Lower oil prices could cost Canada dearl

By: Henry Lazenby

Photo by Reuters

TORONTO (miningweekly.com) – An unprecedented 40% dive in crude oil prices in the last four months would impact the Canadian economy much more severely than previously thought, a recent study by analysts at Canadian Imperial Bank of Commerce (CIBC) had found.

In their report ‘No barrel of fun: What weaker crude means for Canada’ that was released on Tuesday, the economists estimated that the price decline would reduce Canada’s gross domestic product (GDP) growth in 2015 to about 2.2%, rather than the 2.7% previously predicted.
The CIBC model doubled the impact to the country’s real GDP to about 0.5%, up from 0.25% estimated by the Bank of Canada. However, the impact on the nominal GDP and net national income could be as much as 2%.
West Texas Intermediate oil was on Wednesday trading at $55.81/bbl for January contracts, and Brent crude oil was changing hands at $60.28/bbl for delivery in February.
The analysts said that even if improved global demand and some paring of excess supply restored substantially higher prices in the second half of next year, WTI oil might still average only $70/bbl in 2015, the base case scenario used in the analysis.
The report said that the US economy was accelerating and would benefit from cheaper crude. Growth disappointments overseas were also believed to only be a modest part of the story of oil’s price decline.
The analysts fingered the Organisation of the Petroleum Exporting Countries (OPEC’s) decision not to trim excess output in November and soaring North American, particularly US output, as the reasons for the supply shock, as opposed to supply routs in previous price corrections.
The low-price impact was nearing the magnitudes of previous price corrections, impacting the country more significantly owing to its increased reliance on energy exports.
“… Canada was not nearly the net oil exporter it is today during either the supply-side price correction of the 1980s, or the next decade’s Asian crisis-inspired jolt, making it much more exposed now to oil’s story,” the economists said.
The energy sector directly accounted for nearly 10% of Canada’s GDP, but the impact on the Canada’s most prolific oil-producing provinces – Alberta, Newfoundland & Labrador and Saskatchewan – would be much more pronounced, as they relied on oil for as much as 25% to 30% of the local economical output.
While things were not expected to get as ugly as in 2009, when oil slid 40% year-over-year, CIBC said the decline in energy prices seemed to be sufficiently large to tip once-robust nominal GDP growth into negative territory for Canada’s three oil-rich provinces.
On the positive side, CIBC said that the combination of a stronger US economy, cheaper energy pricess, a depreciating currency and still-low interest rates was a favourable mix for the country’s factory-intensive provinces, and the bank touted Ontario as being the provincial GDP-growth leader next year.
The analysts calculated that even if oil managed to average $70/bbl next year, the federal government would lose out on about $10-billion to $13-billion in revenue, with Ottawa’s share in the loss estimated at about $5-billion.
CIBC said the lower crude prices were a net benefit to the US, and a net hit to Canada, prompting analysts to believe that the Bank of Canada would push back the earliest date to increase interest rates to the fourth quarter next year, a quarter later than previously expected.
The analysts also lowered by about 5% their estimate of where the loonie would bottom against the greenback, setting C$0.81 as a possible trough.
“The bottom line is that references to a few decimal places in real GDP miss the point. The value of what Canada sells to the world, not just the volumes, is what filters into wages and profits, government revenues, and economic well being.
“Today’s concerning energy price backdrop won’t last, as the world will ultimately need oil from Canada, Brazil offshore, and even costlier sources, suggesting a return to something north of $80/bbl in the years ahead,” the analysts said, warning that behind that national picture, there were regional and sectoral stories that would play out for at least a year if not longer, raising the stakes for policy makers and investors who had grown accustomed to good news from the oil patch.