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Should Canada fear a "catastrophic" collapse in energy prices?

Russia does.

Certainly, the plunge in oil prices is rippling through the country, notably eating into federal government revenues, as we saw this week in the fiscal update.

Russia is, of course, different, but its fortunes, too, are tied to crude. And here's what Vladimir Putin told the Tass news agency as oil prices were sinking and he was headed for the G20 summit in Australia:

"We're considering all the scenarios, including the so-called catastrophic fall of prices for energy resources, which is quite possible, and we admit of it. The Ministry of Economics and the Finance Ministry prefigure development of the economy under each scenario."

On Friday, by the way, the International Energy Agency said prices could drop further still.

And we'll see what happens later this month when the OPEC group of nations meets. Since their last meeting, oil prices have tumbled by about 30 per cent.

"Many oil traders will be feeling that the next OPEC meeting at the end of the month can't happen fast enough as current levels were last seen in October 2010," said market analyst Alastair McCaig of IG in London.

At this point, economists say, the drop in oil will take its toll in Canada, though the country is protected somewhat by its heavy oil and its declining currency.

"While lower oil prices will support the U.S. expansion, the same cannot be said for Canada," senior economist Sal Guatieri of BMO Nesbitt Burns said in a new forecast this week.

"A cutback in oil and gas investment could carve up to 0.2 per cent from GDP growth next year," he added.

"Alberta will take the brunt of the hit, likely slowing to a sub-3-per-cent rate for the first time since the recession. Saskatchewan and Newfoundland will also share the pain. However, the manufacturing-heavy regions in central Canada will benefit from both lower energy costs and a weaker currency."

As The Globe and Mail's Shawn McCarthy and Jeff Lewis report, there are offsets for Canadian energy producers because the loonie, as Canada's dollar coin is known, has tumbled, and there's a narrower discount for Canadian heavy oil against the U.S. benchmark.

Indeed, Canada's oil association says each 1-per-cent drop in the dollar means $1-a-barrel more in oil prices.

"Several factors, including a weaker Canadian dollar and lower discounts for Canadian crude oil, mean that the recent hit to prices received by Canadian producers is less severe than the global oil price decline suggests," Toronto-Dominion Bank economist Leslie Preston said in a report early this week.

(Note that prices dropped further in the days that followed.)

"The average price of Canada's crude oil basket over the past was 8 per cent higher than its average level since 2010, whereas the Brent price was 10 per cent lower," Ms. Preston said.

While sheltered, we're not immune.

"Lower prices present a headwind to the industry, will be a hit to Canada's national income … and take a sizeable chunk out of government coffers of oil-producing provinces (for example, the Alberta government derives 25 per cent of revenues from royalties," Ms. Preston added.

"But, while we are likely to see projects with more marginal economics shelved in the coming months, the overall near-term impact on crude oil production is likely to be limited."

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 25/04/24 0:51pm EDT.

SymbolName% changeLast
BMO-N
Bank of Montreal
-0.71%92.18
BMO-T
Bank of Montreal
-0.75%126.29
CADUSD-FX
Canadian Dollar/U.S. Dollar
+0.19%0.73112
GS-N
Goldman Sachs Group
-1.36%417.3

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