The cost of gasoline followed oil prices on a downward spiral in the last third of 2008. (CBC)

It's been an amazing year for oil — the biggest, fastest run-up in the price of a barrel was followed by the greatest, quickest decline.

Oil hit a record of a little under $150 a barrel in July 2008, leading many to foresee a surge in inflation and a drop in the standard of living. There were predictions that the price would hit $250 a barrel within a year, as rapidly growing Asian economies sucked up an increasing chunk of the supply.

As the price of gas surged well past $1 a litre, Jeff Rubin, the chief economist for CIBC World Markets, predicted that gas would be selling for $2.25 a litre by 2012.

Rising oil prices mean higher prices for a host of items, including jet fuel. In May 2008, Air Canada and WestJet joined other airlines around the world in adding fuel surcharges to their airfares.

There were fears that the Bank of Canada would have to drive up interest rates to prevent inflation from taking off — higher fuel costs were expected to drive up the cost of food. Canada had largely been sheltered from food inflation thanks to a currency that had achieved parity with the U.S. dollar. But in 2008, as global food prices continued to rise, the effects of parity were expected to wear off by the fall, when Canadians turn to imported food.

But a funny thing happened on the way to $2.25 a litre gasoline. The global economy tanked. There's nothing like a recession to dry up demand.

Oil prices fell from a peak of $147 a barrel in June to just over $40 a barrel by early December.

'Consumers across the world paid a tax or transfer to oil producers of $1 trillion.'—Philip Verleger

On Dec. 9, 2008, the U.S. Energy Information Administration predicted that global demand for oil would fall through 2009, marking the longest contraction in demand since the oil crisis of the 1970s.

The EIA said it expected demand to fall by 50,000 barrels per day in 2008 and 450,000 barrels per day in 2009.

Philip Verleger, a leading international oil economist and professor at the University of Calgary, says from August 2007 to August 2008, oil prices were unnecessarily high thanks in part to the U.S. refusing to free up reserves. That allowed producers to rake in record profits on the backs of consumers.

"I calculate that consumers across the world paid a tax or transfer to oil producers of $1 trillion, and I calculate that based on the idea that the price should have stayed around $70."

Now, he says, it's payback time.

In September 2008, WestJet and Air Canada announced an end to fuel surcharges — although Air Canada said future fuel surcharges would be included in the cost of a ticket.

Except for a brief uptick when it looked as though Hurricane Ike would run roughshod over American oil refineries in the Gulf of Mexico in September, gas prices have steadily fallen.

It's like a pay raise

It cost $68 to fill drive a vehicle with a 50-litre gas tank on June 17, when the price of gas averaged $1.36 a litre across the country. By the end of November, that same tank of gas cost $41.70, as the price of a litre of gas averaged 83.4 cents.

That's a savings of $26.30 a tank — or $1,367.60 a year in after-tax dollars, based on filling up once a week. That's like getting a raise of almost five per cent, if you're making $45,000 a year, which is slightly higher than the average industrial wage in Canada.

That's the bright side.

The downside? Saving money on gas doesn't help much if you're one of the more than 70,000 people who lost their jobs in November.

Low oil prices today could also mean trouble down the road.

'Low prices will increasingly lead drilling and exploration projects to be postponed or cancelled, so supply will become a concern in the medium term'—Christoffer Moltke-Leth

In its most recent world energy outlook, the International Energy Agency predicted that global demand for energy would increase by 1.6 per cent year until 2030, about a 45 per cent total jump from today's demand. The vast majority of it — around 80 per cent — will continue to be satisfied through fossil fuels.

The agency notes that there's enough oil underground to meet the demand — but the supply in existing oilfields is declining too quickly to support the demand. That means a lot more money will have to be devoted to oil exploration and extraction.

"Low prices will increasingly lead drilling and exploration projects to be postponed or cancelled, so supply will become a concern in the medium term," Christoffer Moltke-Leth, head of sales trading at Saxo Capital Markets in Singapore, told reporters.

International research firm CapGemini issued a report on Nov. 24, 2008, warning that low oil prices could mean trouble. The report suggests:

• Low oil prices will render expensive projects no longer financially viable. The report says a price below $90 a barrel would spell trouble for Alberta oilsands development.
• Cheap oil makes the development of renewable energy sources too expensive to be worth the investment.

The report added that while oil supplies may be easily meeting demand now, unless new money is devoted to finding new reserves, there will be supply troubles — and new price spirals — in the future.

Merrill Lynch recently predicted that oil could fall as low as $25 per barrel, if the recession is as deep and as long as some forecasters fear. That will spell trouble for oil-producing provinces like Alberta and Newfoundland and Labrador. Newfoundland and Labrador Finance Minister Jerome Kennedy says this year's bigger-than-expected surplus of $1.27 billion could become a distant memory.

"If oil prices continue at below $60 US per barrel, we could be facing a deficit of several hundred million dollars next year and could potentially be facing deficits in the years to come."