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The Real Price Of Oil

In one of the first

There was no way, I argued, that as a world would we be able to maintain the level of oil production required to fuel the fleets of privately owned cars without significant damage to the environment and the economy. I also noted that it was a completely unrealistic expectation - as a culture we are so wedded to the idea of car ownership bequeathing status upon an individual that we would never surrender the keys to our vehicles.

At the time I think the price of gas at the pump in Canada was flirting with seventy cents a litre - roughly $2.80 a gallon - now here we are three years later and the price has pretty much doubled as it skitters around the $1.40 per litre mark - $5.60 per gallon. Now even if the only economic impact on us was reflected in the amount we were paying out at the pump that would still take quite the bite out of a family's budget. I don't know how many times people have to fill their gas tank in a week but let's say it's twice a week and your tank holds forty litres, it means your dishing out a hundred bucks a week to keep your car in fuel.

The thing is that what your paying at the pump is only a fraction of the total that's being sucked from your wallet because of the escalating cost of oil. I'm sure you've noticed that your grocery bill has risen substantially over the past few years and a good deal of that has been because of the rise in the price of oil. At each stage in the line, from point of origin to the grocery shelf, the cost of fuel has impacted on the cost of production, and therefore on the cost charged for the final product.

A farmer is having to pay more for the fertilizer he spreads on his field because of increased shipping costs and increases in the manufacturing costs caused by the rising fuel prices. He's also having to pay more for the fuel that runs all his equipment, that heats his barns, and that ships his product to market. If the product is packaged in a factory; frozen, canned or processed, those cost have increased due to the amount that it's costing the factory to pay out for powering their equipment and shipping the goods to market. Finally the supermarket you shop at not only has to absorb all those costs, it's also having to pay more just to stay open because of the cost of fuel.

All those costs show up in your grocery bill, resulting in your dollar buying far less at the grocery store then did it even a year ago. However, you don't have to worry, because according to the people who monitor inflation, food costs aren't important enough to be factored into the annual inflation rate that they use to tell you how healthy the economy is. Haven't you ever wondered how the annual inflation rate can only be one or two per cent when your grocery bill seems to have jumped by twenty per cent? Well now you know why.

It turns out though that we've only just begun to feel the economic impact of the rising price of oil. According to a survey of Canadian businesses released by the Bank Of Canada, (the Canadian equivalent of the American Federal Reserve, responsible for setting national interest rates), yesterday over forty-two percent of companies in Canada said price increases for customers will pick up steam over the next year. Consumer prices have remained fairly stable until now because of competition and companies being willing to swallow the costs. (Canada has also been helped out because the increased worth of our dollar against the American has kept manufacturing costs lower last year)

However that's all about to change and we're about to see the cost of everything start rising. With consumers already starting to restrict their spending habits because of the increased costs at the pump and in the grocery store, it only stands to reason that an increase in the cost of consumer goods is going to slow the economy even more. So if you were a business you'd be thinking about drawing your horns in, spending less money, and looking for any way possible that you could cut costs so that you could at least minimize these increases.

Yet the same survey that showed businesses getting ready to jack prices up has them saying that their sales are going to increase this year, and they are spending money accordingly. "Business expectations are being set up to end in tears" says Derek Holt, vice president of economics at Scotia Capital, "They may be doing the entirely wrong things". Which is as nice of way of saying that they have their collective heads up their collective asses as you can get. When you factor in the fact that both the American and Canadian economies are already grinding to a halt we could be heading into not only a recession, but a period of high inflation as well.

In spite of all our attempts at finding new sources of oil, whether the tar sands of Saskatchewan, the Alaskan tundra, or offshore drilling, it's not going to be enough to sate our demand. Prices are going to continue to escalate and our economies will continue to stagnate until they grind to a halt. Instead of making idle promises about "securing" oil supplies, countries need to start figuring out how to wean us off fossil fuels before it's to late.

Now about your car...?

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