Budgeting for lower oil prices is a tall order in Conservative circles

We are often told not to put all our eggs in one basket and not to count our chickens until they hatch.  Someone should have reminded the federal government about those poultry related maxims as they set out to spend a surplus based on assumptions which included oil trading at a high price.  Now that the cost of a barrel has dropped to the point that many producers in Canada are no longer making a profit all bets are off for a surplus that has been expected and effectively spent.  The Finance Minister is refusing to budge on his prediction of a surplus that will be used for election-year goodies like boutique tax credits and income splitting for wealthy Canadians.

The price of oil began to slip last year based on US production increasing, but it was the Saudis who really got the ball rolling on cheap oil by flooding the market.  Of note, this isn’t the first time that increased output has driven down the price of a barrel, it happened in the 1980s too.  At that time, the price stayed low for years.  The lesson for any Canadian government in this can be centred on our inability to sway the international price of oil and the need to diversify our economy to protect against jolts like we are experiencing.

Not to suggest that this is bad news for everyone.  The value of the Canadian dollar has dropped along with oil prices and that is beneficial for exporters while local retailers should feel a bump as cross-border shopping becomes less attractive.  In addition to that, most consumers will be enjoying the savings at the pump which may redirect money to other parts of the economy.   That said, the price of diesel has not dropped along with that of more-refined gas which means the costs for transportation will not drop proportionately with that of a barrel of oil.

The situation with diesel is odd.   As recently as 2010 it was consistently cheaper than gas, now the gap only grows away from diesel which is hard to understand considering it requires less refining than gasoline does.   Producers argue that the cost related to low sulfur regulations have driven up the cost, but that doesn’t wash since those regulations were in place before 2010.  It has more to do with supply and a lack of production than it does with costs associated with a cleaner fuel.  At the end of the day, this will keep prices high for goods that are delivered by truck – which is just about everything nowadays.

Getting back to how this affects Canada; according to our Finance Minister it won’t.  He isn’t going to listen to Banks or the Premier of Alberta who suggest otherwise.  If he were dismissing the opinions of traditional critics such as environmentalists it would merely be in keeping with this government’s all-in approach when it comes to oil production.  By arguing against allies he is showing that there is something more at stake.  It is clear that something more is the list of pre-election goodies that have already been announced and will be campaigned on this year.   They are designed to maintain the Conservative base and hopefully grow their electoral support.