Impact of Cheap Oil, a lower Bank of Canada interest rate, and how it can help you.

Caveat: I am not, nor do I have any experience as, an economist or financial adviser.  This is just my view on the topic.

          Since June 2014, the average price of gas in Canada has dropped $0.50/litre.  50 cents!  I'm not that old and I can't readily recall the last time it was that low.  If you look at the attached link ( 24 month Canadian gas price ), you can see that the price of gas has paralleled the drop in oil prices.  If you heard the recent announcement from the General Secretary of OPEC, the reason for the drop in the price of gas is the fault of the United States of America and its pursuit of shale oil.  The US energy policy, in my opinion, is driven by defence strategy; I've heard the the US Navy estimates it alone uses 1,000,000 barrels a day.  The realpolitik of weak oil prices means nations, like Canada and Russia, that depend on oil revenue as part of its budget calculations did not foresee this stall.  And that will affect their budget forecasts.  But this isn't about how cheap oil is affecting the bottom line of the nation-state.  It's how the nation-states' bottom line will affect you.

          From an economic standpoint for the man on the street, the cascade effect is going to be bigger than most people think.  All we have to do is look at how oil producers function; they are businesses after all.  When oil prices drop below a profitable margin, the less productive oil wells are capped first, laying off those crews.  That loss of revenue not only affects the individual employees, their families, their communities, the communities the work sites are located in and their debtors (read banks they have borrowed from to buy cars and houses).  That means loss not only loss tax revenue from oil sales, but loss of personal tax revenue and extra funding put out for social support systems.  The reality of cheap oil and its fiscal impact upon nation-states and people is like a rogue wave when sailing, there is only one way to face it and that's head on.  

          It used to cost me around $90 to fill my tank from empty; and because we drove to the nearest park and ride, in addition to running kids to activities 4-5 times per week, we were filling up every 7-10 days.  That's anywhere from $270 to $360 a month in gas alone, plus I was still paying for two adult bus passes (an additional $200 per month).  That was half a pay cheque just on transportation. Now with gas around $0.85/litre, it only costs about $55-$60 a fill, automatic gain $30 every week or so; that's like me not paying  my kids their allowance every week.  My household income isn't tied to the oil industry at all.  So for me, right now, low oil is a good thing; but that doesn't mean I can sit back and live the good life on all this 'extra' money.

          There's no such thing as spare change or 'extra' money in the budget, there's just creating room to save or paying off debt.  An article from CBC about yesterday’s Bank of Canada announcement regarding interest rates made it pretty clear on how we, as consumers are going to be affected.  Basically, no relief for consumer debt.  But that doesn't mean we aren't afforded an opportunity to create leverage for ourselves. By taking the excess from your transportation (read fuel) expenses and, hopefully, lower prices on store shelves, we have more cash to service our consumer debt, i.e. extra payments against credit cards, lines of credit, or even bills that are in arrears.  It is NOT the time to take on more debt because of lower prime-rate rates.  And with a lower Bank of Canada rate comes lower interest rates on savings account.  

          Think about it where are you going to have more gain with $100 a month?  Put it in a savings acct with, what, 0.75% annual return?  (Right now, it's actually 0.000%.)  Or against $10,000 outstanding on a credit card with a 20% annual interest rate?  For easy math, we won't use compound interest.  

So for your savings account,  that's roughly $0.75 per year for every $100 deposited (or $9 in interest).  

Or put it against your credit card (we'll assume you are paying the minimum), $10, 000 last year cost you $2,000 in interest (pretty much your entire budget for paying that credit card). This year, $10, 000 - an extra $100/ month means you end the year with only $8,800 in outstanding principle, or 12% less; that means you're minimum payments are 12% lower too. 

          Even if prices for everything else goes up and that $100 gets used by other expenses, you still had $2000 dollars budgeted to pay the interest on your credit card; but because the annual interest is now only $1760, you have now budgeted $240 to put against the principle (remember the no such thing as 'extra' money), all because you leveraged the lower prices of gas and necessaries.

          I can only use my experience and observations to demonstrate the principle of my argument.  Another change we made that has helped - changing the way we commute; we now catch the bus at the stop at the end of our block.  I have driven my car to the transit way twice since returning from Christmas vacation, that's right - TWICE!  The last time I bought gas before I filled uplast Thursday was on Jan 2nd.  Nearly three weeks on one tank of gas.  Now, this situation is unique to me because I live in a city and am close to public transit terminals and stops.  I realise some of you may not live close enough to take such advantage but there is still opportunity to create  leverage for yourself without getting a second job or selling things off.   Add to that the fact we should be able to expect lower costs for necessaries on the store shelves (hopefully), we are provided with extra cash to attack our debt.

          If I can go from filling my gas tank, at $90, every ten days to filling it every 21 that means I'm going from 37 fills (roughly $3,300 a year) to 17 (roughly $1,550), it's like I got $150 a month pay raise; and all I did was maximize the use of my bus pass, which I was paying for anyway.  And that doesn't even take into account the lower gas prices.  Last Thursday, I didn't even pay $55 to fill up and my fuel gauge was flat-lined. 

Make hay while the sun shines.

          Changes in the economy don't always turn in our favour, and never last as long as we would like.  Take advantage of them immediately.  Market changes like this allow you to apply leverage against your debt which, while not sexy, in the end means a less stressful life with more financial freedom.  

And that's an advantage everyone could use.