What Can We Do About High Energy Prices?

Higher oil and natural gas prices are here to stay and that may be a good thing in terms of helping us move to a more energy-efficient economy and averting catastrophic climate change. But we need a plan to safeguard jobs and the living standards of working families in the transition.

Rather than leave it all to the market, we need to take control of our national energy future and ensure that the costs of higher energy prices are fairly shared.

High energy, especially gasoline, prices are clearly now having major negative impacts on the Canadian economy and on our jobs. We have already seen major layoff announcements in the auto sector as sales of SUVs and trucks slump and in the airlines sector as fares begin to soar. Truckers and others who can’t easily pass on their costs are being pushed out of business.

Ordinary working families who mainly live from paycheck to paycheck will inevitably react to higher gas prices and utility bills by cutting into other areas of spending. The travel and hospitality industry already looks like it may be in big trouble this Summer.

This big new hit to jobs is coming on top of job losses arising from a continued very high dollar, reduced exports to a US economy flirting with recession and growing competition from Asian imports. Unemployment is on the rise, from a low of 5.8% at the start of the year to 6.1% in June; private sector paid employment has stopped growing; and economic growth has ground to a halt, falling even below growth in the US.

It is not just oil and gasoline prices but also many basic food prices which are now soaring out of sight. Home heating costs will rise dramatically this coming Winter due to higher fuel oil prices and fast-rising natural gas prices. This will hurt lower and middle income families the most, for the simple reason that they spend more than the well-off on the basics.

The fact that overall inflation is still quite low (2.2% in June) shows that the higher Canadian dollar is still cushioning us against global price movements and that it is difficult in a weak economy for businesses to pass on major input cost increases to consumers. Still, the Bank of Canada and other major central banks have stopped cutting interest rates. Instead of dealing with the economic slowdown and the credit crisis, they now seem quite prepared to see unemployment rise significantly so as to maintain low inflation.

It is tempting to blame higher oil prices (and food prices) on speculation, and there is no doubt that the hedge funds have moved into commodity futures and derivative markets in a major way. Flows of funds in and out of derivatives markets are the major explanation of why oil prices can move so far, up and down, but mainly up, so dramatically in even a single day.

Dealing with speculation will require international regulation of commodity markets and Canada should be pushing other governments to act together before it is too late.

While speculation plays a role, the dramatic increase in the price of oil is still primarily driven by basic supply and demand factors. Demand from developing Asia has been growing fast (partly due to subsidies which cushion them from global prices), as has domestic demand within many major oil producing developing countries where prices are kept deliberately low. China has just significantly hiked domestic oil prices, but it is generally thought that demand falls only slowly in response to higher prices. This has been the case in Canada, at least until very recently, because most energy use cannot be easily reduced in the short-term.

Meanwhile, world oil supplies do seem to be very tight. Even if one does not buy into the most pessimistic scenarios of ‘peak oil’, cheap conventional oil supply is running down quite rapidly, and it takes a long time to develop and bring to market non-conventional supplies such as oil from the tar sands, deep offshore wells, etc. In other words, high world oil prices are likely here to stay.

What could and should Canadian governments be doing to ease the impacts on jobs and on the living standards of working families? The Canadian Labour Congress proposes an seven point action plan.

1. Reign in the Global Speculators
Governments must take a cue from the destructive collapse of the dot com bubble in 2000 and the recent collapse of the US sub prime housing bubble. They should restrict highly leveraged purchases of commodity futures by regulating hedge funds and other traders, or impose transaction taxes on short-term trades in commodity markets on the model of the proposed Tobin tax on speculation in international currency markets. Short-term capital gains should also be taxed much more heavily than capital gains from longer term holdings.

2. Maintain Low Interest Rates
The impact of soaring energy prices on jobs and real wages is going to be worse if the Bank of Canada deliberately lets unemployment rise to forestall any threat of energy and food price driven inflation. With inflation excluding energy and food prices running at just 1.2% in June, there is, in fact, no evidence of energy-driven inflation to date.

3. Tax Surplus Oil Company Profits
Every dollar increase in the price of a barrel of oil delivers huge windfall profits to oil companies and their shareholders, since the cost per barrel of current production averaging perhaps $40 today is far below the current price. The operating profits of Canada’s oil and gas industry in 2007 came in at $26 Billion, of which less than one quarter ($6 Billion) was paid to governments in corporate income tax. There is no good reason why governments should not tax away a significant share of these high profits, at least to the extent that incentives are still maintained for oil companies to invest in added production.

One way to raise energy sector corporate taxes would be to eliminate the deductibility of provincial resource royalties for federal corporate income tax purposes, as recently proposed by none other than the OECD. As the OECD further suggests, remaining tax breaks for the highly profitable oil industry should be removed. Both of these measures would boost federal corporate income tax revenues from the oil patch.

4. Redirect Surplus Oil Company Profits to Protect Low Income Households Against Energy Poverty
Higher taxes on the oil industry should be used to finance immediate increases in tax credits for households, tilted to lower and middle income families, to provide some cushion against higher prices. High prices would still give people a major incentive to reduce their energy consumption.

We should immediately increase the GST credit, the Working Income Tax Benefit and the Guaranteed Income Supplement for seniors to cushion very low income households against rising gasoline and home heating costs.

5. Give People Real and Affordable Energy Alternatives
To reduce oil consumption, we need major new investments to expand the capacity of public transit systems, tied to Made in Canada procurement requirements. Existing transit systems can be expanded quite quickly by buying new vehicles, hiring new staff, expanding park and ride operations etc. Expansion of passenger rail will take longer but must begin.

Households (and owners of rental buildings) should be given no interest loans, repayable from lower utility bills, to immediately retrofit their houses and apartments for greater energy efficiency, including the purchase of high energy efficiency furnaces and other appliances and to pay for much higher standards of insulation. A major national program could reduce consumption quite quickly at modest cost and create many new jobs, offsetting the slowdown which is just now beginning in the residential construction sector.

Governments should support development and production of highly energy efficient Made in Canada vehicles and appliances, so that adjustment to higher prices creates jobs.

6. Re-Regulate Oil and Gas Exports and Increase Domestic Supply

We are maintaining and even increasing exports to the US of our remaining low cost, readily accessible conventional oil and natural gas resources, even as our known reserves are rapidly depleted. We should direct the National Energy Board to approve exports only if Canadian longer-term needs will be met, and re-establish the pipeline capacity needed to bring Western Canadian oil to central Canadian markets to reduce our dependence on imported oil.

All tar sands production should be upgraded and refined (or processed into petro-chemicals) in Canada so as to enhance national energy supplies and national energy security while also maximizing Canadian economic benefits from our resources.

7. Focus Climate Change Policies on the Large Industrial Emitters
The sharp run up in oil and gasoline prices and rising natural gas prices already amount to a significant carbon tax on working households, even though almost all of the growth in greenhouse gas emissions has been driven by the oil industry and very affluent Canadians.

Rather than impose even higher energy prices on working families through a carbon tax, the immediate focus of our climate change policies should be to reduce the emissions of the “large final emitters”, especially the energy intensive tar sands and coal fired power plants. Regulations capping emissions must force investment in new technologies and revenues from selling emission permits should be directed to helping industry adjust and to cushioning lower income households against price increases. Further tar sands expansion should not take place unless the industry can reduce its total emissions by investing in carbon capture and storage.

14 comments

  • Andrew, you’re a very smart guy, so I take it you are not implying that carbon taxes would impose higher prices on working families, but regulation or auctioning permits would not.

    Because I am 100% certain that if regulations are put on large final emitters, or if government auctions emission permits, industry will pass on some of the cost to consumers. Actually, as much as possible.

    I realize that the federal tories and NDP (and BC NDP) are going to try to make political points by implying otherwise, but they’re spouting nonsense when they do so.

    Also, rising oil prices do not amount to a carbon tax. Quite the reverse actually, as they will enable dirtier alternatives (tarsands, oil shales, gasoline-from-coal) to come on stream sooner, thus putting upward pressure on CO2 emissions.

  • Andrew Jackson

    I agree. Caps on the large final emitters – notably the coal plants – would indeed increase consumer costs via higher power prices. But not by as much as a carbon tax which also applies to natural gas for home heating and more modestly for power generation. And LFE controls on the tar sands would mainly impact export prices. I also agree that higher oil prices are not a carbon tax insofar as coal prices are not affected – which is why I think we should initially focus our reduction efforts on coal fired power generation and the tar sands.

  • Whatever happened to the economic tradition of measuring tax incidence, and of contrasting the impacts on prices of per unit versus lump sum taxes? People can glibly can say that industry will pass on all the costs to the consumer. But that is not generally the case, and I thought economists knew that.

  • If we are serious about saving our environment we need to look at our excess and what is driving oil and gas prices up. Its the Never Ending War that has no winners just dead soilders and a thirst for OIL and GAS and lots of Cash. It is the major contributor to harming our environment and the deaths of many and the loss of jobs and the high price of food. If we want prices to come down PEACE is the answer. Do you seriously think Iran is going to fill those army tanks so someone can come kick their ass? Get real and what can I say Bush Off. Peace keeping Canada is going to help fuel that gas guzzling, carbon fuming monster they call war. An annoucement over the radio last night confirming plans to expand tar sands operations. Have a good day given the climate permits.
    \How many Conservatives does it take to screw up a light bulb?

  • I was just listening to advertisement number quadrillion over how the tax was necessary evil but how lucky we all are. Mr. Campbell says he implemented this tax for the children of BC and their futures in this province. I guess those are not the same children Mr. Campbell government forces kids to eat a steady diet of expired food products at a very special store for the poor where all the cities garbage is taken and sold. Who is this store well it has the Governments stamp and that gets you into the store shopping. What happens if you don’t want to eat that garbage? Starve. I am looking into possibly hoping into my scooter and go through the store, say weekly and pick up those food products that are not only deadly but without nutrition. Let me know what yo think. I know there are some real food scares going on in Canada, USA, and Mexico. What BC’s KIDS are worthless and not deserving of proper food and nutrition. Have you ever seen some of those priceless little faces. You would have a hard time saying that if you did. Mr. Campbell is a screw up as a politician as mere definition is someone who makes everyone feel like they have gone a mile for them yet they have barely given them an inch.

  • Oh yes as I was saying I’m thinking of going shopping and posting it on line and give out alerts and foods to stay away from especially when they have prolonged shelf life. There is going to be a real need as food is already scare for these people and is only going to get harder with the new minster, Coldman or as referred by many as the man with the ax. I talking with the community about ways to help this situation instead of creating just another organization that feeds of the poor. Libs are good at that.

  • one last thing there are major food concerns in Canada, USA and Mexico I’m thinking those concerns should also involve the kids of BC.

  • Economics affects our lives in hundreds of ways that we often don’t
    realise. It ‘s true that US economy is in real bad shape right now
    and obviously, it is going to get very, very bad and it may get
    worse. Interest rates are going up regardless. That’s what happens
    when you have inflation. So, interest rates are not the issue. Gold
    went up along with interest rates during the 70s. Now, whether we have
    inflation or deflation, I truly don’t know. However, it’s safe to
    assume that if we do get deflation, that it’s not going to be some
    minor thing. As far as your money goes, the kind of inflation we’re
    experiencing can be a real killer. It drives up interest rates. It
    destroy purchasing power. It can destroy your nest egg. It can affect
    wages, housing, etc. I think it’s also a big help if we can have more
    knowledge and awareness and be able to track the to track the impact
    of the fiat money systems that affects their lives. I found the
    website http://www.viritix.com or Viritix Inflation Tracker which I think can
    help us understand more about inflation and how it affects them, it
    aims to track inflation and give individuals an indication of how
    inflation is affected by what they spend their money on’. Do visit the
    site and let us know how you get on.

  • Canadians needs to take control of all their natural resources as proposed by the Word Economic Justice WEJ – and NIRMO – The New International Resource Management Order. It is the only way to bring back order and proper management of world’s scarce resources under the control of ordinary people not greedy stateless, boarderless- Multi national corps.

  • I came across a scientific report calling Canada a Haven of fresh Air. The Conservatives light bulb input was more than sufficient for a Country listed as the number one place in the world to live where global warming will have the least impact. This is very good news for us fortunate enough to live in Canada and making it a very attractive place to live. Not so much in BC though because of that stupid tax which there was no need for. Living under a dark cloud move to BC Mr. Campbell will arrange it with his bleeding of our pockets. Bad News, real bad news for Afganstan with all that war going on Mr. Bush is almost destroyed their environment. So why is Mr. Bush over with his tanks, jeeps, and destroyers anyhow? To destroy a continent? Axe the Tax, Axe the War, Axe the Liberals. There will be an almost immediate reaction gas prices will come down, family members will come home, and we quit helping destroying our neighbors homelands.

  • And I was just so disappointed in Mr. Dion when he jumped on the band wagon to bleed the hearts of Canadians at a time when then most need your assurance they live on the most wonderful place on earh, well as far as the environment goes? Want to move to Afganastan?

  • The report is available at climate@maplecroft.com

  • Colleen, if you look at that study you will see that Canada rates number one because only our wildlife and our poor will suffer enormously under climate change, and on a global scale our poverty rates are relatively low. That may be fine with you, but I don’t think it will be fine with most Canadians, not to mention the devastation we would be contributing to in less fortunate countries.

  • Kudos for putting this together, Andrew.

    I tend to see high energy prices more as an opportunity for Canadians to take advantage of than as a problem that we need to do something about. As proprietors of vast Crown-owned energy reserves, Canadians should welcome high prices not only for ecological reasons but also for economic reasons. Unfortunately, Canadian governments have allowed the proceeds of expensive energy to mostly fall into oil-company coffers rather than collecting them on behalf of the citizens to whom the resources belong.

    As someone who was advocating higher resource royalties and taxes before they were hip, it is great to see the OECD taking-up this important cause. Of course, the federal government should end the oil industry’s preferential tax treatment. I would also support reinstituting a higher corporate income tax rate for non-renewable resource industries.

    However, I am not convinced that eliminating the deductibility of provincial resource royalties is the best way of collecting more revenue from these industries. The OECD’s position is apparently that royalties should not be tax-deductible unless they collect pure economic rent. It seems to me that, whether or not royalties collect pure rent, they are the price charged by resource owners for businesses to extract the resources. Like every other input a business buys, this cost should be deducted from revenues to calculate taxable profit.

    Until recently, the progressive position was that businesses should be allowed to deduct only actual provincial royalties instead of the more generous “resource allowance”. Now that the federal government has implemented this change, it seems odd to go after the deductibility of royalties.

    If provincial governments greatly increased royalties to cut into federal tax room, then one might reasonably consider terminating deductibility. This is what prompted the federal government to replace deductibility with the “resource allowance” in 1974. However, the issue today is that provincial royalties are too low. If anything, deductibility gives provincial governments a much-needed incentive to raise their royalty rates to more appropriate levels.

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