The general rule of thumb is that what's good for the global economy is good for Canada (small, open, export-oriented, commodity-heavy economy – stop me if you've heard all this before). But the rule breaks down when we're talking about oil.
Or does it?
It's a pretty important question when we're staring down the barrel of $78 (U.S.) oil, in an economy that has leaned pretty heavily on a strong energy sector to lead it out of the export wilderness, create jobs and generally grease some pretty squeaky wheels of growth.
When a lift-off in business investment is the key missing ingredient in your wobbly economic recovery, it's hardly comforting to see the oil and gas business, which has delivered more than 40 per cent of Canada's capital spending growth since the recession ended, suffer a 25-per-cent price drop in its main product in just five weeks.
And just in time for oil company budget season, when the industry's big spenders are deciding how much to commit to capital spending in 2015. Another reason for uncertainty, doubt and cautious purse strings.
There has been considerable debate during oil's slide about how big a deal it is to the Canadian economy if the downturn is sustained, but the general conclusion is that it's a small yet meaningful negative – the downside for the country's large energy sector outweighs the upside for consumers.
The Bank of Canada recently estimated that the roughly $20-a-barrel drop in the oil price from the beginning of summer to mid-October is worth about one-quarter of a percentage point on Canada's gross domestic product growth for 2015. That's less of a deal if your economy is humming along at 3-per-cent growth; it's a bigger issue when annualized growth is under 2 per cent, as recent estimates suggest it could well have been in the third quarter.
But for most of the rest of the world, lower oil prices have the opposite effect – the break they deliver to consumers is a considerable net economic lift. Capital Economics, an independent economic research firm based in London, this week estimated that a $20 drop in the price of crude (which is about what we saw from mid-June to mid-October) would deliver a 0.4-percentage-point rise in global economic demand.
The Bank of Canada estimated that oil's drop since the start of the summer would boost U.S. economic growth by 0.2 to 0.4 of a percentage point over the next year.
Some of this is simply because most of the world's biggest economies are bigger consumers of oil than producers. But more importantly, a lower oil price represents a transfer of money from oil producers to consumers – and consumers have proven much more likely to actually spend that money than producers.
(Producers have tended to sock away a significant portion of their windfall from $100 oil prices for a rainy day; the big oil countries of the Gulf region have been particularly big savers.) So having the money in consumers' hands will mean a net rise in total consumption of all goods and services.
At a time when much of the global economy is struggling, this transfer of money to consumers is not the worst thing that we could do; indeed, it might be one of the best. The desired economic effect is similar to that of tax cuts – but for so many countries that are still wrestling with budget deficits and committed to austerity, this tax cut comes essentially for free, from a fiscal standpoint. Free, I think we can agree, is a good price for economic stimulus.
The resulting lift in the global economy is, ultimately (if not immediately), a positive for Canada – even for Canadian oil producers. A recovery in global demand is what Canada needs to drive its export revival over the longer term, rather than a set of inflated commodity prices that weren't strongly supported by underlying supply-demand fundamentals.
And let's not forget that the United States, which accounts for fully three-quarters of Canada's exports, will be a key beneficiary of this oil-price dividend and the resulting lift in demand.
It's worth noting that the oil and gas sector's biggest year for capital spending growth since the recession wasn't either of the past two years, when crude prices averaged more than $97 a barrel. It was 2010, when the average price was under $80 – but the global economy was rebounding and the demand outlook was on the upswing. It suggests investment in the sector isn't driven by high prices (though they don't hurt), but by demand growth.
This isn't to say that Canada and its oil sector won't feel a sharp sting from oil's slump over the next few quarters – they absolutely will, assuming the price doesn't bounce back. But if the consumer benefits can provide a kick to the global economy and further accelerate U.S. demand, Canada's short-term pain could lead to longer-term gain.