March 25, 2011
Title: The Canadian petro-economy?
Subtitle: Rising pump prices are a real pain, but Mideast uncertainty hasn’t really been all bad for Canada.
Last week’s air strikes by Canadian and NATO forces against Libyan air defences have significantly heightened tension in a region that supplies a significant chunk of the world’s oil. Not surprising, prices have been firming up, to the $105 per barrel range for West Texas Intermediate crude by week’s end. And while many consumers are feeling the pain at the gas pump, the situation for Canada as a whole is more nuanced.
“On balance rising oil prices are good for the Canadian economy,” says Benoit Durocher a senior economist with the Desjardins Group. “Though of course not all of the country’s regions benefit equally.”
The most obvious overall winners when energy prices rise are Canada’s energy-rich western provinces, which benefit from increased exploration, development and production jobs. But that’s just the start. The big bad oil companies, which by the end of January accounted for more than a quarter of the market capitalization of the S&P/TSX also earn greater profits, a big chunk of which flow into government and private sector pension plans, which are big holders of energy stocks.
Rising oil prices also make alternate energy sources, such as natural gas, wind and solar, look good in comparison, so money tends to flow those sectors as well.
A petro economy?
Governments too are big winners when oil prices rise, both those that share in the increased tax revenues and royalties directly such as Alberta, Saskatchewan and Newfoundland and others such as Quebec, Ontario, Manitoba, Prince Edward Island, Nova Scotia and New Brunswick, which get them indirectly, in the form of transfer payments.
In short, rising oil prices bring a slew of benefits to Canadians, to the point that international markets regard the loonie as a petro-currency, which they bid up during tight energy markets. In fact the recent Mideast uncertainty is one of the major reasons that the Canadian dollar has been trading above par value with the US greenback. This in turn makes most imports cheaper for Canadian consumers and makes travelling to other countries more affordable.
Housing prices remain strong
The jobs and increased government revenues that rising oil prices bring also have a considerable effect on Canada’s housing market. According to the Canadian Real Estate Association, the average price of homes sold during February rose by 8.8 percent during the past year, to $365,192 (compared to a median price of just US $203,000 south of the border, according to the National Association of Realtors). Housing starts too increased during the month to 181,900 units on a seasonally adjusted basis, up from 170,600 units the previous month.
However as CREA’s chief economist Gregory Klump notes, the recent strength in resale home prices may not last forever. “When you take Vancouver out of the equation, the year-over-year increase in the national average price drops to 3.2 percent,” says Klump.
“While that’s still stronger than in the past six months or so, national average price gains may recede after tighter mortgage regulations take effect in March.”
Not everyone benefits equally
The big challenge from rising oil prices though remains the unequal effects that they have. For example, other than the direct job gains stemming from the oil sector, most Canadians don’t see any of the other benefits directly. However they see the negative consequences every week when they tank up their SUVs.
Other effects can be just as insidious. For example when global currency markets bid up the value of our petro-dollar, it not only made imports cheaper, it made our exports more expense. This has had a terrible effect on the country’s manufacturing sector, which is disproportionately concentrated in Quebec and Ontario.
Even worse, many experts warn that if oil prices rise above $125 per barrel, it could push the global economy into recession, which in turn would hit demand for many of Canada’s other commodities exports ranging from metals to fertilizers.
In short, while living in a petro-economy sure has its advantages, not all of them are immediately apparent.
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