Wednesday, 10 December 2014 16:09

Falling oil prices not the only concern for Canada’s energy sector

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Economy watchers might be wondering if dropping oil prices will be giving the Canadian economy a lump of coal this festive season.

The price of oil reached a five-year low Dec. 8 when it traded at less than $64 a barrel and on the same day the Toronto Stock Exchange suffered its biggest drop on one day in more than 18 months.
The market uncertainty was also reflected in the value of the Canadian dollar, which traded at around 87.55 cents U.S. on Dec. 9.
Scotiabank’s latest forecast expects the Canadian dollar to be at 85 cents by the end of 2015 and the bank expects the West Texas Intermediate (WTI) oil price, which is used as a benchmark in oil pricing, to be at an average level of US$70 in 2015.
The bank considers falling oil prices to be the most significant reason for the weak outlook of the Canadian dollar.
“The dramatic drop in oil prices will negatively impact Canada from the perspectives of trade, investment, growth, fiscal and sentiment,” the December 2014 report notes. “The uptick it provides to the U.S. economy should mitigate some of the downside.”
A Royal Bank of Canada (RBC) analysis of the impact of lower oil prices on the Canadian economic outlook, which was released Dec. 8, adjusts the forecast on WTI prices to an average of $70 per barrel in 2015 and $80 per barrel in 2016.
The lower oil prices can result in lower corporate profits, especially in industries associated with oil extraction, and it can have an impact on government revenues. The country’s GDP growth might slow down, but according to RBC the national impact might be less than the regional implications.
“While the impact on Canada’s economy, in the aggregate, would likely be minimal, there would be substantial variations across provinces,” the report states.
The oil-producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador might experience reduced incomes from the lower oil prices while other oil-consuming provinces will actually benefit from this situation.
The report estimates the impact on Alberta’s economy to be a reduction of 0.8 percentage points in real GDP growth, but the economy will still grow at a rate of 2.7 per cent.
“It is important to keep in mind that the provincial economy (and government) would face this challenge from a position of strength, which enhances its ability to absorb the shock,” the report says. “We would expect that work on oil sands projects would go forward largely as planned and that oil production (mainly non-conventional) continue to trend higher.
The bank expects Saskatchewan’s economy to be more resilient in the face of lower oil prices because it is less dependent on the oil sector and there will still be a demand for other commodities produced in the province.
There will be an impact on government revenues in the oil-producing provinces, but it will be less in Saskatchewan than in Alberta. According to the report the Alberta government has estimated that every $1 decline in the oil price will mean $215 million less for provincial coffers.
Canadian motorists will be happy to see lower gasoline prices as a result of the dropping oil prices and there might even be some benefit for the economy as people spend their gas savings on other goods.
The dropping oil prices this past week happened while the latest round of United Nations climate change talks to reduce greenhouse gas emissions are taking place in Peru.
Lower oil prices are considered to be bad for the environment because it encourages higher consumption of fossil fuels. It also reduces the urgency to invest in the development of alternative and renewable energy resources, which at the moment is only a more affordable option when oil prices are high.
On Dec. 9 the Canadian government used dropping oil prices as motivation to postpone the long-awaited implementation of regulations on the oil and gas industry to reduce greenhouse gas emissions.
Prime Minister Harper told Parliament it would be “crazy” economic policy to impose unilateral penalties on this industry if there are not similar regulatory steps by the United States.
Canada will be unable to meet its 2020 target to cut greenhouse gas emissions by 17 per cent below 2005 levels without additional regulatory steps.
Volatile oil prices are a serious concern at the moment, but other issues are equally important in any discussion of Canada’s growing energy sector. There is a need to create clear strategies for the sustainable development of the country’s oil and gas resources that includes a realistic approach on pipeline development and environmental performance standards.
Any discussion about Canada’s energy sector should include ways to support development of green renewable energy, both as a means to achieve greenhouse gas emission targets and to promote economic innovation.
In August the provincial and territorial leaders agreed at a Council of Federation meeting on the need for a national energy strategy. Faltering oil prices will hopefully give a renewed urgency to talks between these leaders as well as efforts to involve a reluctant federal government in discussions.
Matthew Liebenberg is a reporter with the Prairie Post. Contact him with your comments about this opinion piece at This email address is being protected from spambots. You need JavaScript enabled to view it. .

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Matthew Liebenberg