The Canadian economy has been hurt as global oil prices have climbed even as the saturated U.S. market drove down the price of Canadian crude, the Bank of Canada said Wednesday.
In its monetary policy report issued Wednesday, the central bank noted that the domestic economy typically benefits when world oil prices climb because Canada is a net oil exporter.
But the usual patterns have been broken because Canadian crude prices have not matched the runup in international oil, but consumers and businesses are paying product costs that tend to be priced off the global market.
While international prices paced by North Sea Brent have risen since October, North American crudes such as West Texas Intermediate have not kept pace. And Canadian crude prices, including the leading benchmark Western Canada Select, have actually declined this year.
“This is why the evolution of oil prices since January have been unfavorable to Canada,” the central bank says.
“The increase in the price of our oil imports raises production costs for Canadian firms and also puts upward pressure on gasoline prices, since about half of the gasoline purchased in Canada is produced using refined petroleum priced off Brent.”
Typically, the higher prices to consumers are offset by greater export earnings for Canadian producers. So while the impacts are unevenly spread between producing and consuming provinces, the net effect on the Canadian economy is positive.
Canadian prices have recovered somewhat from a serious slump in February, when refinery outages in the U.S., plus the glut of crude in the U.S. mid-continent drove prices down sharply.
The Bank of Canada noted that planned pipeline expansions in the U.S. should help lift the price of Canadian crudes. Enbridge Inc. and its partner, Enterprise Products Partners LP, are reversing the Seaway pipeline - which formerly carried crude into Cushing, Ok., - to take oil from that over-supplied market to the massive Gulf Coast refining hub.
However, central bank analysts say the differential between WTI and Brent will persist until more pipeline capacity is built between western Canada and the U.S. Gulf Coast, the route for TransCanada Corp.’s proposed Keystone XL line, and between Oklahoma and Texas, where there are several projects being planned.