The Canadian Economy is Resilient
Momentum Public Relations
The volatility of oil prices has been a major global economic factor for the past few years. The unprecedented price drop from levels of close to $100 a barrel in June 2014 down to the mid 30’s a barrel in December 2105 has had a gigantic ripple effect in every industry and in every part of the world.
As we approach 2016, where will oil prices go and how will this impact the overall economy of Canada? Investors, businesses and consumers are watching closely. To suggest that there is a lot of nervousness in the market is an understatement. Accompanying this concern is a number of forecasts that anticipate further oil price drops. At the same time, other forecasters provide strong reasons why there will be a price recovery. Of course, if anyone was actually capable of making a credible prediction on the price and supply of oil the investment community would be paying much closer attention.
The price of oil impacts the Canadian economy differently when it is contrasted with most of the other larger economies in the world. The difference is due to the complexity of Canada being almost equally a producer and a consumer of petroleum. If Canada was primarily an importer or a major net exporter the help/hurt argument would be much more clear. Canada’s economic sectors that rely on the production of oil are suffering from a drop in prices making a return on investment challenging. The inescapable reality is that lower revenues produce a reduction in profitability. At the same time, other important sectors in Canada, like manufacturing and transportation, stand to benefit from a cost reduction for fuel and raw materials.
The short term pain of lower oil prices may actually be beneficial for Canada in the medium term. Sure, in the short term, there is evidence that this is having a significant negative impact in Canada, particularly in places like Alberta. Lagging indicators such as the low rate of GDP growth, the Bank of Canada’s key interest rate and rising regional unemployment are all cause for concern. Nonetheless, there are three reasons why investors and interested observers should be encouraged to take a slightly longer view of the prospects of Canada’s ability to weather the storm.
- Oil is here to stay. The fundamental need for petroleum products is not about to evaporate. Unlike major transitions in technology that have occurred in history, the need for oil and its derivative products will continue. When wood gave way to coal and coal to the use of oil there were substantial technical advances that accompanied each shift. At the moment there is no game changing technical advance that is emerging to render oil obsolete. With little prospect of diminishing tension in places like the Middle East there will continue to be a need for a reliable supply of oil and gas for big consumers like China, Japan and the USA. Even if the consumption of gasoline fell due to the use of alternative energies there would continue to be a very large need for a wide variety of chemicals, consumer goods and medical products that are manufactured from petroleum. Typical products of this sort are listed on this link.
http://www.ranken-energy.com/products{92d3d6fd85a76c012ea375328005e518e768e12ace6b1722b71965c2a02ea7ce}20from{92d3d6fd85a76c012ea375328005e518e768e12ace6b1722b71965c2a02ea7ce}20petroleum.htm
- An exceedingly diverse economy. Canada is in a far better position to maneuver and manage in a volatile environment. Countries like Russia, Saudi Arabia and even the United States have more compelling concerns. Russia and Saudi Arabia are undoubtedly being forced to deal with a major budgetary shortfall at the moment. The United States has to make a number of important strategic decisions regarding long term supply in an environment where predicting the future is extremely challenging. Canada, on the other hand, is likely to suffer a relatively small loss of overall revenue and may actually see some stronger growth in the medium term if the Canadian dollar remains weak. The complexities and concerns associated with falling oil prices for a number of countries who have much more to lose is outlined in a recent post by Ravi Srikant.
http://www.investopedia.com/articles/investing/051315/complex-story-global-impact-low-oil-prices.asp
- Cities emerging as wealth hubs. The growth of the Canadian economy is, like most major economies in the world, increasingly centered in cities rather than in resource extraction or the sale of commodities. There are six Census Metropolitan Areas (CMAs) in Canada that all have relatively high employment levels and continue with a track record of significant job growth. They are Montreal, Toronto, Vancouver, Ottawa-Gatineau, Calgary and Edmonton. These locations account for roughly 50{92d3d6fd85a76c012ea375328005e518e768e12ace6b1722b71965c2a02ea7ce} of Canada’s employment and consequently are a major centre for wealth creation. A great amount of the economic activity in cities comes from the development of new technologies that make new services and product possible. This phenomenon is displayed in Professor Livio Di Matteo’s graph.
http://www.macleans.ca/wp-content/uploads/2015/11/Di-Matteo.png
Some people believe that history repeats itself. In the case of oil, that would mean that the world will see prices that move higher before very long. The theory that what goes up must come down (and vice-versa) is a compelling one. It may be more important to learn from history rather than be resigned to it. Short term issues aside, Canada’s wealth of natural resources is complimented by its open economy and well educated workforce. The future price of oil is anyone’s guess. The future of the Canadian economy, however, isn’t dependent on low or high priced oil. It is dependent on making wise choices around new technologies and ensuring that the cities, that are driving growth, are adequately resourced and that the infrastructure they require to compete effectively on the world stage is second to none.