Just because the Bank of Canada hasn't altered interest rates for more than two years doesn't mean policy makers have been idle.
With little room to manoeuvre on policy, Governor Mark Carney and his deputies have been conducting something of a stress test on the Canadian economy. Their speeches, interest-rate announcements, and quarterly reports have become the most important sources of insight into Canada's economic strengths – and more importantly, its weaknesses.
There is no more galling weakness than the gap between the world price of oil and the much lower price Western Canadian oil fetches in the United States.
It's the opportunity cost of all opportunity costs.
Back in April, when the central bank brought the price difference to a wider audience, the world price of oil was about $35 (U.S.) a barrel higher than Western Canadian Select. According to Charles St-Arnaud, a former Bank of Canada economist who now works for Nomura in New York, the spread now is about $50, a shift that is costing Canada about $1.5-billion a month.
To be clear, that only accounts for the lost export earnings from the widening of the spread to $50.
If Canadian Western Select traded at a more normal level, which Mr. St-Arnaud estimates to be about $10-15 lower than the Brent crude price set in London, Canada would be earning about $2.5-billion more a month from oil exports. The country would be running a trade surplus instead of a small deficit. Mr. St-Arnaud's estimate implies lost revenue of $30-billion a year, or 1.6 per cent of gross domestic product.
There are a few reasons for the persistent gap between the Canadian and world price of oil.
One is the boom in U.S. production from hydraulic fracturing, which has created a glut at mid-Western refineries where Canada's heavy crude is processed.
But more important is a lack of pipelines. Northern Alberta producers have no easy way to get their oil west or east. Canada now is paying the price for that lack of foresight. Canada imports more than 40 per cent of all the oil it consumes. That's primarily Central Canada, and consumers and businesses there are paying the world price, not the cheaper Canadian price.
"Our challenge is to develop our commodities intelligently and sustainably and to ensure that the whole country benefits," Tiff Macklem, the Bank of Canada's senior deputy governor, said in a speech earlier this month in Kingston, Ont. "Infrastructure investments in pipelines and refineries to get Western heavy oil…to Central Canada and to foreign markets would bring more of the benefits of the commodity boom to more of the country."
Mr. Macklem's remark suggests the weaker Canadian oil price continues to weigh on the minds of policy makers.
In April, the Bank of Canada expressed its concern in its policy statement, noting that the "considerably higher" international price could "dampen the improvement in economic momentum." It was an unexpectedly specific comment on the economy. One reason to do so was to show less sophisticated investors that the link between the Canadian dollar and the world price of oil was broken. Dispel the notion that Canada's dollar is a petro-currency and you might take some of the upward pressure off the loonie, which would be a relief to those central Canadian factories who are forced to pay the international price for energy.
Investors might need another reminder.
Krishen Rangasamy, an economist at National Bank Financial in Montreal, says Canada's current-account deficit likely widened to 4 per cent of GDP last year, the widest in more than two decades. That has a lot to do with the currency, which is trading roughly at par with the U.S. dollar because international investors have come to see it not only as a petro-currency, but a haven as well.
The haven trade makes sense. Canada's finances are sound, its banks are safe and its central bank makes no attempt to actively debase the value of the currency. But the petro-dollar trade makes less sense. Mr. Rangasamy crunched some numbers and found that the correlation between the loonie's value and the West Texas Intermediate price was twice as strong as with that of the Edmonton Par price.
"By tying the loonie to the `wrong' oil price, markets are perpetuating the Canadian dollar's overvaluation," Mr. Rangasamy said.