Saudi Arabia may be half a world away, but as the world’s fifth-largest oil-producing nation, Canada is already feeling the economic pinch from cheap Saudi oil.
And when sanctions lift and Iran starts ramping up production, things could get bad, some experts warn, especially as demand from a cooling Chinese economy shrinks.
How bad?
Goldman Sachs last week predicted oil prices could stay in the US$50 per barrel range for the next 15 years. At those prices, some Canadian oil producers wouldn’t survive.
The International Energy Agency is a bit more optimistic. It recently estimated the demand for oil will increase by 1.8 million barrels per day (bpd) in 2015 and 1.4 million bpd in 2016.
But that increase could be wiped out, if Iran makes good on last week’s announcement that it plans to boost production to 4.2 million bpd by the end of 2016 from 2.8 million bpd.
Kamran Bokhari, a Middle East security and intelligence expert, who spoke in Vancouver last week at a talk sponsored by Forge First Asset Management, said he doubts Iran can meet those targets.
Although Iran is poised to become “the centre of gravity” in the Middle East, he said it has a lot of catching up to do, and building new oil wells and pipelines will take time.
“This is a country that has not seen investments since ’79,” said Bokhari, who is a guest lecturer on security at the University of Ottawa and co-author of Political Islam in the Age of Democratization. He said Iran needs massive investments to modernize its infrastructure.
“That’s going to take several years before Iran can ramp up production and say, ‘Now we’re ready to rival the Saudis.’”
Given that oil accounts for one-quarter of Canada’s exports and 8% of its total gross domestic product, an era of cheap oil and lower demand – in part due to China’s cooling economy – could have a big impact on Canada.
“Oil was really pulling our economy along for the last five or six years, and now it’s going to take a breather,” said Jamie Feehely, managing director of Canadian structured finance for the credit rating firm DBRS. “So the real question is: what’s going to fill that gap?”
Since the Great Recession, Canadian consumers – aided by low interest rates and heavy borrowing – have buoyed the economy, says a recent DBRS economic analysis. But higher unemployment in oil-producing provinces could slow consumer spending and real estate markets.
“The question is, given all the uncertainty with oil and other commodities, will consumers pick up the slack and pull Canada out of its mild recession, or is the country in for something more severe?” the report asks.
Alberta has taken the brunt of oil’s plunge: 35,000 job losses in the oil and gas sector since the beginning of the year.
So far, consumer spending and an uptick in manufacturing have absorbed the impact. But a prolonged era of cheap oil would take its toll, and not just on Alberta.
The energy sector accounts for a quarter of Saskatchewan’s economic activity, the DBRS report points out, with oil royalties and Crown land sales accounting for 10% of the government’s revenue. Offshore oil royalties account for 30% of provincial revenue for Newfoundland and Labrador.
Low oil means a low Canadian dollar, which is good for Canadian exporters, particularly manufacturers. But as DBRS points out, Canada’s manufacturing sector has lost 600,000 jobs since 2005. Ontario’s automotive sector has suffered as automakers have moved manufacturing from Canada and the U.S. to Mexico.
Canada’s economy remains heavily dependent on resource extraction.
Mining is suffering one of the longest downturns in decades, and commodities experts like Goldman Sachs are predicting a similar prolonged era of low prices for oil.
A global oil glut is, in part, a problem of Canada’s own making. In the past decade, American and Canadian energy companies have significantly increased oil production capacity through innovations in shale oil and oilsands extraction.
In an effort to protect market share, Saudi Arabia – traditionally a swing producer with tremendous clout in determining world oil prices through production controls – has taken unprecedented action (or, rather, inaction) by maintaining its production levels.
But Saudi Arabia and Iran might not be the biggest threat to Canada’s oil economy; B.C. could hold that distinction.
Canada is the largest supplier of oil to the U.S. It exports more oil there than Saudi Arabia, Iraq and Kuwait combined. It has little choice in the matter.
Alberta oil is landlocked and the province is forced to sell oil to the U.S. at a discount – about $20 per barrel. Getting that oil to international markets – and higher prices – requires pipelines.
In B.C., polls show the majority of British Columbians are opposed to both the Northern Gateway pipeline and the Trans Mountain pipeline expansion projects.
Canada is even having a hard time selling more oil to its best customer: U.S. President Barack Obama has erected roadblocks to the Keystone XL pipeline, and his potential successor, Hillary Clinton, last week officially confirmed she plans to keep those roadblocks in place.
Amin Asadollahi, oilsands program director for the Pembina Institute, said the oil price shock should be used by the industry and government as the wake-up call needed to start diversifying Canada’s energy sector and improving its image through “decarbonization.”
That would mean putting a price on carbon emissions – something even major oil companies like Royal Dutch Shell agree is necessary.
“Canada’s energy strategy, for the longest time, has been: produce as much fossil fuels as possible and get it to market as fast as possible,” Asadollahi said. “And that overreliance on fossil fuel exports has obviously exposed our economy to risks.
“All these market signals are clear – that in order for Canada to have economic growth over the longer term, we need to have a more diversified economy in order to have a more resilient economy.”
