No nation’s economy prospers indefinitely. Even the notion of “prosperity” isn’t absolute: people in Malawi would gladly trade their nation’s best-ever quarter for the United States’ worst one during the 2007-08 recession. Speaking of the 2007-08 recession, Canada didn’t participate in it to the extent that its G7 brethren did. With no quasi-governmental secondary mortgage market to speak of, and none of the credit default swaps that leveraged the U.S. economy beyond capacity, Canada barely registered a hiccup. Today, as unemployment decreases in the United States while inflation remains low, it is Canada whose economy is starting to (in very relative terms) sputter. And there’s already a ready-made scapegoat. A black, oleaginous scapegoat.
Live By the Pumpjack, Die by the Pumpjack
In the summer of 2014, oil prices in North America averaged around $100 a barrel. You might remember a general display of hand wringing from various sources. A year later, with oil down to $40 a barrel, not only is no one calling for sympathy for oil companies, plenty of people are drawing a connection between oil’s fortunes and the recent faltering of the Canadian economy.
Last month Canada’s central bank lowered its benchmark interest rate from 0.75% to 0.5%. Instead of seeing that as a chance for consumers and investors to borrow at even more agreeable rates than before, the educated opinion seems to be that falling oil prices are creating an environment of static and slow growth. And said prices are falling because demand in previously thirsty places such as China is dwindling. As some note, this becomes a purely academic exercise in correlation, as the Canadian economy recently experienced consecutive quarters of contraction (the introductory economics textbook definition of a recession), meaning the arrows are pointing in the same direction as that of the price of oil. That Canada still has one of the world’s largest economies (15th by some measures) and as high a standard of living as almost anywhere is of less interest to the doomsayers.
There’s Still Gold in Them There Tar Sands
Furthermore, as Canada’s economy dips into what are technically recessionary depths, the country’s oil-producing regions have little to do with that. Economic growth in Alberta remains positive, even when one accounts for every conceivable indirect outside force on the price of Canadian oil, no matter how tenuous the connection is: potential new Iranian supply, single-industry OPEC nations being forced to reduce output, Greece leaving the Eurozone, Donald Trump surging in the polls, Tom Brady facing suspension, etc.
Suncor Energy (SU), Canada’s largest oil company, made more money in the most recent quarter than it did in the previous three combined. Revenue might be down, but so are operating expenses (no sense in committing capital costs to drilling new wells when the existing ones are still producing.) The company’s stock is at a two-year low, which in some circles counts as a buying opportunity.
It’s Not the Money, It’s Where It’s Spent
The concept is literally foreign to people in most other parts of the world, but Canada maintains a transfer payments system among its provinces. In short, the federal government takes revenue from provinces that run surpluses and remits it to those that don’t.
Not to condense modern-day Canadian geopolitical history into a single paragraph, but oil-laden Alberta has been the nation’s wealthiest province for some time. In fact, in the half-century history of federal equalization payments, Alberta has been a net benefactor to the other provinces every single year—usually by huge margins. Last year, Alberta generated less revenue to “donate” to the remaining provinces, hence what is now being referred to as a weakening of the Canadian economy on a province-by-province basis. It’s a bold proclamation to make—that Quebec and Ontario’s failure to generate great revenue (despite being Canada’s two most populous provinces) is the fault of a cooling worldwide market for Albertan oil, but here we are.
The Bottom Line
Hydrocarbons drilled out of the ground remain the world’s greatest energy source, at least with regard to price and utility. A temporary drop in the price of oil doesn’t make oil any less desirable a commodity in the long run. Given that the revenues from non-oil Canadian exports are dropping too (lumber, drugs etc.), it seems unfair to blame the nation’s misfortunes on its one most notable industry, or even to categorize 2015’s minor ebbs as true “misfortunes.” With oil futures prices rising – in expectation of decreased production, therefore presumably increasing prices – the cycle between low and high oil prices gets closer to a theoretical if unachievable equilibrium. When Canada’s economy inevitably shifts into a higher gear, probably sooner than later, oil will be a huge part of it as always.
