Personal Finance

How do high oil prices affect the average consumer?

With Oil hitting almost $80 per barrel, Canadians may be wondering how it affects them. Clearly, high oil prices have a huge effect on all consumers.

At the pump, we are paying 40% more for our gas from a couple of years ago. In 2003, gas was 80 cents per litre and now at $1.10 per litre. If it used to cost $50 per week to fill, it now costs $70 to fill. Our mini van now costs $80 to fill, which is the highest it has ever been. In global terms, the average Canadian spends about $200 per month on gas, now they will spend $280. Canadians on a tight budget as it is, will either have to drive less or spend less on other items.

High oil prices do not only hit you hard when you fill up at the pump but also at home, at the grocery store, when you book that plane ticket for your next vacation. When you think about it, higher oil prices affect every business. As a result, they will either have to raise their prices to reflect their higher cost to doing business or they will have to accept lower margins and face a lower profitability. Either way, it’s not good from a consumer standpoint when it comes to spending money. Generally, people will have less discretionary income than ever before. People on a tight budget will have to really make some changes to their lifestyle.

On the other side of the coin however, in parts of Canada like Alberta, high oil prices can also be good for the economy. High Oil prices means more revenues for the government, more employment and a stronger energy sector, which plays a huge role in the economy.

Where is oil going to go from here?

I think the reality is nobody really knows. We’ve done some research on Oil forecast opinions and there is a significant range of expectations in the future. TD Economist Derek Burelton, for example thinks the price of oil will be back to $45 per barrel by 2007. Others think oil will go the other direction to $100 per barrel. The fact is that the price of Oil is something nobody can predict and nobody can control. It’s important to remember that oil is a cyclical commodity meaning that the price will go up and down. Those that think the price of oil will never drop are fooling themselves. While timing it may be impossible, the price of oil will eventually drop.

So what can consumers do from here?

As I mentioned, we can’t predict nor control the price of oil. We are better off devoting our time on things we can control. One of the main things Canadians can do is get their fiscal house in order. Canada has been a great place to be. Our economy if growing, our housing prices have continued to contribute to our wealth, most people are working and we’ve enjoyed a low interest rate environment. Many people have enjoyed spending discretionary income.

That’s the good news. The bad news is Canadians are spending too much money. Currently, the savings rate in Canada is -3%. In essence, people are going into debt as opposed to saving money. People are not only spending every dollar they make but also they are actually spending more than they make. I think there is a wake up call coming and oil prices may be the catalyst. If you are spending more than you make, it’s time for change. Here are my top tips to consider:

  1. Pay down debts. Pay down debts from highest interest rate to lowest interest rate. Pay off non-deductible debt before deductible debt. If interest rates rise, those with more debt will hurt more than those with less debt.
  2. Do some budgeting – how much are you spending and where are you excessive? I know budgeting can be a bad word but it is necessary for financial success. Wealthy people know where they spend their money so you should too.
  3. Drive less, smaller cars, walk more, take public transport. Canadians are infatuated with their cars and generally spend too much money on their cars. Cars are not contributors to wealth because they depreciate in value.
  4. Pay yourself first. Start a savings plan. The bottom line is starting sooner than later is better. Anything is better than nothing.

What is most interesting is that this advice is really timeless. But if it takes high oil prices to get you to get your fiscal house in order than so be it. Good luck!

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