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Oil’s retreat from the $110-a-barrel (U.S.) mark this year may have helped fend off a deeper global economic slump, but for Canada the benefits of lower energy prices come with a serious cost.
The drop in the cost of crude to about $87 currently has made it cheaper for companies to run their plants and has saved drivers some money at the pumps.
But Canada’s manufacturing sector continues to struggle with a high dollar and lower-cost Asian rivals, and the oil-price pullback highlights how dependent the country’s economy has become on the energy sector for growth.
Few countries feel the rise and fall of oil prices more than Canada, and a healthy oil industry is crucial to ensure the country’s modest growth outlook doesn’t turn into something worse. Consider that oil and gas exports and investment in machinery and infrastructure in the oil sands accounted for fully one-third of Canada’s economic growth in 2010 and 2011.
In May, oil exports fell 5.5 per cent to $5.7-billion (Canadian), according to Statistics Canada – the fourth-consecutive monthly decline.
“If oil prices get to a point where they are going to deter investment in the [energy] sector, the negatives outweigh the benefits,” said Diana Petramala, an economist at the Toronto-Dominion Bank.
At Calgary-based Mullen Group, the negatives are starting to be felt. The trucking and oil-field services company is paying less for fuel, its second-largest operating cost. But its most important customers, oil sands producers, are slowing production and putting off expansion.
Murray Mullen, CEO of the company whose roots go back to 1949, says he’s happier when energy prices are higher, even if it costs more to run his machines.
“There’s a fine balance,” he said. “Oil is a lifeblood to our customers.”
Worries are mounting about the energy sector’s pace of spending. Energy stocks, which comprise one-quarter of the value of the S&P/TSX composite index, have been poor performers. The sector has declined by 9 per cent this year as declining oil prices, particularly for Canadian benchmark crude, have dampened earnings expectations.
If oil prices were to reach as low as $70 per barrel, large Canadian producers such as Imperial Oil, controlled by Exxon Mobil Corp., would be “significantly outspending cash flow,” said Andrew Potter, an analyst at CIBC World Markets.
For the rest of this article, please go to the Globe and Mail website: http://www.theglobeandmail.com/report-on-business/falling-oil-puts-pinch-on-economy/article4418057/