Tag Archives: West Texas Intermediate

The economic pendulum swings again

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The grand expanse that is Canada guarantees that one of the iconic realities of our national character remains our ability and willingness, when necessary, to pull up stakes and head for wherever the pastures grow greenest.

Rarely, of course, has that been Atlantic Canada.

Most often – at least since Confederation made honest European invaders of some of us – the Elysian fields of our economy have been located in Ontario, the country’s traditional manufacturing hub. That’s where, as the late, great Stompin’ Tom Connors once famously wrote, “the Maritimers all go.” 

Or, they did.

Over the past decade, or so, the big employment draws have been the tar sands of Alberta and the surrounding support industries of the oil and gas sector in Saskatchewan and British Columbia. That’s where, lately, my friends and former neighbours sojourn – driving trucks, working back-office jobs and otherwise punching gilded time clocks.

Or, again, they did.

Now, the shift – as inevitable as the ebb and flow of an ocean tide begins again, and one of Canada’s leading financial institutions, the Royal Bank, is sounding almost chipper.

“There has been considerable discussion about the negative impact of falling oil

prices on the Canadian economy,” Bank economists Paul Ferley, Nathan Janzen and Gerard Walsh write in a recent monograph. “This has been reinforced by anecdotal reports about oil-producing companies cutting back on investment spending particularly within the oil sands. However, as we have emphasized in earlier commentaries, there are offsetting positive outcomes from lower oil prices.”

The first, and most obvious one, they note, is the concurrent boost to the U.S. economy, on which Canada depends for much of its export business (some $300-billion a year). “A stronger U.S. economy implies a growing market for Canadian exports. This is the case despite the recent expansion of oil production in that economy reflecting greater utilization of shale oil reserves. Though the U.S. oil and gas sector is likely to see reduced investment activity, its share of overall capital spending is relatively small.”

Secondly, falling oil prices depresses the value of the Canadian dollar relative to its American counterpart. Again, that’s good for domestic manufacturers and exporters, whose wares suddenly cost less to American buyers.

“The third key offset,” the economists report, “is that Canadian consumers will also be looking at lower gasoline prices that will provide an attendant boost to consumer spending domestically. It is of note that while business investment is a sizable 13 per cent of nominal GDP (including investment in intellectual property products), consumer spending is a massive 54.3 per cent. Thus, a small rise in consumer spending can go a long way to offsetting a marked drop in investment.”

All of which has Ontario Premier Kathleen Wynne fairly salivating. And why not?

For years, that once-mighty, supremely confident, magisterially self-important province, has suffered the indignities that $100-per-barrel oil has wrought on its manufacturing-export economy, including an ignominious slump into have-not status in the federal equalization formula. Now that the price of benchmark West Texas Intermediate oil has settled below $53 a barrel, Ms. Wynne is doing her level best to appear generous.

“Ontario’s economy can be a buffer,” she told the Globe and Mail last week. “We have a diverse economy and it can be a buffer in a time like this, against some of that volatility. I don’t wish for low oil prices and a low dollar for Alberta. But at the same time, we want our manufacturing sector to rebound. So if that (low oil price) helps, then that’s a good thing.”

In reality, though, as long as Canada’s value to the world is predominantly measured by the oil and gas it extracts and the pipelines its builds – which has been the common hymn, soulfully trilled by the western caucus of the reigning Conservative Government in Ottawa – volatility, and all that this implies, is likely to be the national economy’s organizing principle for years, even decades, to come.

Shall we now expect a new wave of pink-slip-bearing, prodigal Maritimers returning to their roots down home, where the pastures are, if not exactly green, a little less brown than they seemed not so long ago?

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The perils of running a petro-economy

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Western oil magnates and their fellow travellers in government and media once crowed superciliously about their pride of economic place in Canada. They and they alone, they insisted, were responsible for the nation’s surging fortunes in global markets.

They still exult this way, though lately their gloating has become a tad muted thanks to the pounding the price of oil is taking on international commodity exchanges. West Texas Intermediate crude (WTI), the standard used to benchmark all grades, fell to $82 a barrel earlier this week. That was off by more than 10 per cent since the beginning of the month.

We wretched urchins on the East Coast may be tempted to indulge in a little schadenfreude when we witness the fear and loathing that cyclically descends on Alberta’s oil patch. Something about the best laid plans of mice and men rattle around in our brain pans as we watch yet another plane load of New Brunswickers abandon their unpromising, little towns for putatively greener pastures under big sky country.

But, in the broader context, when Alberta hiccups, all of us should worry.

For more than 30 years, economic planners and regulators at both the federal provincial levels have been slowly and deliberately transforming this country into an oil and gas giant. They have nurtured, with countless millions of dollars in publicly supported research and development and tax breaks, astonishing advances in drilling and extraction technologies. Now, we’re all dependent on this continued success, for without it, there’s precious little else to fall back on.

Today, Alberta companies employ nearly as many Maritimers between the ages of 18 and 35 – many of whom are the major breadwinners for their families back home – as do Atlantic firms. Over the past year, the bitumen-rich province generated all of the country’s net jobs growth, adding some 82,000 positions.

Currently, Alberta accounts for nearly a third of Canada’s GDP. According to Oil Sands Today, quoting figures compiled by the Canadian Energy Research Institute, “New oil sands development is expected to contribute over $2.1 trillion (2010 dollars) to the Canadian economy over the next 25 years about $84 billion per year. According to Statistics Canada, $84 billion is enough to feed more than 90 per cent of Canadian households for a year.

What’s more, “The oil sands industry will pay an estimated $783 billion in provincial ($122 billion) and federal ($311 billion) taxes and provincial royalties ($350 billion) over the next 25 years.”

Meanwhile, “employment in Canada as a result of new oil sands investments is expected to grow from 75,000 jobs in 2010 to 905,000 jobs in 2035 with 126,000 jobs being sourced in provinces other than Alberta. . . .It is estimated the oil sands industry will purchase about $117 billion in supplies and services from Canadian provinces outside Alberta over the next 25 years – about $5 billion/year. For every direct job created in Alberta’s oil sands industry, approximately one indirect and one induced job will be created in the rest of Canada.”

All of which is swell, unless you’re an environmentalist worried about humanity’s rapacious ways with Mother Nature or, as the case may be in the current circumstance, an economist.

Although oil prices have been sliding globally for only a few weeks, the signs of steadily softer demand are everywhere, especially in emerging powerhouses such as China and India, where the pace of growth is slowing. And the causes of this bottoming trend are especially perplexing.

“Historical pricing has been affected by, and dependent upon, turmoil facing the Middle East,” writes Brigham McCown, a former government executive, attorney and public policy expert, in a recent commentary for Forbes. “In times of war and geopolitical instability, prices have historically increased rather quickly, often overnight. As turmoil eased, so too would oil and gas prices, albeit at a much slower pace. Based on historical data, one would expect prices to be dramatically spiking given current events in Syria, Iraq and Libya, yet for all of this instability, prices continue to drop.”

That they do suggests that something more systemic than routine price fluctuations is at work here.

Canada’s unequally booming industries may soon feel the brunt of a great, leveling downturn thanks entirely to Alberta’s outsized pride of economic place in this country.

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