What does Canada’s economy look like with oil prices at $40 a barrel? Certainly it won’t be the energy superpower envisioned by Prime Minister Stephen Harper.
If $40 a barrel still seems a ways off, consider that the benchmark price for oil sands crude is already trading in that price range. What’s more, if production from high-cost sources isn’t withdrawn from an oversupplied market, oil prices may soon be trading even lower.
The first thing Canadians should recognize about the new world order for oil prices is – contrary to what we’re being told by our federal government – the economy is no longer in dire need of any new pipelines. For that matter, it can live without the new rail terminals being built to move oil as well.
At current prices there won’t be any massive expansion of oil sands production because those projects, which would produce some of the world’s most expensive crude, no longer make economic sense.
The recent spate of project cancellations by global oil giants – Total’s Joslyn mine, Shell’s at Pierre River, and Statoil’s Corner oil sands venture – is only the beginning. As oil prices grind lower, we can expect to hear about tens of billions of dollars of proposed spending that will be cancelled or indefinitely postponed.
Not long ago, the grand vision for the oil sands saw production doubling over the next 20 years. Now that dream is in the rear-view mirror. Rather than expanding production, the industry’s new economic imperative will be attempting to cut costs in a bid to maintain current output.
With the exception of oil sands players themselves, no one will feel those project cancellations more acutely than new Alberta Premier Jim Prentice. His province’s budget is beholden to the gusher of bitumen royalties that will no longer be accruing as planned. Of course, falling oil prices are a concern for much more than just Alberta’s budget. Real estate values also face more risk, particularly downtown Calgary office space. .
If plunging oil prices are writing a boom-to-bust story in Alberta, Saskatchewan and Newfoundland, the narrative will be much different in other parts of the country.
Ontario’s long-depressed economy is already beginning to find a second wind, recently leading the country in economic growth. As the largest oil-consuming province in the country, lower oil prices put more money back into the pockets of Ontarians. Ontario’s trade leverage with the U.S. is set to become even more meaningful as the Canadian dollar continues to slide along with rapidly fading oil prospects.
With the loonie’s value falling to three quarters of where it was only a few years ago, we’ll start seeing Ontario, as well as other regions of the country, start to regain some of the hundreds of thousands of manufacturing jobs that were lost in the last decade.
For the Canadian economy as a whole, much is about to change, while much will also remain the same. Once again, oil will largely define the fault lines that separate the haves from the have-nots. But at $40 oil, it’s the consuming provinces that will drive economic growth. Rather than oil flowing east through new pipelines, jobs and investment will be heading in that direction instead.
(Full comment by Jeff Rubin found in Globe & Mail)