How drops in oil price impact Canadian and international economy
Those of us who own cars may be pleasantly surprised by the current drops in gas prices, as the price of a barrel oil continues to slide. As a result, however, Canadians saw the loonie fall to 84.57 cents US last week. Despite this unfortunate drop for the Canadian dollar, the dramatic decrease in oil prices could be extremely pleasant for consumers: The Royal Bank of Canada’s (RBC) assistant chief economist, Paul Ferley, noted in a report last week that Canadians could save up to $9 billion at the pumps.
In Ontario, cheap oil is also considered to be, perhaps, a good thing.
“Energy’s share of Ontario’s economy is a scant two per cent, and that province will actually benefit by a weaker Canadian dollar,” the Canadian Imperial Bank of Commerce (CIBC) stated.
Not all of Canada, however, will see these proposed benefits. The decrease in crude oil prices has hammered the Toronto Stock Exchange (TSX), and last week, the commodity-based shares were especially hit hard with the drop: the energy sub-index was sent off six per cent, and metal and mining off more than four.
The dramatic decrease in oil prices that we are seeing in Canada will especially hit Alberta, Saskatchewan, and Newfoundland and Labrador hard – those areas of Canada who have oil energy sectors and will experience losses in those sectors, accounting directly to nearly 25 to 30 per cent of Canada’s Gross Domestic Product (GDP). In fact, the Bank of Canada estimates that overall, the drastic drop in oil prices will cause around one-third of a percentage off of Canada’s GDP next year.
Some companies have reported their intention to spend less to try and balance their losses in the market. However, a Wall Street Journal analysis published in January of 2015 showed that this decision will depend entirely on the debt load being carried by some producers. Some of these companies may have to continue production despite the dive in oil prices, as they require the income to pay off their debts.
Long-term, this is the danger that certain countries may face, as Russia’s economy is predicted to shrink 4.5 per cent next year if oil continues to be priced at $60 a barrel and below. Venezuela and Iran will also see dire economic consequences, and the United States could see mixed results. Some areas of the United States, opposingly, will experience economic boosts; it’s the areas which produce oil, such as Texas and North Dakota, that are expected to see drops in revenue.
Certain predictions state that there is the possibility that oil will continue to drop, as the Bank of America’s Merril Lynch noted how West Texas Intermediate (WTI) prices could fall as low as $35 per barrel.
“We see a growing risk of WTI and Brent falling to $35 and $40 per barrel near-term to force either non-OPEC producers or Saudi to cut,” the Bank of America said in a research note last week.
A Conference Board of Canada report was also released in early January, predicting that prices will rise again in Canada over the course of 2015, but will still be much lower than the $100 range that it was traded for just this past summer.