Is Oil Driving Our Economy?
It is, according to a major story by Barrie McKenna in today’s ROB.
The story is full of telling anecdotes which ring more or less true. But I doubt that higher oil prices are, on net, a plus for the total Canadian economy in terms of either GDP or employment.
True, high and rising oil prices will (often with a significant lag) boost real investment in the oil producing sector which generates additional purchasing power and government revenues in the oil producing regions. Increased investment also boosts activity in sectors selling goods and services to the oil producing sector, a boost which extends to non oil producing regions.Â As the story notes, the boost to the oil sector is also shared with other regions to some degree through labour migration.
On the other side of the ledger, high levels of foreign ownership mean that higher rents in the oil sector may flow through to foreign shareholders rather than be immediately re-invested in Canada.
More importantly, high oil prices reduce consumer purchasing power which will result in reduced demand in most other domestic economic sectors, from housing, to retail trade, to manufacturing for the domestic market.
Moreover, high oil prices have a major depressing effect on the US economy which is, of course, both our largest export market and a major net importer of oil.
Further, to the extent that the Canadian dollar has become a petro-dollar, higher oil prices will raise the exchange rate of the Canadian dollar against the US dollar (in which currency oil is priced.) A higher Canadian dollar reduces revenues from oil exports, and also squeezes output and jobs in other tradeable sectors, notably manufacturing but also some sophisticated services. (A high dollar, does, of course, come with a few pluses such as reduced import costs.)
I recollect that high oil prices used to be considered aÂ significant net negative for the Canadian economy when run through economic models, and that was not so long ago.Â True, the oil sector has become relatively larger with the decline of manufacturing, but I doubt that the sign has switched from negative to positive.
But I stand to be corrected.
A minor quibble – oil and gas prices seem to have become delinked with the rise of internationally traded LNG and shale gas. Oil prices may be high, but natural gas prices are very low compared to recent highs.