Skip to main content

Crude oil storage tanks are seen at the Kinder Morgan terminal in Sherwood Park, near Edmonton, Alberta, Canada November 14, 2016.

CHRIS HELGREN/REUTERS

The Bank of Canada says the economy as a whole has adjusted to lower prices for crude, and the oil-price shock that began three years ago is largely complete.

However, Wednesday's small-but-meaningful hike to the country's key interest rate is still worrying for many in Western Canada, especially in oil-focused Alberta – where the ill effects of the downturn and the spectre of continuing oil price weakness lingers.

Peter Tertzakian of the ARC Energy Research Institute said that, when taken in combination with lower global oil prices and the higher Canadian dollar, Wednesday's increase in the overnight lending rate to 0.75 per cent from 0.5 per cent makes higher-cost oil producers "even more vulnerable."

Story continues below advertisement

Explainer: How the rate hike affects homeowners and buyers

Related: Rising rates: An investor's guide to a new era

Rob Carrick: Five harsh realities of rising rates for savers and borrowers

Mr. Tertzakian calculates the interest-rate hike could potentially add $180-million in debt-servicing charges to the Canadian oil and natural gas industry's collective $72-billion in short-term debt. The figure might not sound significant when stacked against the activities of a multibillion-dollar industry, or for highly efficient producers.

But "for high-cost producers that are on the margin, every bit of added expense is significant."

While 2017 started out on a more optimistic note, forecasts for oil prices have been revised downward. This week, the U.S. Energy Information Administration predicted that West Texas intermediate crude oil prices will average below $50 (U.S.) per barrel until the second half of 2018. Just last month, the U.S. energy data agency had predicted WTI would average just above $50 per barrel this year.

An increase in the value of the Canadian dollar also hurts. Canadian crude exports go to the United States – and like almost all oil in the world – sells for U.S. dollars. Although Canadian companies often have to spend more to buy U.S. equipment when the loonie is low, Canadian currency weakness is a boost to the bottom line when it comes to exporting crude.

Story continues below advertisement

Alberta's opposition Wildrose Party immediately used the bank's rate hike as another opportunity to criticize the mounting deficits of the provincial NDP government, saying it "will cost taxpayers big time with ballooning interest payments as the NDP government plunges Alberta deeper into debt."

The Bank of Canada cut rates twice in 2015, in part to protect against the fallout from the collapse in the price of oil. The bank's Monetary Policy Report suggests the central bank is aware that investment prospects for the sector are still "highly contingent on the outlook for global oil prices, which have recently declined."

However, many passages from the bank's report – which makes the case for Wednesday's rate hike – sound as if they were written based on results from the first quarter of this year, before oil prices plummeted again. "The drag on investment spending and economic growth from lower oil prices is mostly over, and growth in commodity-related activity is resuming," the report said, in a line that now appears optimistic.

The risk for Western Canada is not only in the debt accumulated by oil companies. With unemployment rates higher in Alberta than the rest of the country, the central bank's decision to hike its overnight lending rate could disproportionately affect individual debt holders on the Prairies, said Martha Hall Findlay of the Canada West Foundation.

"A lot of people have been laid off," Ms. Hall Findlay said of the energy sector. "There will be extra concern than in regions where things are perhaps moving along more successfully."

But she added household indebtedness is an issue across the country. "Having a relatively small increase that is a bit of a warning to people is a really smart thing. That's not a Western-versus-Eastern thing."

Story continues below advertisement

Mr. Tertzakian said the country's fledgling renewable energy sector – which is flourishing in Alberta thanks to the provincial government's goal of doubling renewable-energy capacity by 2030 – could be affected by Wednesday's and future interest-rate hikes. Renewables are financed based on cash flow, and projects are often highly leveraged.

"Typically, renewable energy projects are 75-85 per cent debt," he said.

Stephen Poloz, governor of the Bank of Canada, and Carolyn Wilkins, senior deputy governor, give a press conference in which they announce the central bank's first rate hike since 2010.
Report an error Editorial code of conduct
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

If your comment doesn't appear immediately it has been sent to a member of our moderation team for review

Read our community guidelines here

Discussion loading…

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.