Oil drop

How cheaper oil affects your dollar & your debt

Chart: U.S. dollars per barrel, West Texas Intermediate crude oil

In mid-January 2015, a barrel of oil cost about $46 dollars (U.S.). That's less than half the price it was in June.

Put simply, prices have plunged because more oil is being pumped out of the ground and there is less demand for it worldwide. This oversupply has driven prices down.

Cheaper oil has major implications for the Canadian economy, and affects everything from your loonies to your mortgage.

Source: U.S. Department of Energy

Chart: U.S. dollars per barrel, West Texas Intermediate crude oil

The federal government and oil-producing provinces — mainly Alberta, as well as Saskatchewan and Newfoundland and Labrador — receive income from oil royalties and corporate taxes.

The falling price of oil is expected to slash that revenue by billions of dollars.

And because oil is less lucrative, energy producers will likely invest less. The Canadian Association of Petroleum Producer estimates a decrease of $23 billion in spending in 2015.

But cheaper oil benefits other provinces. It lowers the cost of gasoline and boosts energy-hungry industries such as manufacturing.

Source: U.S. Department of Energy

Chart: Bank of Canada overnight rate

Worried by oil's plunge, Canada's central bank decided to reduce its key interest rate by a quarter point on Jan. 21, 2015. Bank of Canada governor Stephen Poloz acted again in July, dropping the overnight rate by another quarter point.

Poloz said Canada's economy had not grown at all for the first six months of 2015, in part because of lower oil prices.

Source: Bank of Canada

Chart: Bank of Canada overnight rate

By cutting the interest rate, the central bank aims to make it less expensive for businesses and consumers to borrow money.

A rate cut usually lowers interest rates on loans based on the prime rate, such as variable-rate mortgages and lines of credit.

Source: Bank of Canada

Chart: Canadian dollar in U.S. dollars at close

After both of the central bank's rate cuts this year, the Canadian dollar dropped in value compared to the U.S. dollar.

A lower interest rate makes it less appealing to hold Canadian dollars, as they will earn less interest relative to other currencies. Investors were also concerned by the central bank predictions that Canada's economy would grow at a slower rate in 2015.

A lower loonie is good news for Canadian exporters, because their products cost less to foreign customers.

But on the flip side of the coin, a cheaper Canadian dollar makes cross-border shopping and traveling in the U.S. more expensive.

Source: Bank of Canada

Chart: Household debt to disposable income ratio (%)

One final repercussion: the amount of household debt owed by Canadians continues to climb.

On average, Canadians owe about $1.65 for every dollar of disposable income they earn.

In December, the governor of the Bank of Canada warned this debt poses a serious risk to the country's financial stability.

Economists are divided on whether the lower interest rate will make it easier to pay off this debt or will only encourage more borrowing.

Source: Statistics Canada