Troubles facing the Alberta oil patch could become troubles for the Canadian economy.
For much of 2012, Canada has faced a dual threat from divergent oil prices, with international crude selling more than $30 (U.S.) a barrel above some Canadian product. Oil prices have sagged in Canada amid growing problems shipping to markets outside Alberta.
Gasoline prices, meanwhile, have soared. The disparity has afflicted consumers with higher pump prices, while trimming profits to energy companies – a kind of double economic penalty.
In a rate decision released Tuesday, the Bank of Canada warned: “If sustained, these oil price developments could dampen the improvement in economic momentum.” The central bank is expected to include an analysis of how oil prices affect the Canadian economy in its quarterly forecast, which will be released Wednesday.
The bank specifically pointed to the fact that global oil prices are now “considerably higher” than those received by Canadian producers.
The prominence of current oil price discounts in the bank’s analysis is another sign of the growing national importance the energy industry is playing in Canada.
“It’s considered an important item on the public policy agenda,” said Avery Shenfeld, chief economist at CIBC World Markets Inc. The Bank of Canada is lending the authority of its governor, Mark Carney, to the issue at a time when Ottawa is weighing how to speed approval of pipelines that could alleviate the price discounts.
Mr. Carney “is certainly viewed as someone who is a clear thinker on economic issues, and therefore adding his voice on the side of getting on with the job of expanding pipeline capacity could be important,” Mr. Shenfeld said.
Oil was Canada’s single most valuable export in 2010; energy exports, in total, were worth $94-billion, or nearly a quarter of the Canadian total.
But those exports have been hurt by a confluence of events that have dramatically diminished the price of Canada’s crude much of this year. Fast-growing production, both in Canada and the northern U.S., has created a glut of production into the traditional midwestern U.S. market at a time when public opposition has slowed the development of new pipelines to other markets. That has pushed down the value of Canadian product relative to North American benchmarks: Canadian heavy oil has traded at a $25 discount, while light oil has been down as much as $10.
The discounts are far higher when compared with much pricier international crude – severe enough that one estimate suggested they could strip $18-billion from Canadian oil producers this year. And though prices have recovered somewhat in recent weeks – to a $16.90 discount for heavy and $1.75 for lighter crude tracked by Net Energy Inc. – futures trading continues to be grim.
At the same time, high overall prices – the internationally traded Brent crude traded just below $119 Tuesday – still hurt. A 2010 central bank study calculated that a 10 per cent crude spike would diminish the Canadian GDP by 0.3 per cent. The reason: while oil and gas is a critically important industry, it’s not as important as energy itself, which touches every corner of the economy. Statistics Canada data shows that, in 2010, the energy sector made up 6.7 per cent of the Canadian economy. But fully 9.4 per cent of household costs go toward energy.
It’s a similar story for many in the corporate world.
Take Polaris Minerals Corp. , which ships construction aggregate from Vancouver Island to California and Hawaii. Polaris pays shipping firms an adjusted price on each boatload of aggregate, depending on fuel costs, and increases are passed on to clients, chief executive officer Herb Wilson said. As a result, the higher cost doesn’t come directly off the Polaris bottom line, but it does tend to dampen customer demand.
In the past six weeks higher fuel prices have caused the delivered cost of Polaris aggregate to rise by almost ten per cent, Mr. Wilson said, and if that keeps up clients will likely be ordering less of his product.
He is also worried about the broader impact of the highly visible gasoline price. “Nothing impacts [consumers]more than a rapid increase in gas prices,” Mr. Wilson said. “It slows down the economy.”
For many companies, though, there is a benefit to higher oil prices. Winnipeg’s Exchange Income Corp. , for example, has a mix of businesses ranging from regional airlines to small manufacturing operations. Its airlines have been hit by oil price hikes, said CEO Michael Pyle, while the manufacturing businesses mainly supply oil patch companies and have benefited from the boom caused by higher prices.
While consumers and some consumer-product businesses clearly suffer from high oil prices, the gains for oil patch companies – and governments that collect taxes and royalties – probably outweigh the disadvantages, Mr. Pyle said. “I think at the end of the day increased fuel prices are a net positive to Canada.”
with a file from Jeremy Torobin