Why high gasoline prices are good news for Canada

Or at least, not the unremittingly bad news that they would appear to be from stories like this:

Gas prices 'sucking energy' out of Canadian households: The long upward march in gas prices since late 2010, which has helped keep Canada's resource-based economy chugging, is also equivalent to a 7% hike on the income tax bills of Canadians in 2011, a CIBC World Markets report said Monday.

This will impair consumer consumption growth rates, bad news for Canada’s retail sector, Benjamin Tal, deputy chief economist at the CIBC, said in the report.

"As a share of disposable income, spending on gasoline is now estimated to be less than half a percentage point shy of the peak seen in 2008, and it has already reached that peak when measured relative to total retail sales," Mr. Tal said.

Very grim news, until you start asking yourself "So where is all that money going?" The answer is - to a rough approximation - to Canadians. Moreover, a measurable chunk of the extra money US households are paying for gasoline is also going to Canadians.

Regular readers will of course recall the beer and pizza story of commodity prices, the terms of trade and Gross Domestic Income; the basic result is that higher commodity prices improve our terms of trade and have been an important factor in the growth of purchasing power. Here are the updated versions of the graphs in that post:

Higher gasoline prices are part of a relative price shift. Gasoline prices are going up, but other prices are going down. The net effect on Canadians' purchasing power is generally positive - except perhaps for those whose gasoline expenditure shares are larger than average.

 

Comments

[jg]

The report actually mentions the effect of rising prices on the median household. the point is that lower income households have a largely inelastic demand for gasoline and the rise in prices will not be offset by decreases in prices elsewhere (for them). Wealthy households will be able to capture the gains from improving ToT. Canada's terms of trade will improve, but there is an important re-distributive effect of price rises at the gas pump.

[Jim Sentance]

If only some political party would campaign on some kind of "tax shift" that would compensate the lower income families for this increased cost of oil based products.

[Stephen Gordon]

*Snicker*

[Min]

Talt: "As a share of disposable income, spending on gasoline is now estimated to be less than half a percentage point shy of the peak seen in 2008, and it has already reached that peak when measured relative to total retail sales."

Stephen Gordon: "Very grim news, until you start asking yourself "So where is all that money going?"

Aren't you assuming constant spending?

[Mandos]

We loveses our price changes. All price changes are WONDERFUL!!!

[westslope]

Jim: The poor could use some more exercise.

Then they would be more productive, less sick, earn more income, maintain better mental acuity, make better financial decisions and live longer.

[Mandos]

Or they could just die stuck at home. Canada is not bicycle heaven. FCOL.

[westslope]

Mandos: Once upon a time, Canadians used to walk.

The welfare state regime already pays people not to work and finances regional asset collapses. That is enough damage isn't it? Venezuela heavily subsidizes fuel costs and per capita income stagnates, despite rich oil reserves.

A galloping obesity epidemic is threatening to make life miserable for all sorts of Canadians including aboriginals in communities experiencing 60% unemployment rates. The descendants of colonial settlers in both rural and urban areas are increasingly in extremely poor physical condition. Even the children of Asian immigrants are starting to look like plump footballs.

Screw the cake. Let them walk! Among other benefits will be less road congestion impeding the way of public emergency service crews such as ambulances.

Canadians should stop giving up on poor people.

[Nick Rowe]

Min: "Aren't you assuming constant spending?"

An increase in oil prices reflects an increased demand for Canadian exports. AD increases. The exchange rate appreciates (if the Bank of Canada responds to keep inflation on target) to offset that increased AD. Unless the Bank of Canada screws up its response, the assumption of constant spending (i.e. AD) would be a good one.

Mandos: "We loveses our price changes. All price changes are WONDERFUL!!!"

Come on now. If you are a net seller of apples a price increase is good; if a net buyer it is bad. If neither it is approximately neutral. But if there's a shock to demand or supply, then yes we should love a price change in response. They are wonderful responses, given the circumstances, and much better than the alternative. Adam Smith figured this out a long time ago.

[Mandos]

Westslope: Leaving aside the reasons for the obesity epidemic---which is at least partly attributable to access to low-quality food, few sources of stimulation, etc, let me put it this way: that is a matter of urban planning. I lived in the suburbs in the USA almost ENTIRELY on foot for five years, groceries two miles away, work two miles away in another direction, and so on. I did not own a car. It did not make me particularly thinner, just less productive. A lot less productive. And possibly in worse health. I know what of I speak. This is not some kind of hunter-gatherer paleolithic life. It does not make you healthier in the modern world.

Your punitive attitude betrays an ignorance of why the poor and in poor health, and why they are poor. It's a recipe for more Kimberley Rogerses, not svelte poor people. In the modern world, THAT takes public investment including the desire to PLAN and transform the nature of our living spaces, first and foremost.

[Mandos]

Come on now. If you are a net seller of apples a price increase is good; if a net buyer it is bad. If neither it is approximately neutral. But if there's a shock to demand or supply, then yes we should love a price change in response. They are wonderful responses, given the circumstances, and much better than the alternative. Adam Smith figured this out a long time ago.

I don't bow before the market deity and believe a priori that His dictates are moral and good. Sorry.

[Mandos]

(And by market deity, I wasn't necessarily referring to Adam Smith...)