It would be an irony if Canadians should find, after all these years of squabbling over the spoils of high-priced oil, that while we were fighting the oil boom had passed us by.
All those bitter disputes over equalization payments and whether they should be adjusted to take account of the recipient provinces’ newfound energy wealth; all those demands from British Columbia and others to be paid their “fair share,” with the pipelines that were to carry the oil held to ransom; all those similarly tendentious efforts to claim a slice for central Canada, as compensation for the effects of the dreaded “Dutch disease” — and here we are with the price of oil below US$70, a drop of more than a third since the summer. This kind of irony you usually find only in folk tales or O. Henry stories.
Of course, no one knows whether the price will stay this low. Indeed, no sooner had an excitable Canadian oilman predicted the price would drop all the way to $30, when it bounced back, rising 4% in a single day. It wasn’t that long ago that we were hearing similarly excited predictions that oil was headed for $200.
Still, with world oil production exceeding consumption by nearly two million barrels a day, it’s entirely possible that the days of $100 oil are gone, if not for good, then for some time to come. While OPEC — or rather Saudi Arabia, since that’s who’s behind last week’s non-decision by the cartel on production ceilings — is plainly hoping to drive higher-cost North American producers out of the market, they may find it is not so simple as all that. At some price south of $70 the marginal operator may start to shut in production, but most of the shale oil producers whose increased output over the last year has helped to create the supply glut can get by on much lower prices — and can ramp up production again relatively quickly in response to any price rebound.
That has set off a lot of apocalyptic talk of the dire impact of cheap oil is likely to have on Canada’s economy — often from the same people who were wringing their hands over the effects of dear oil. How foolish of Stephen Harper, runs this line of thinking, to have tied our economic fates to the swings of the commodity cycle. This is what comes of being a petrostate — evidence, surely, of the need for wise and far-seeing governments to steer the economy towards some more respectable pursuit like manufacturing.
It is evidence of nothing of the kind. Whatever the prime minister might wish, we are in no danger of becoming a petrostate. The entire energy sector — oil and gas, coal, hydro-electric, nuclear, the works, including not only production, but transformation and transportation — accounts for less than 7% of Canada’s GDP; oil and gas extraction alone is about half that. Even in Alberta, the sector accounts for barely a fifth of provincial output, and just 6% of employment.
Nevertheless, at the margin, the boom in oil and other commodity prices over the last dozen years or so has been good to Canada. As with any economic change, it benefited some and cost others: oil consumers, obviously, but also some exporters, via the associated rise in the dollar. But for a net oil exporter like Canada the balance is pretty clearly positive. The beneficiaries, moreover, were not limited to the oil sector, but also to its suppliers and, again via the rising dollar, consumers in general, whose purchasing power was thus enhanced.
Will all of that go into reverse, now that oil prices are falling? Some, yes. It depends on how deep and how sustained the fall turns out to be: people made investments, both in increasing supply and reducing consumption, while prices were high that they will be hesitant to unwind. And any impact will again be on balance, netting out the benefits of lower oil prices to consumers. Just as a rising dollar helped to spread the wealth as prices rose, so a falling dollar spreads, and eases, the pain of lower prices. (Not only does it help manufacturers, but also the oil patch itself: since oil is priced in U.S. dollars, a cheaper Canadian dollar offsets some of the decline.)
Yes, but who needs all of this volatility? Wouldn’t people be better off with a less unstable source of income? Maybe, but it doesn’t seem to have hurt Alberta much: the province has the highest median incomes, before tax and after, of any province in Canada, indeed of most places on earth. Perhaps there is a trade-off between the level of income a sector produces and its volatility; if so, people are perfectly capable of judging that for themselves. If they don’t think the trip is worth the ride, they can invest and work in other sectors.
Alberta’s economy is already plenty diverse, without government’s help (or perhaps in spite of it). There is a case, however, for diversifying the government’s own revenue base, of which energy royalties account for fully a quarter. The province is already arguably in deficit, on a proper accounting. If oil stays below $70, next year’s will be worse. And while runaway spending has contributed mightily to that — the province has tended to spend the royalties as they came in, as if the boom would continue indefinitely — a greater reliance on a more stable revenue source would help to restrain that urge. An Alberta sales tax, anyone?
Source: PostMedia News - Andrew Coyne