Predicting the Price of Oil In Canada

Abstract

Introduction When our recent economic history has been definitively written, the price of oil may well prove to havebeen the dominant factor not only in energy developments, but in world economics as a whole. The price of oil has been a major determinant of the rate of growth of industrial and lion-industrial nations, the timing of our recessions and their depth, and the distribution of economic power between nations, and therefore it has directly affected the exercise of political power. The future price of oil will be a pertinent factor in every sector of our industrial economy. The tremendous success of industrialization has largely depended on cheap energy. As our food becomes more and more processed and the agricultural industry more efficient, a higher and higher energy content is represented by what we put on our tables. Because it is such a basic factor, this article proposes to comment on the future price of oil. The Pricing of Oil To assess where the price of oil will go in the next few years, you must know how it is determined. In Canada our price is set by the Federal Government once or twice a year and this has been the case since January, 1974. The world increase in oil price was from $3 to $10 over a four-month period at the end of 1973. For Canadian consumers, a cross subsidy has kept the increase much more gradual. There is no doubt that eventually we too will be paying the international price of oil This is part of the current Canadian oil policy and a quick look at our decreasing exports of oil and increasing imports will show that the Federal Government cannot finance the oil subsidy for more than the next few years. Not only will we have to pay each future increase in international oil price as it comes along, but the gap between international price and our own price in Canada will close at a fairly rapid rate. For example, the Canadian price was frozen at a new level in July, 1975 for twelve months. During that period, in October, 1975, OPEC increased the international price by $1.05. The Canadian price was then increased by $1.05 in July, 1976 to incorporate the OPEC increase. Finally, the Canadian price will increase again by $0.70 in January, 1977. The Canadian subsidy, the gap between our cost and the international price, is thereby reduced by about 40%, from $4.60 to $2,65 (see Fig. 1). The first factor to evaluate is the international price of oil and how that is set by OPEC. The price of oil has long been of strategic concern to governments. Ever since oil substantially supplanted coal as a prime energy source, governments have shown a proclivity to interfere with its price.