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jeff rubin

Canadian dollar.Jonathan Hayward/The Canadian Press

It's a few weeks into a brand new year and so far Canadians are discomfited by watching our dollar rank among the world's worst-performing currencies. The oft-cited reasons include high consumer debt levels, the potential for a housing bubble, and worries that Canada's economy is on a divergent path from the U.S. Really, though, it's about oil.

For years now, Canada's currency has traded as a petrodollar. That might not jive with its standing in the domestic economy, where it accounts for around 4 per cent of GDP and roughly 2 per cent of employment. When it comes to investment and trade flows, though, it dominates. Given that the loonie's fortunes will continue to be tied to oil for years to come, what might that future hold?

Canada certainly has the potential to become an even bigger player in the global oil market than it is now. The oil sands are the third-largest oil reserves in the world. The Harper government, meanwhile, has made no secret that it will do everything it can to ensure environmental and other concerns won't stand in the way of the oil industry's plans to more than the double bitumen output from northern Alberta to five million barrels a day over the next two decades.

But is that best-case scenario for the oil industry realistic? Prime Minister Harper may think so. He clearly still has visions of Canada becoming an energy superpower. Financial markets have more doubts. The shine has come off the oil sands, as more investors have started to question whether oil sands development is really a sure thing, particularly at the speed projected by bullish petro-boosters. Instead, there's an increasing likelihood that much of Canada's impressive oil sands reserves will never be produced.

The most immediate issue is geography. Canada's landlocked oil reserves are tough to get to market, which is why pipelines are rarely far from the national discussion these days. Enbridge's Northern Gateway project, which just won approval from the National Energy Board, is one solution to that problem, but the line – regardless of its new stamp from the NEB–won't see the light of day. Opposition is simply too strong and widespread.

As for Keystone XL (once called a "no-brainer" by Harper) it remains stalled, as President Obama continues to face pressure from US environmentalists to nix the project. His options are more open now than they were a few years ago, as America has become less tethered to Canadian supply. Thanks to the so-called shale revolution, the US has enough oil that it's actually exporting more than 3 million barrels a day of gasoline and diesel to the rest of the world.

Even if Keystone XL is eventually approved, it would still only provide a fraction of the pipeline capacity the energy industry will need to increase production by several million barrels a day. To reach those levels, a number of major projects will have to get the green light. If public opposition to Northern Gateway and Keystone are any indication, getting multiple new lines built could turn out to be little more than a pipedream for the energy industry.

In the meantime, oil producers are turning to rail to move their product. However, after the disaster in Lac-Mégantic, which has been followed by four other explosions and derailments in recent months, it's become clear that moving massive amounts of oil by tanker car is hardly the panacea that some in the energy industry have hoped.

Oil sands producers are in a predicament – and investors have noticed. Share prices of oil sands players are down by roughly half since the recession and have shown few signs of perking up for the last several years running.

Watching the petro-fuelled Canadian dollar steadily lose ground against the greenback isn't all bad news, though. The oil industry's good fortune artificially inflated the value of the loonie. When it traded at parity with the greenback, it was overvalued by about 20 per cent. That was enough to wipe out more than half a million manufacturing jobs in central Canada. As the country's energy dreams begin to look more unobtainable, a rapidly shrinking loonie may help Canada get some of those lost jobs back.

Jeff Rubin is a former chief economist of CIBC World Markets and the author of the award-winning Why Your World Is About To Get A Whole Lot Smaller as well as The End of Growth.