As they say, the cure for high prices is higher prices.

That always seems to make the high prices more reasonable, Its called sticker shock we become acclimatized to paying a high price for our consumer goods.

But the truth at the heart of the collapse in oil prices in 2015, a force that will shape our personal finances in the coming year, is that we will become acclimatized to these low gas prices. In the GTA, it’s good news. The commute is cheaper and so is the cost of heating our homes. It adds up to a tax cut as good as the one the Liberals are giving us.

The downside of cheap gas is the upside to other expensive consumer goods across the board. So much for the savings established at the pump

In the west, where 40,000 industry-related jobs have disappeared, more pain is on the way because the energy rout may only be midstream. Even if it isn’t, more jobs will likely go. Until the price of oil stabilizes, the only thing companies can do is guess and keep cutting to make sure their costs stay below their falling revenues.

It’s hard to recall that 18 months ago, oil was at $110 (U.S.) a barrel. Today it’s trading under $35, two-thirds lower.  If you think about that in terms of your household, how would you fare if your family income was cut by 69 percent?

This is all about a fight for control of the world’s oil market, dominated by the Organization for Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the lead. As China’s insatiable demand for energy drove up prices, a search for cheaper supplies made sense. New technologies made it easy to drill into shale formations and fracture the rock to release oil, creating a plentiful supply of energy in North America.

A sign of the times is that the U.S. lifted a 40-year ban on the export of domestically produced oil. That is because fracking is making the U.S. almost energy self-sufficient, just as China’s economy is slowing — and so is its need for oil. In the meantime, Iran is adding two million barrels to world markets as part of its nuclear deal.

The Saudis seeing a long-term threat to their oil power have ensured that OPEC continues to produce at the same pace to keep up market share. The Saudi goal is to drive the higher-cost fracking industry under. Our, even more, expensive oil sands are caught in the crossfire.

OPEC shows no signs of standing down.

The dollar

In June 2014, with $110 oil, the loonie sat at 92 cents (U.S.). It cost us $1.09 for one American dollar. Today, it was at 72 cents, a drop of 22 percent. Which is $1.38 to $1 at the consumer level!

If oil rebounds, so will the dollar; if not, it may fall further which is something Canadians living close to the borders care a lot about. Even if you don’t live close to the border that cheap flight or vacation in the U.S. is no longer an option.

Canadian stocks

Toronto share prices are down 9.8 percent year to date. Energy stocks make up about 10 per cent of the TSX and have fared much worse. The TSX Energy Index is down 26 percent.

If oil prices improve, these shares will too.

Inflation

We climbed out of our 61-cent-dollar hole in 2000, gradually getting to par in 2009 without much inflation. Our exports to the U.S. were cheaper and so more attractive, creating profits and jobs. By substituting Mexican avocados for California ones, we energized our economy without higher prices. Cross your fingers we can do that again.

Interest rates

If we can’t and inflation starts picking up, rates may rise even though the Bank of Canada doesn’t want them to. If so, housing starts will cool, consumer spending will fall and we’ll all have a harder time.

There are a lot of ifs, and’s and maybe’s here and, as always, beware of forecasts. Between now and this time next year, anything can happen. As I stated in a previous article no one can predict the future but much speculation will spin these storylines moving forward. All we can do is live life have fun and enjoy the day as it comes.

Since gas is cheaper in your area fill up and enjoy the ride as it will not last. We know  all too well that things go up and down over night. This soon shall pass and we will be talking about something completely different in 12 months time.

www.henleyfinancial.ca

 

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