I get a little nervous when I see headlines suggesting oil could hit $150 a barrel, if Israel attacks Iran.
Beyond the nuclear implications of such an exchange, oil at that level could be a bullet to the chest of many economies that are struggling to get back on their feet. In particular, oil at that level could be a tremendous blow to both the European and American economies.
It wasn't that long ago - July 2008 in fact - that oil did indeed hit close to that level, topping out at $147 a barrel. And by the next spring, it had dropped to $38 a barrel. Part and parcel of this collapse was the recession walloping the global economy, a recession spurred by rising fuel prices.
So despite the fact a strong oil price helps out the sector I report on, too strong a price is not a thing to wish for, but rather one to avoid.
There are certain tipping points where the economy simply can't pay anymore. The laws of supply and demand catch up, and soon demand dries up, and prices fall, or worse, collapse. Another collapse in the near future not only spells trouble for the companies and workers, but the provinces and federal government. Oil and potash are keeping Newfoundland, Saskatchewan and Alberta, and by extension, Canada, humming at a time when much of North America is still in the doldrums.
Will our petro-dollar stay at parity with the greenback if oil collapses again? Some manufacturers would see it as a reprieve, even if consumers do not.
At current oil prices, Saskatchewan's provincial budget this March should allow the province a little bit of breathing room. Hopefully this will be used to pay down debt, not increase spending. That was the pattern four years ago, and would do well for us if it is repeated. Saskatchewan was better positioned to weather the storm that followed, even if the finance department truly messed up its potash price predictions.
The quicker this province can clear off its debt, the healthier we will be in the long run.
That lesson can be applied on a micro level as well. In January, the Bank of Montreal announced the lowest fixed interest rate on a closed five-year mortgage in Canadian history. Other banks soon followed up with similar offers. I personally jumped on that like a fat kid on a Smartie, seeking to reduce interest costs, and therefore debt servicing.
It's part of a personal plan of reducing as much debt as possible, and freeing up cash flow. That way, when bad things do happen, as inevitably they do, there is more breathing room to roll with the punches.
Some people are going to be hoping for a new football stadium in Regina coming out of this budget. With the Grey Cup coming to Regina in 2013, and a premier who has his own weekly football radio segment called "Premier's Picks," it would be astonishing if we don't hear such an announcement.
Everyone likes new, shiny things, especially if they will have a Rider flag flying from the rooftop. But before we buy a stadium with oil royalties, let's pay off the mortgage on the province, first.
- Brian Zinchuk is editor of Pipeline News. He can be reached at [email protected].
