Canada's Housing Bubble

May 15, 2011 Jesse Kline nationalpost.com

Can you believe the price we’re paying for gasoline at the pumps today? It doesn’t seem sustainable and when something isn’t sustainable it eventually changes.

Some research tells me that taxes make up about 32 per cent of the cost of a litre of gas. This means if we’re paying $1.40 for a litre of gas then 45 cents of that is tax. Of course, the higher the prices, the higher the consumption taxes because they are a percentage. Said another way, a fill-up of 50 litres at $1 per litre the taxes are $16 and at $1.40 per litre the taxes are just over $22. That’s a lot of money to pay in taxes.

I also found out that eastern Canada gets much of its oil from the North Sea and the price of North Sea crude is significantly higher than the price of western crude, which is the price of crude reported to us. I find it interesting that when the price of crude oil got to $150 per barrel we were paying prices at the pump not much different than we are today. With the Canadian dollar being worth more than the American dollar and the price of crude oil being quoted in the low $100 per barrel range, it seems incredible that we could still be charged $1.40 per litre.

Speculators bet on the direction of the price of oil and this is one group you least want to succeed as they can cause great fluctuations in the marketplace and it hurts those who are actually consuming the oil. May is a switchover month between production of winter fuel products and summer fuel products and we are now moving into a summer driving season. I wonder how many people will be adjusting their consumption of gasoline. I certainly know I am paying much more attention to which car I drive on the highway and gas mileage is becoming increasingly important.

Oil is a commodity and if they are paying more for oil in Buffalo then product from Toronto will move to Buffalo and vice versa so that it becomes very much a North American pricing.

The final straw for me was when the price of a barrel of oil had dropped 17 per cent yet the retail price of gas was going up six cents per litre. This just doesn’t make sense.

Since this doesn’t make sense and isn’t sustainable it will probably change. I remember people talking about Nortel and how everyone should buy Nortel stock because it was guaranteed to go up in value. The tech bubble in the early 2000, which Nortel was part of, saw people buying and selling companies based on how many employees it had and not on the profitability. Many entrepreneurs were shaking their heads asking how people could pay more for a business that has no revenue than one that has been generating revenue and was a profitable business.

Then there was the housing bubble in the U.S. People bought properties on the basis that the price of the house would continue to rise giving them the opportunity to refinance. The reality was somebody new couldn’t get into the housing market because the prices had gone beyond what was sustainable.

I’m hoping that past experiences will win out. The rise in the price of oil doesn’t seem sustainable given that we will change our consumption patterns. I’m hoping for a sustainable price of gas and that it will come in the near future.