Tom’s Take: The big (oil) shift

As I write this the West Texas Intermediate (or WTI) price for a barrel of crude oil is about US $57 per barrel.

Factor in the discount rate for western Canadian crude and it means Alberta oil is selling in the mid $40 range. The Dow is down 315 points, the Toronto Stock Exchange about 200.

On every level imaginable, this could change everything. For the sake of mere speculation, let’s assume this drop is real and with us for a while.

For better or worse the world runs on oil. Economies, politics, war and peace are all tied to the oil economy.

This sudden, massive and likely lingering plunge effects all of it, and could well create whole new classes of winners and losers.

In the geo-political power game, the West mostly wins. Its foes don’t fare as well.

Cheap oil undermines the foundation of the Russian economy and by extension the political future of Vladimir Putin. An angry population and a worried, and suddenly poorer, group of oligarchs may look elsewhere for leadership.

They may also determine that pursuing their push into Ukraine and other nations is just too expensive, and frankly not worth it.

Iran too depends on oil revenues to support the repressive religious regime, and to build nuclear centrifuges. Take away the money, and both could collapse.

Finally the hubris of Venezuela will be tamed when the socialist regime there starts running short of money to quell opposition.

There are downsides of course. Wounded regimes don’t always just fade away. All too often they lash out against foreign enemies, real or imagined, to distract their populations. That could happen, especially in Russia or Iran, but it would be from a position of weakness not of strength.

The West would easily survive.

Low oil prices could create a political shift in Canada

Here at home, the changes may be dramatic.

On an individual level, Canadians will initially feel pain if the drop is not short-lived. Retirement savings inevitably include investments in banks and any number of other institutions that are themselves invested in oil.

They will all take a hit and so will the retirement plans.

Albertans especially will feel pain. Already the provincial budget is cratering with an $8-billion shortfall, and that was before this week’s free fall in oil prices.

Premier Jim Prentice has walked into a box canyon of his own design. Having told his province that he won’t touch health or education or a host of other basic services, he left unanswered where he will find the money to make up the shortfall.

Raising taxes is the kiss of death in western Canada, but it may be the only way out.

Politically there’s an even bigger change coming.

For more than a decade, the locus of power in Canada has been moving west, as have many of the best and brightest people that Canada has to offer.

But if the drop in oil lasts for more than a few months, that might shift again, back to central Canada. That part of the country is a net user of energy, and cheap oil and a low Canadian dollar is a potent elixir for the manufacturing sector, which is largely based in Ontario and Quebec.

The new reality of oil also may present Ontario with the silver bullet it needs to fix its very damaged economy. The decline of oil prices means a steep drop in the price of gas at the pumps.

Think of it as a massive tax break brought to you by Saudi Arabia.

So Ontario and Quebec could simply slow a bit of the drop by imposing say a 5-cent-a-litre tax on gas. The consumer still gets a huge savings, while the provinces use it to pay down the deficit and invest in critical infrastructure.

Naturally, if we wake up next week to discover that oil has soared back to $100 a barrel, this speculation will be nothing but fiction. But if the experts are right, and this persists for a year, then change is inevitable. However the landscape develops in the next weeks and months, oil will be the story of 2015.