One big emerging theme in Oilpocalypse 2015 (I'm thinking of getting T-shirts made) is that it has morphed into a major threat to the stability of Canada's teetering mountain of household debt. A good story, makes for gripping headlines, and it isn't hard to find signs to support it. But maybe we're looking at it all wrong. Maybe oil's plunge could give Canadians an avenue to some welcome debt relief.
I can already hear hundreds of readers wondering out loud whether I took a puck to the head in my Misguided Economics Writers' Hockey League (MEWHL) game this week. After all, when the Bank of Canada gobsmacked the financial markets with a thoroughly unexpected interest rate cut just two weeks ago, a key part of the rationale was that the destructive forces of the oil shock on the substantial energy-related segments of Canada's economy posed a significant threat to many over-indebted households – maybe even opening the door for the kind of financial-sector instability that the central bank has long feared. The high-flying housing market in Calgary is already in free fall – which, coupled with cuts to spending and jobs that the big energy companies have announced, provides instant and ample grounds for such fears.
Meanwhile, the central bank just precipitated a lowering in borrowing costs for Canadian households that already have collective debts equal to a record 165 per cent of disposable income – priming a debt pump that is in no need of any such priming. While the cut might help prop up Calgary's at-risk mortgage holders, it could just as easily exacerbate the already serious housing excesses in the likes of Toronto and Vancouver (which are both bigger markets than Calgary, I might add).
Yeah, I've seen it. I get it. It ain't the prettiest picture ever painted.
But come along on a little mental stroll with me. As many economists have pointed out, regions (and their consumers) that are less beholden to oil are getting a bonus from the oil shock, in the form of deep discounts on their energy costs. (For that matter, so are the consumers in the energy-heavy regions, even if growing numbers of them have other concerns on their minds.)
This represents, essentially, an increase in savings. And increased savings are something Canada could use in its quest to bring household ledgers back into a healthier balance.
Canadians' saving rate – which is calculated, simply, as what's left over after you subtract household consumption spending from household disposable income, expressed as a percentage of disposable income – was a thin 3.9 per cent in the 2014 third quarter (the latest figures available), its lowest in four years. It's not nearly as bad as it was in the mid-2000s, but it's not enough, and it's been heading in the wrong direction for the past two years.
Enter the oil savings. Yes, consumers could just spend this money on other things – which would provide a handy economic lift to at least partly offset the drag from the oil sector.
But let's say they don't instantly blow it all. As I wrote in last week's column, this seems more likely, as beneficiaries of oil shocks typically aren't in a big rush to spend their windfall, there's nothing putting pressure on them to do so. That might be especially true in a national economy that suddenly looks like it's on shaky ground; that's the kind of thing that can turn consumers a bit defensive.
So whatever didn't get spent is, by definition, additional savings. The saving rate doesn't distinguish between money put into a Tax-Free Savings Account, stuffed under a mattress, applied to debt or even ritualistically burned. But the rational choice for the heavily leveraged would be to pay down some debt. And while anyone who has been to a mall on Boxing Day would be hard pressed to call Canadian consumers "rational," it's reasonable to assume that at least some of the found money from all those fuel savings will make its way to the credit-card balance – especially for the squeezed consumers who need it most, and are at the highest risk.
So how much of might we be talking about? Well, consider that gasoline alone makes up about 5 per cent of Statistics Canada's basket of goods for its Consumer Price Index; so, a 30-per-cent drop in gasoline prices (which is about what we've experienced) represents, by itself, a 1.5-per-cent decline in overall consumer costs. Household energy utilities make up another 4 per cent of the CPI. And then there are the energy inputs in a wide range of other consumer products, where savings could be passed along to the consumer. It could add up to a meaningful chunk of change.
At the very least, oil-related savings might help offset lost incomes in oil-sensitive segments of the economy. And they could provide a timely valve to release pressure on household debts elsewhere.