of nature that, when in a pinch, the Canadian public will always advocate the worst possible economic policy at the worst possible moment. The loonie is plunging and near record lows—people want the U.S. dollar. The U.S. is charging tariffs on our softwood lumber and won’t abide by trade panel rulings—let’s tear up NAFTA. And now that the price of gas has spiked above $1.30 a litre—it must be time for price controls.

Last week the Canadian Federation of Independent Business (CFIB) sent a letter to the Prime Minister complaining that “soaring energy prices are having a major negative

impact on the Canadian economy,” and demanding intervention to “alleviate” high fuel costs. Commuters in Ontario and Quebec are already hyperventilating over the cost of gas, truckers in New Brunswick are blocking traffic in protest, and consumer confidence is slipping fast. This week, oil executives will be in Ottawa to face a grilling from MPs worried that “petro-rage” may be undermining their re-election hopes.

It looks like things are only going to get worse. CIBC chief economist Jeffrey Rubin predicts oil prices will hit US$100 a barrel by the end of 2007. Right on cue, Canada’s undying love affair with bad economic ideas has resurfaced. A Léger Marketing poll, taken at the height of the New Orleans disaster, found that 79 per cent of Canadians want gas taxes cut, 54 per cent are in favour of price controls, and 49 per cent want Canada’s oil industry nationalized.

When a near-majority is advocating we follow Russia’s economic example—putting oil and gas under government control— it would appear a touch of irrationality has seeped into the debate. Perhaps it’s time to remind ourselves why rising energy prices aren’t a disaster scenario. In fact, sky-high oil might be just what this country needs.

The CFIB is sure to get lots of support when it claims that the economy is being ravaged by pricey oil. But that’s the trouble with lobbyists—they make lousy economists. They forget things. Like, for instance, the fact that this country is an energy exporter, meaning we Canadians are knee-deep in the oil business. The industry now accounts for close to seven per cent of Canada’s econ-

omy—almost five times more than it did 30 years ago. Aside from the thousands of jobs being created, this oil boom has increased the value of Canada’s energy sector by $160 billion since the start of2004. CIBC’s Rubin figures soaring energy stocks could “singlehandedly” lift domestic stock markets by almost 10 per cent in the next year. Sure, you’re paying more for gas, but your retirement savings are looking better all the time. In the words of David Wolf, economist with Merrill Lynch Canada, high oil is “a net positive to the Canadian economy.”

If that doesn’t make you feel better, remember that unlike past energy crises, this one is the result of too much demand as opposed to too little supply, and that’s a huge difference. In the 1970s, Arab nations crushed

the fragile North American economy by turning off the oil taps. This time, prices are rising because economies, especially in Asia, are growing faster than oil drillers can increase production. Fuel costs may slow the rate of growth in some industries—particularly manufacturing and transportation—but recession is highly unlikely in a country that gets flooded with cash every time the oil price rises.

That helps explain why consumers have been so resilient in the face of higher pump prices. Energy prices rose by more than a third in 2004 and the economy kept growing at a healthy pace. This year oil has risen even

faster, helping to drive the loonie to 13-year highs above US85 cents, but the Canadian economy has still churned out 242,000 new full-time jobs in the past 12 months and, so far, retail sales have exceeded expectations.

In part, that’s because we’ve been through much worse before. In 1981, the price of crude hit US$81 a barrel (in today’s dollars, adjusted for inflation). Through most of the 1980s, the average household shelled out close to eight per cent of income on energy. That fell as low as three per cent a few years ago, and now—even after the recent surge in prices—economists figure energy represents about five per cent of spending.

We learned important lessons in the last energy crisis. Car manufacturers discovered fuel-efficiency. Homeowners bought insulation and better furnaces. Business embraced technology to cut costs. As a result, the U.S. now burns less than half as much energy for every dollar of gross domestic product as it did 30 years ago. Canada managed similar improvements, but with the return of cheap oil came apathy and waste. Canada still uses more energy per capita than any other G7 nation, making us more vulnerable to market shocks than we should be. The only thing that will change that is a major financial incentive to conserve and develop alternatives. Happily, the market is giving us one. That is, if we have the guts to face what the market is telling us.

Fuel rebates for the very poor are one thing, but price caps artificially enforce an unsustainable status quo. Seventy per cent of the oil consumed in North America is burned in car engines—does it make sense to demand a multi-billion-dollar subsidy for SUV drivers? Cheap gas was a luxury, not a right, and its time has expired. If energy bills are getting you down, don’t howl for government help. Put on a sweater, get a bus pass, and think of the big picture. R1

Read Steve Maich’s weblog, “All Business,” at www.macleans.ca/allbusiness

CHEAP GAS was a luxury, not a right. If energy costs are getting you down, don’t howl for government help. Put on a sweater, get a bus pass, and think of the big picture.