Oil’s retreat from the $110-a-barrel (U.S.) mark this year may have helped fend off a deeper global economic slump, but for Canada the benefits of lower energy prices come with a serious cost.
The drop in the cost of crude to about $87 currently has made it cheaper for companies to run their plants and has saved drivers some money at the pumps.
But Canada’s manufacturing sector continues to struggle with a high dollar and lower-cost Asian rivals, and the oil-price pullback highlights how dependent the country’s economy has become on the energy sector for growth.
Few countries feel the rise and fall of oil prices more than Canada, and a healthy oil industry is crucial to ensure the country’s modest growth outlook doesn’t turn into something worse. Consider that oil and gas exports and investment in machinery and infrastructure in the oil sands accounted for fully one-third of Canada’s economic growth in 2010 and 2011.
In May, oil exports fell 5.5 per cent to $5.7-billion (Canadian), according to Statistics Canada – the fourth-consecutive monthly decline.
“If oil prices get to a point where they are going to deter investment in the [energy] sector, the negatives outweigh the benefits,” said Diana Petramala, an economist at the Toronto-Dominion Bank.
At Calgary-based Mullen Group, the negatives are starting to be felt. The trucking and oil-field services company is paying less for fuel, its second-largest operating cost. But its most important customers, oil sands producers, are slowing production and putting off expansion.
Murray Mullen, CEO of the company whose roots go back to 1949, says he’s happier when energy prices are higher, even if it costs more to run his machines.
“There’s a fine balance,” he said. “Oil is a lifeblood to our customers.”
Worries are mounting about the energy sector’s pace of spending. Energy stocks, which comprise one-quarter of the value of the S&P/TSX composite index, have been poor performers. The sector has declined by 9 per cent this year as declining oil prices, particularly for Canadian benchmark crude, have dampened earnings expectations.
If oil prices were to reach as low as $70 per barrel, large Canadian producers such as Imperial Oil, controlled by Exxon Mobil Corp., would be “significantly outspending cash flow,” said Andrew Potter, an analyst at CIBC World Markets.
Crescent Point Energy Corp., an oil sands producer based in Calgary, has delayed most of its drilling projects from June to August, said chief executive officer Scott Saxberg. At that point, Mr. Saxberg is counting on the companies that service oil sands producers to lower their rates to match the current environment.
Greater crude inventories and weak economic growth in Europe and the United States – markets that together make up more than 50 per cent of worldwide demand for oil – have dampened oil prices since early May. The North American benchmark, West Texas intermediate, hit a low of $77.69 (U.S.) a barrel in June, and economists aren’t predicting a return to triple-digit prices until late 2013.
The recent drop in energy prices must be placed in context.
Prices are nowhere near the $145 mark reached in 2008, a peak that was followed by a swift plunge to $35 a barrel amid the global economic crisis. Oil closed at $87 on Friday, down from this year’s peak of $109.77 in February.
In the United States, falling oil prices have a mostly positive effect. The U.S. Energy Information Administration estimates that a $20 drop in oil prices adds about 0.4 per cent, or $60-billion, to U.S. GDP.
That will provide spinoff benefits for the Canadian economy even if oil producers suffer, argued Peter Hall, vice-president and chief economist at Export Development Canada. While the Canadian dollar has not fallen in lockstep with declining oil prices over recent months, economists expect it will remain below parity for at least the next year, so Mr. Hall expects Canadian manufacturers to enjoy an advantage.
“Every little bit helps” he said. “The remaining Canadian manufacturers are quite resilient at a parity currency, so anything they’re seeing below that is a bonus for them.”
Lower gasoline prices help sales for Rick Jamieson, chief executive officer of ABS Friction, a company that manufactures brake pads in Guelph, Ont.
The cheaper gas is, the more people drive and the more often they need to replace brake pads, Mr. Jamieson said. His sales are up 8 to 10 per cent compared to the same time last year, he said. About 50 per cent of ABS Friction’s revenue comes from the U.S., where Mr. Jamieson said consumer spending seems to be especially affected by changes in the price of fuel.