Arm and Leg Oil Prices: We Don’t Want to Go There

Oil PricejpegIf there’s one constant when talking about family finances, gas prices always seem in the mix.  Our American friends seemingly have a fixation on gas prices while at the same time enjoying some of the cheapest gas prices in the developed world.  I know that gas prices are about a $1.27 a liter near Dresden Ontario, which are much higher than I’ve grown used to.   It is a testament to cheap oil that most of the gas pumps in Canada were never made to price gasoline in triple digits.

Maybe we are a crotchety bunch.  It has been a long, cold and snowy winter in Canada.  In the last few days we have actually enjoyed some spring weather with temperatures rising into warm levels.  Its at this time of year when many people feel free to break the shackles of winter and make some summer plans.  That usually means driving somewhere and it always seems that the oil companies jack up gas prices on the weekends.  It just doesn’t seem fair and with the price of gas crowding a $1.30 a liter, we are getting into the territory were many Canadians will have to stay home.

The price of oil is actually fallen about $4 per barrel over the last few days.  For instance today it finished $109 a barrel after reaching up to $113 in the last two days.  There was a bit of a flyer on a Libyan peace deal, which sent oil prices down.  However, I hear tonight that the Libyan rebels do not accept the deal so maybe that four dollars will be tacked onto the price of oil tomorrow.  Political instability and Arab countries seems to be synonymous with the higher price of oil.

Of course the worry is that the high price of energy will affect the global economic recovery.  For instance there are some economists who think the price of oil is about $10-$20 a barrel away from causing large negative effects to the global economy.  It has been a long way back from the financial meltdown of 2008 and nobody wants to see the party spoiled by record oil prices over $134.  I know that I find it, a bit unrealistic to expect that.  Oil prices create their own hype, but there are limits to prices before demand falls off.

We may be getting there now.  However, remember Canada is not an island and neither is the United States.  A few years ago I wrote a column about the new Tata Nano.  That was the new subcompact car, which was being manufactured in India for the Indian middle-class.  The argument that I made then was Indian people want to go for there Sunday drive just like people in North America.  Their incomes are rising and their demand for oil is increasing.  When you add China into the mix, the demand for oil remains buoyant and any supply hiccup, real or perceived tends to cause the price of oil to go high.

It will not continue to rise.  Sure, India and China do create the potential for renewed oil demand over the next couple of decades.  However, there will be ebbs and flows and that’s exactly what we are in now.  The problem is it is painful in the pocketbook for those of us who have been used to cheap fuel.  For those of us who live in rural areas, it’s doubly hard because we have to rely on cars and other vehicles of transportation to get anywhere.  Governments around the world are sensitive to oil price spikes.

You might argue that oil prices are only the latest example of the crazy demand that has sent most commodities into higher-priced territory.  It is no secret that food prices have increased, but that is mainly from ” big grocery” raking off profits, which are exorbitant.  Still, when incomes are fixed, any price rise in food commodities does cause hardship.  For instance, when they are selling loafs of bread by the slice in sub-Saharan Africa instead of the loaf, you know there are problems.  Oil, may not be edible, but it is a commodity and at least for the moment it has all the publicity.

I think most of us would be quite happy if oil prices retreated to more reasonable levels.  It is a double-edged sword, because you can argue Canada benefits from higher oil prices.  Look at Alberta, look at the jobs created and look at government tax revenues.  High oil prices enhance those entities.  However, I think we know the rest of the story.  Higher energy prices, especially when they get too high kill jobs and cause much economic angst.  I once saw a gas sign that said gas was “an arm and a leg.” I hope we don’t get there this time around.  When it gets that high, I don’t think it’s good for anybody.