Calgary — As oil soars, Canadians have been consoling themselves with the thought that at least crude is relatively cheaper than during the energy crisis of the early 1980s.
Then, a toxic economic brew of costly oil, double-digit inflation and soaring interest rates plunged Canada deep into recession. For months, economists have been singing the same refrain: Don't worry about another similar recession. And be happy that oil is still below the heights it hit in the early 1980s, once inflation and efficiency gains are taken into account.
It may be time to start worrying. Oil prices in Canada are now higher than during the worst of the 1980s energy crisis, even accounting for the effect of inflation. And crude is rapidly approaching its all-time peak price — by any definition, a danger zone that ratchets up the peril of inflation and recession.
Even without any record being breached, some economists believe crude prices are elevated enough that they threaten to push global economic growth into low gear. “The current level of oil prices is sufficiently high that it's posing a global economic risk,” said Craig Alexander, deputy chief economist at Toronto-Dominion Bank.
Yet, Mr. Alexander's moderately pessimistic assessment is based on the idea that prices are still relatively lower today than 25 years ago.
The notion that the cost of crude is lower now than in the early 1980s is true in some parts of the Western world — but not in Canada. Then, the federal government's National Energy Program capped the selling price of oil, limiting expenses for consumer and industrial users — but slapping a ceiling on revenue for the oil patch.
“The oil industry never had a chance to capitalize on those high prices,” said Onno DeVries, general manager of oil sands and oil markets at the Canadian Association of Petroleum Producers.
So, as world oil prices surged, the cost of oil in Canada lagged, never rising as high or as quickly. The result is that Canada's peak price for crude in that era was significantly lower than today, even after inflation is taken into account.
According to figures from the Canadian Association of Petroleum Producers, the highest NEP-era price was in 1983 — $59.27 (Canadian) a barrel in today's prices. Friday's equivalent price: $79.82. (Those figures don't factor in transportation charges and currency conversion needed to make a direct comparison to world oil prices.)
That means consumers and businesses today are paying about a third more for oil than they did in the 1980s. But there is a catch, as Mr. Alexander points out: Each barrel of oil goes a lot further than it did two decades ago, reflecting both gains in energy efficiency and the growth of the services sector.
Roughly speaking, the Canadian economy is 40 per cent less energy intensive today than during the early 1980s, meaning the same amount of economic activity consumes that much less oil. However, most of those gains have resulted from the surge in the growth of services, and the benefit of the increased energy efficiency is spread unevenly through the economy.
Once energy efficiency is taken into account, today's consumers and businesses are indeed better off than in early 1980s, but not by nearly as much as many economic analyses have claimed. On this basis, the oil of the early 1980s is about 25 per cent more costly than today.
Put another way, crude prices on the world market would need to hit about $81 (U.S.) a barrel to reach the levels of the last energy crisis. A $15 jump from Friday's close of $66.13 on the New York Mercantile Exchange would be substantial, but is consistent with some forecasts made by commodity analysts.
However, even if oil prices were to rise that high, today's economy would still be better off, Mr. Alexander said. The reason is that inflation is under control, unlike the galloping price hikes of the late 1970s and early 1980s. The hard-earned reputation of Western central bankers as inflation fighters, and the resulting modest inflation expectations reinforce each other and make it unlikely that the rest of the debilitating brew of the last energy crisis — soaring inflation and high interest rates — will reappear, he said.
© The Globe and Mail
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