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TORONTO (miningweekly.com) – As prices for Western Texas Intermediate (WTI) oil on Monday fell below the $50/bl level for the first time since April 2009, a report published by one of Canada’s ‘big five’ banks argued that while the low prices would impact negatively on the country’s economy, offsetting positive outcomes would more than counteract the expected weakening in oil sector investment.
Royal Bank of Canada (RBC) economists pointed to three significant offsets that could counterbalance the impact of the nose-diving oil price. These included a “a clear positive shock” to the US economy, the enhanced competiveness of Canadian products in the US market by the associated weakening in the Canadian dollar in the face of weaker oil prices and increased Canadian consumer spending, boosted by lower fuel prices.
The authors of the RBC report noted that while business investment was a sizeable 13% of Canada’s nominal gross domestic product (GDP), including investment in intellectual property products, consumer spending comprised 54.3%. Thus, a small rise in consumer spending could go a long way to offsetting a marked drop in investment.
However, the report warned that cuts to oil production investment were more likely to occur than potentially offsetting positive outcomes, as the financial viability of projects was being undermined by the lower selling price for output.
Several companies had already announced cutbacks to capital expenditure.
“Will consumers spend the savings realised at the gas pumps? Will Canadian exporters more aggressively seek out markets for their goods benefiting from the strengthening US economy and a weaker Canadian dollar?
“Our current Canadian forecast assumes that both consumers and exporters will respond to these incentives that will slightly more than offset the expected weakening in oil sector investment,” the economists said.
The report used an assumed WTI price of $65/bl on average in 2015 and $74/bl in 2016.
Analysts at Canadian Imperial Bank of Commerce (CIBC) last month warned that the unprecedented 40% dive in crude oil prices in the last four months would impact the Canadian economy much more severely than previously thought.
In their report ‘No barrel of fun: What weaker crude means for Canada’, the economists estimated that the price decline would reduce Canada’s GDP growth in 2015 to about 2.2%, rather than the 2.7% previously predicted.
The CIBC model doubled the impact on the country’s real GDP to about 0.5%, up from 0.25% estimated by the Bank of Canada. However, the impact on the nominal GDP and net national income could be as much as 2%.
RBC on Monday noted that the lower oil prices would have significant impacts on government budgets in oil-producing provinces. Provinces such as Alberta, Saskatchewan and Newfoundland and Labrador had seen big increases in revenues from price increases in recent years, positioning them to potentially better absorb the shocks of a prolonged price decline.
Conversely, other provinces could benefit from the low crude prices in the form of cheap gasoline and the falling loonie, which was creating a better climate for their manufacturers and exporters – should the manufacturers be able to tap into the stronger US economy.
The Canadian dollar fell on Monday, dragged below the $0.85 level as a result of the continuing weakness in the oil price. The plunging oil price also pounded the TSX, which was off by more than 3%, or 380 points, at noon.