What happens when oil prices go down instead of up

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Luck plays a part in any political career. Napoleon famously asked of a general recommended to him for his military prowess: "so he is good -- but is he lucky?"

A barrel of oil that was selling in the US$110 range last summer, now sells for less than US$70. That was not the future Stephen Harper and his ruling Conservatives expected when the party leader touted Canada as an energy superpower, based on massive petroleum reserves -- the world's third largest after Saudi Arabia and Venezuela -- locked away in the bitumen sands of Alberta.

But there is good news for the Conservatives in the bad news.

Lower gasoline and heating oil prices will put money into the pockets of strapped Canadian workers, helping to drive up consumption and employment.

Lower oil prices are good luck for Stephen Harper because increases in domestic consumption from windfall gains for consumers will partially compensate for the wrong-headed cuts in government spending made by his government -- without ever replacing the valuable services lost, say to veterans, or to women's organizations.

While Harper has been counting on new tax cuts -- funded by government austerity -- to produce electoral prosperity for his ruling party, a weakening economy, especially in Ontario, would ensure he loses his majority in the planned October 19, 2015 federal election.

Outside intervention in the form of falling oil prices could give the economy the boost it needs to avoid a recession induced by government austerity. Of course there is a downside as well. Lower oil prices increase production of greenhouse gases and reduce investment in green alternatives to fossil fuels.

The price of oil matters because it is a big price: when it goes down, so do prices across the board; simply because energy costs are a big part of all prices.

And the oil price is linked to another big price: the foreign exchange rate. When the price of oil goes down so does the value of the Canadian dollar against the American dollar. Foreign exchange traders have cued on lower than expected oil prices to drive the Canadian dollar down below 90 cents.

Since oil prices (and those for many exports) are set in U.S. dollars, when the Canadian dollar falls by 10 per cent, exporters get a foreign exchange dividend of 10 per cent (represented by the 10 cents more per Canadian dollar one U.S. dollar will buy).

A lower Canadian dollar makes purchasing in Canada more attractive: cross-border shopping becomes more an American than a Canadian pastime. Indeed, the Harper Conservatives can hope that the fall in gasoline and other prices will drive up American consumption, and translate into increased U.S. sales for Canadian producers, reversing a decade-long slump in Canadian exports.

God-given Alberta bitumen deposits ended up fuelling foreign corporate control of Alberta resources. With the price of oil below US$70 a barrel, and possibly headed as low as US$45, exploiting the bitumen sands become less profitable. While some companies need an oil price of US$65 in order to break even, at that price, giant Canadian Oil Sands Ltd will be losing money..

The bad news for the Harper Conservatives is that the $169 billion in bitumen sands investment from 2001 to 2012 is now in jeopardy. A slumping Alberta economy would hurt the overall performance of the Canadian economy, just as a strong Alberta economy has disguised regional weaknesses.

Spending in the Alberta sands has accounted for a big percentage of all energy and mining spending in Canada in the first decade of this century. By 2011 energy and mining investment equalled all other Canadian business investment.

Because of low oil prices and weakened commodity prices generally, resource exploitation, the motor of economic growth for the Conservatives, is slowing down.

The Alberta government was forecasting new investments in bitumen to total over $200 billion in the period from 2013 to 2022, but at current price levels that will never happen, and keeping existing operations going will be a challenge.

Royalties paid to the Alberta government are on a sliding scale. On mega projects companies pay a paltry one per cent when oil is priced at $55 a barrel, and a bit better nine per cent when oil is at $125 a barrel. In short, if it can be sold, the people of Alberta will be giving away the bitumen.

Already Alberta crude oil prices are below world levels because of the difficulty of getting production to markets. And the various pipeline proposals to remedy the situation all face serious regulatory difficulties and solid opposition on environmental grounds. Even if somehow they can be made acceptable, Keystone XL, Kinder Morgan, Northern Gateway and Energy East need strong oil prices to make profits.

The Harper government can hope that slumping oil prices will boost the Canadian economy and make them look good temporarily. The timing is right for the 2015 election if they should be so lucky.

The energy superpower strategy does not look so smart.

Duncan Cameron is the president of rabble.ca and writes a weekly column on politics and current affairs.

Photo: Sten Dueland/flickr

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