When you fill up your tank, thank our “petrodollar”

Last night, I wrote a long post on exchange rates, and discussed the impact of the Canadian dollar appreciation on our purchasing power. As usual, the best way to demonstrate that increase in purchasing power is with a graphic, so here you go:

Data: Statistics Canada and the US EIA, Author's Figure

What you’re looking at is the relative changes in gas prices, in local currency, in the US and in two Canadian cities, Edmonton and Toronto. In the periods of late-2002 through mid-2008 and again from late 2008 through today, $US gas prices in the US rose rapidly.  Canadian gas prices also rose in these time periods, but much less quickly. Why? Because Canadians pay for gas in Canadian dollars, while gas is traded as a global commodity. As the Canadian dollar appreciates, you can buy more gas with every dollar, all else equal.  The same applies to just about anything we buy while outside of Canada as well as to goods which we import. In 2011, Canadians imported over $37 billion dollars worth of goods every month (our net imports were smaller, at about $2 billion per month). Before arguing for a devaluation of the Canadian dollar to make producers more competitive, Canadians should remember that any push to do so is a push to reduce Canadians’ real wages and to decrease our purchasing power.

You might be happier paying more for gas and most everything else we buy, but I can’t imagine why you would be.

13 responses to “When you fill up your tank, thank our “petrodollar””

  1. Robert McClelland

    So cheaper gas due to the petrodollar is good but cheaper gas due to a lower HST is bad.

  2. Kyle

    It is not just gas Robert – it would be more expensive for everything that is traded in quantity.

  3. ljd

    Canadians also pay roughly twice the gas tax, on average, than Americans, which naturally damps price oscillations when measured in relative terms, as above. Have you done things graph subtracting off gasoline tax?

    And in terms of generalizing from gasoline to all other products in the economy – how do you then explain OECD numbers that Canadian purchasing power has _not_ increased relative to the US in recent years, when measured in terms of PPP? (eg, http://www.progressive-economics.ca/2012/03/07/loonie-purchasing-power/)

  4. Chris Short

    Andrew – you don’t PPP – look at the terms of trade for CDN$ vs US$ to make your point (I’ll let you chase the data…you raised the point :-)

    cheers
    Chris

  5. rdb

    Andrew, would you please use “gasoline” rather than “gas” when referring to the refined petroleum product. Whenever I see “gas” I think of natural gas. Maybe it’s just me (because I don’t drive much) but this usage drives me crazy.

    Regarding this post and yesterday’s: The dollar affects many other sectors, from tourism to forestry. The latter has seen a triple whammy: dollar, housing crash, and mountain pine beetle.

  6. McDermott in NYC

    Andrew,

    Interesting commments given that you’ve said before that the purchase of international offsets — from the lower cost international providers — is a bad idea.

    I take it then that your position is this: If an import’s purpose is oil sands extraction related, low costs matter . But if an import’s purpose is GHG mitigation related, low costs don’t matter.

    Sounds hypocrytical, frankly.

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