Globe Economics

Columnist Doug Saunders writes (from his Mediterranean cruise) in today’s Globe:

“It’s a little like the decision being faced by the Bank of Canada, which can print money and ease the dollar’s value downward to please Ontario’s manufacturers, or let it rise to please Alberta’s petroleum exporters – but not both.”

Huh?  Petro exporters get more Canadian dollars and higher profits if they can convert their US dollar denominated oil exports back into Canadian dollars at a low exchange rate.  It is importers and consumers – not exporters – who gain from a high Canadian dollar.  The partial exception would be exporters who import a lot of components, but that’s not the oil industry. It is true that high resource prices drive up the Canadian dollar, but not true that a high dollar is a great thing for resource exporters.


  • Yes, Saunders’ example is baffling.

    A lower Canadian dollar indeed increases the profits of oil producers, who buy many of their inputs at Canadian-dollar prices but sell all of their output at American-dollar prices. Similarly, a lower exchange rate increases the Canadian-dollar value of provincial resource royalties. Even when inflation was relatively high in Alberta, the provincial government opposed combating it with higher interest and exchange rates.

  • Andrew makes an important point. One aside. I have no good idea of how best to calculate the impact of foreign ownership on the value of our dollar. I note that our current account deficit is up. A lot of oil companies are foreign owned, and take profits out of Canada. The more money they make through higher prices for oil, the more the re-patriation of profits should weaken the Canadian dollar. Does it?

  • No, there is a strong positive correlation between higher oil prices and a higher Canadian dollar.

    The causal relationship is more nebulous. The conventional view is that higher oil prices increase the value of oil exports, strengthening our current-account balance and hence our dollar. In fact, the current-account balance was weaker after oil prices took off than it had been before.

    I think the main issue was that the loss of manufactured exports more than offset the gain in oil exports. The repatriation of oil profits (a loss of investment income) may also have played a role.

    So, if higher oil prices did not strengthen our current account, how did they strengthen our dollar? Jim Stanford sees the answer in the capital account.

    As oil prices rise, financiers buy up Canadian dollars in order to purchase oil-producing assets in Canada. Jim suggests that foreign-ownership restrictions on Canadian oil companies would help limit this dynamic and thereby moderate the exchange rate.

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