A tectonic shift is occurring in the Canadian economy that will see oil increasingly become the dominant driver of wealth in the country, says the Bank of Nova Scotia's chief commodity analyst.
Patricia Mohr, vice-president of economics and commodity market specialist at Scotiabank, says there have been dramatic shifts in the export of natural resources in the last few years, with oil and gas commodities the clear winners and lumber products suffering since the U.S. housing market crashed.
To reflect the massive changes occurring in Canada's resource industry, Ms. Mohr on Tuesday announced a reweighting of the Scotiabank Commodity Price Index, which measures price trends in 30 of Canada's major exports.
Oil and gas now account for 40 per cent of the index, up from just 17 per cent previously. Forest products have been reduced to just 15 per cent, down from 40 per cent. This represents the biggest redesign of the index since Ms. Mohr created it in 1987.
The metals and minerals weighting rose slightly to 30 per cent from 27 per cent, partly due to the inclusion of the rapidly expanding iron ore trade from Labrador and northern Quebec to China and Europe. The weight of the agricultural index remains relatively unchanged at 15 per cent.
"We're becoming an economy that is very oil-dominant and this is very important to recognize because it has public policy implications," Ms. Mohr said. "We need to build adequate export infrastructure for our oil industry. The pipelines really need to go ahead because if they don't, it's going to have a big drawback on our economy."
Oil producers in Canada are eager to develop new export channels to Asia as North American prices slump on excess supply.
Enbridge Inc.'s proposed $6.6-billion Northern Gateway pipeline project to carry oil sands output to the port in Kitimat, B.C., is awaiting regulatory approval. It is one of the most controversial industrial projects the country has seen in years. In the U.S., local groups and politicians recently stalled the expansion of TransCanada Corp.'s Keystone XL pipeline.
The component weights of the Scotiabank Commodity Price Index are determined by the net exports of commodities and resource-based manufactured goods.
"This is a shift that mirrors structural changes in the Canadian economy that probably got under way in the aftermath of the 2008 recession," Ms. Mohr said.
It's not just Alberta's oil sands that are driving change. New technology is being used to tap oil fields in Saskatchewan and Manitoba, and Newfoundland is enjoying its own oil boom. There are also huge spinoff benefits occurring across the country, touching a wide range of businesses from equipment manufacturers to legal and accounting firms, she said.
The addition to the index of iron ore, the principal ingredient of steel, is important because some observers of the commodity markets say iron ore may be a better indicator of global economic health than copper, which is subject to volatility caused in part by speculator trading.
Until recently, iron ore prices lacked market oversight and were set quarterly by the big three producers, Vale S.A., BHP Billiton Ltd. and Rio Tinto PLC. Vale has nearly completed a shift to market-based pricing in response to demands from importers in China, the world's largest consumer.