Canadian economic growth could take a significant hit overall with the western Canadian provinces, especially Alberta, most affected if low oil prices and the resulting lower Canadian dollar were to persist over the next seven years, according to a new study from the Canadian Energy Research Institute (CERI).
“But provinces not so dependent on oil revenues but more dependent on export revenues could actually benefit from the lower dollar,” Dinara Millington, CERI’s vice-president of research and the study’s author, said in an interview.
“Provinces in eastern Canada will fare much better from the price decline and actually see higher economic growth,” the study noted.
The study, Low Crude Oil Prices and Their Impact on the Canadian Economy, concluded that Canadian economic growth would be 23 per cent lower on average in the Low Case scenario in which WTI would average US$46.26 in 2015, rising only to $51.52 per bbl (in 2014 dollars) by 2021. In comparison, in the Reference Case WTI rises to $72.88 per bbl from $53.25 a bbl in 2015.
Average annual growth in the Gross Domestic Product (GDP) of $89.56 billion would be 24.5 per cent lower on a cumulative basis than the average annual GDP growth of $118.62 billion in the Reference Case, cutting into national incomes and spending power. Other variables such as compensation, employment and federal and provincial taxes also would suffer from low oil prices, according to CERI.
“As a net oil exporter, Canada will face net negative impacts, although the impacts will be both positive and negative,” said the study.
“The most immediate impact will be negative: impacts to Canada’s terms of trade caused by the lower value of Canada’s energy exports,” it stated. “This would be partially offset by a boost to consumers’ disposable incomes and spending power through lower oil prices at the pump although retail prices might take some time to adjust, partly due to higher profit margins and refinery outages that have kept petroleum product prices high.”
The study also suggests that the positive effect of low crude prices on the world economy and the resulting stronger growth could also be positive for Canada. “A recovered global economy could increase Canada’s non-energy exports, boost confidence and lead to improved business investment.”
However, these gains will be more than offset as lower revenues in the oilpatch (resulting from low investment) and along the supply chain spill over to the rest of the economy. The lower prices, if they are expected to persist, will significantly discourage investment and exploration in the oil sector, the report warned. “Declines in upstream investment could cause Canada’s crude production to fall, which in turn would translate to lower energy exports.”
Lower oil prices are also typically accompanied by a weaker Canadian dollar and its depreciation against the U.S. dollar will partially help to cushion the economy from the impact of lower oil prices that will benefit many sectors such as manufacturing by reducing production costs. Consumers, though, will face higher prices for imported goods.
The fall in oil prices also will have a mixture of positive and negative effects on employment, said the report. Although additional jobs in the energy sector will be lost if low prices prevail, new jobs will be created in sectors such as transportation and some manufacturing that would benefit from the low exchange rate.
However, the study noted that while the job layoffs are immediate in the energy sector, employment growth in non-energy related sectors might take a few years to materialize. Over the forecast period, it is estimated that, on average, there will be almost 116,000 fewer jobs (direct, indirect and induced) in Canada if crude oil prices remain low.
Among the provinces, Alberta will be most affected if the Low Case oil prices continue for the next five years, said the report which estimates that GDP growth would be 31 per cent lower than under the Reference Case as all the top economic sectors will be in decline.Daily Oil Bulletin