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Labour's plan for dealing with high energy prices
Published: July 9, 2008
Source: Canadian Labour Congress
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Higher oil and natural gas prices are here to stay. That may be a good thing in terms of helping us move to a more energy-efficient economy and averting catastrophic climate change. But we need a plan to safeguard jobs and the living standards of working families in the transition.

Rather than leave it all to the market, we need to take control of our national energy future and ensure that the costs of higher energy prices are fairly shared.

High prices for energy, especially gasoline, are clearly now having major negative impacts on the Canadian economy and on our jobs. We have already seen major layoff announcements in the auto sector as sales of SUVs and trucks slump and in the airlines sector as fares begin to soar. Truckers and others who can't easily pass on their costs are being pushed out of business.

Ordinary working families who mainly live from paycheck to paycheck will inevitably react to higher gas prices and utility bills by cutting into other areas of spending. The travel and hospitality industry already looks like it may be in big trouble this summer.

This big new hit to jobs is coming on top of job losses arising from a continued very high dollar, reduced exports to a US economy flirting with recession and growing competition from Asian imports. Unemployment is on the rise, from a low of 5.8 percent at the start of the year to 6.1 percent in June; private sector paid employment has stopped growing; and economic growth has ground to a halt, falling even below growth in the US.

Besides oil and gasoline prices, many basic food prices are also now soaring out of sight. Home heating costs will rise dramatically this coming winter due to higher fuel oil prices and fast-rising natural gas prices. These increased costs will hurt lower and middle-income families the most, for the simple reason that they spend more than the well off on the basics.

The fact that overall inflation is still quite low (2.2 percent in June) shows that the higher Canadian dollar is still cushioning us against global price movements and that it is difficult in a weak economy for businesses to pass on major input cost increases to consumers. Still, the Bank of Canada and other major central banks have stopped cutting interest rates. Instead of dealing with the economic slowdown and the credit crisis, they now seem quite prepared to see unemployment rise significantly so as to maintain low inflation.

Some blame speculation for higher oil and food prices. There is no doubt that the hedge funds have moved into commodity futures and derivative markets in a major way. Flows of funds in and out of derivatives markets are the major explanation of why oil prices can move so far, up and down but mainly up so dramatically in even a single day.

Dealing with speculation will require international regulation of commodity markets. Canada should be pushing other governments to act together before it is too late.

While speculation plays a role, the dramatic increase in the price of oil is still primarily driven by basic supply and demand factors. Demand from developing Asia has been growing fast (partly due to subsidies which cushion them from global prices), as has domestic demand within many major oil producing developing countries where prices are kept deliberately low. China has just significantly hiked domestic oil prices. But generally, most economists think that demand falls only slowly in response to higher prices. This has been the case in Canada, at least until very recently, because most energy use cannot be easily reduced in the short-term.

Meanwhile, world oil supplies do seem to be very tight. Even if we do not buy into the most pessimistic scenarios of 'peak oil', cheap conventional oil supply is running down quite rapidly, and it takes a long time to develop and bring to market non-conventional supplies such as oil from the tar sands, deep offshore wells, etc. In other words, high world oil prices are likely here to stay.

What could and should Canadian governments be doing to ease the impacts on jobs and on the living standards of working families? The Canadian Labour Congress proposes a seven-point action plan.

  1. Rein in the global speculators
    Governments must take a cue from the destructive collapse of the bubble in 2000 and the recent collapse of the US sub-prime housing bubble. They should restrict highly leveraged purchases of commodity futures by regulating hedge funds and other traders, or impose transaction taxes on short-term trades in commodity markets (following the model of the proposed Tobin tax on speculation in international currency markets). Short-term capital gains should also be taxed much more heavily than capital gains from longer-term holdings.
  2. Maintain low interest rates
    The impact of soaring energy prices on jobs and real wages is going to be worse if the Bank of Canada deliberately lets unemployment rise to forestall any threat of energy and food price driven inflation. With inflation excluding energy and food prices running at just 1.2 percent in June, there is, in fact, no evidence of energy-driven inflation to date.
  3. Tax surplus oil company profits
    Every dollar increase in the price of a barrel of oil delivers huge windfall profits to oil companies and their shareholders, since the cost per barrel of current production averaging perhaps $40 today is far below the current price. The operating profits of Canada's oil and gas industry in 2007 came in at $26 Billion, of which less than one quarter ($6 Billion) was paid to governments in corporate income tax. There is no good reason why governments should not tax away a significant share of these high profits, at least to the extent that incentives are still maintained for oil companies to invest in added production.

    One way to raise energy sector corporate taxes would be to eliminate the deductibility of provincial resource royalties for federal corporate income tax purposes, as recently proposed by none other than the Organization for Economic Co-operation and Development (OECD). As the OECD further suggests, remaining tax breaks for the highly profitable oil industry should be removed. Both of these measures would boost federal corporate income tax revenues from the oil patch.
  4. Redirect surplus oil company profits to protect low-income households against energy poverty
    Higher taxes on the oil industry should be used to finance immediate increases in tax credits for households, tilted to lower and middle income families, to provide some cushion against higher prices. High prices would still give people a major incentive to reduce their energy consumption.

    We should immediately increase the GST credit, the Working Income Tax Benefit and the Guaranteed Income Supplement for seniors to cushion very low-income households against rising gasoline and home heating costs.
  5. Give people real and affordable energy alternatives
    To reduce oil consumption, we need major new investments to expand the capacity of public transit systems, tied to "Made in Canada" procurement requirements. Existing transit systems can be expanded quite quickly by buying new vehicles, hiring new staff, expanding Park and Ride operations etc. Expansion of passenger rail will take longer but must begin.

    Households (and owners of rental buildings) should be given interest free loans, repayable from lower utility bills, to immediately retrofit their houses and apartments for greater energy efficiency, including the purchase of high energy efficiency furnaces and other appliances as well as much higher standards of insulation. A major national program could reduce consumption quite quickly at modest cost and create many new jobs, offsetting the slowdown, which is just now beginning in the residential construction sector.

    Governments should support development and production of highly energy efficient "Made in Canada" vehicles and appliances, so that adjustment to higher prices creates jobs.
  6. Re-regulate oil and gas exports and increase domestic supply
    We are maintaining and even increasing exports to the US of our remaining low cost, readily accessible conventional oil and natural gas resources, even as our known reserves are rapidly depleted. We should direct the National Energy Board to approve exports only if Canadian longer-term needs will be met, and re-establish the pipeline capacity needed to bring Western Canadian oil to central Canadian markets to reduce our dependence on imported oil.

    All tar sands production should be upgraded and refined (or processed into petro-chemicals) in Canada so as to enhance national energy supplies and national energy security while also maximizing Canadian economic benefits from our resources.
  7. Focus Climate Change policies on the large industrial emitters
    The sharp run up in oil and gasoline prices and rising natural gas prices already amounts to a significant carbon tax on working households, even though almost all of the growth in greenhouse gas emissions has been driven by the oil industry and very affluent Canadians.

    Rather than impose even higher energy prices on working families through a carbon tax, the immediate focus of our climate change policies should be to reduce the emissions of the "large final emitters", especially the energy intensive tar sands and coal-fired power plants. Regulations capping emissions must force investment in new technologies and revenues from selling emission permits should be directed to helping industry adjust and to cushioning lower income households against price increases. Further tar sands expansion should not take place unless the industry can reduce its total emissions by investing in carbon capture and storage.

from the Canadian Labour Congress

The Canadian Labour Congress is the largest democratic and popular organization in Canada with over three million members. The Canadian Labour Congress brings together Canada's national and international unions, the provincial and territorial federations of labour and 130 district labour councils.


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