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Life at $20 a barrel: What the oil crash means for Canada

Posted on Feb 11, 2016 in Crisis, Economy, Ftrd, General

As the price of crude plunges, and drags the loonie with it, the pain stretches far beyond the Alberta oil patch. What’s next for Canada’s economy?

In September 2008, when thousands of riled-up Republicans filed into the Xcel Energy Center in Saint Paul, Minn., for the party’s national convention, the upcoming election wasn’t the only thing on their minds. Oil had soared to US$145 a barrel just months earlier, and though crude had begun to fall fast—a harbinger of the Great Recession—Americans fumed that they were still paying $4 a gallon at the pumps and the nation was gripped by anxiety over its reliance on the Middle East for its energy needs. So when party stalwart Michael Steele took the stage for his keynote address, he preached the bumper-sticker gospel of energy independence. “Drill, baby, drill!” he hollered. “Drill, baby, drill!” the multitudes roared back.

But away from the convention, a legion of energy companies were already doing just that, furiously exploring the oil fields of Texas, North Dakota, Colorado, and anywhere else they could park a rig. That drilling brought on the biggest energy revolution the world has seen in decades, one that continues to be measured in U.S. oil production at 40-year highs, glutted global crude inventories and a seemingly bottomless floor for oil prices. The price of a barrel of West Texas Intermediate crude, the benchmark measure for U.S. oil, fell more than 15 per cent last week, briefly dipping below US$30 on Tuesday, a 12-year low.

A growing number of grim forecasts are calling for even that demolished price to fall further. Last fall Goldman Sachs warned oil could hit US$25 as crude storage tanks reached capacity. In December a report from the International Monetary Fund argued new oil flowing from Iran could push prices even lower. This week analysts at Morgan Stanley made the case for US$20 oil based on the strengthening value of the U.S. dollar, which tends to push commodity prices lower.

(Todd Korol/Reuters)

(Todd Korol/Reuters)

Others have been even more pessimistic for longer, and their forecasts, once mocked, have taken on new gravity. In November 2014, when oil was still well above US$50 a barrel, U.S. financial analyst Gary Shilling, the author of The Age of Deleveraging, predicted oil would fall to between US$10 and $20 a barrel as producers in the U.S. and the OPEC oil cartel faced off over which side would curtail output first. This week Shilling reiterated his call. “Once the wells are drilled and the oil is flowing, the question becomes: what is the cost to get it to market? In the Permian Basin in Texas, that’s $10 to $20, and in the Persian Gulf it’s even lower,” he says. “They’re playing a game of chicken over who can stand lower prices the longest before a producer pulls out.”

Caught in the middle, of course, is Canada. While the shock was at first expected to be focused mostly on energy-producing provinces like Saskatchewan, Newfoundland and Labrador and the economic driving force of Alberta, there are now very real signs the pain is spreading to other regions. Last week Bank of Canada governor Stephen Poloz reminded the country of the hit we’re collectively taking: the drop in oil has delivered a $50-billion cut to Canada’s national income, equal to $1,500 per year for each man, woman and child. Then this week the Bank released the results of its latest business outlook survey, which polls firms on their investment and hiring intentions.


Why Canada’s economy is headed off the cliff

Posted on Apr 11, 2015 in Crisis, Economy, Ftrd

Editor’s Note: When we think of economic crisis, we think Greece. And maybe, closer to home, the collapse of Lehman Brothers or Florida’s overleveraged housing market. But rarely do our neighbors to the north come immediately to mind.

Just back from Canada, Vikram Mansharamani argues that they should. Mansharamani, a lecturer in the Program on Ethics, Politics & Economics at Yale University and a senior fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, is concerned about rising home prices and falling oil prices. The author of “Boombustology: Spotting Financial Bubbles Before They Burst,” he’s also written for Making Sen$e about random class admissions at Yale.

A version of today’s column first appeared on his website, where you can subscribe to his mailing list or read his weekly commentary. Follow him @mansharamani.

— Simone Pathe, Making Sen$e Editor

Canada is in the midst of an unprecedented housing boom that seems likely to bust. I was recently in Canada and noticed a schizophrenic oscillation between housing exuberance and oil-price despair. What did it mean for the Canadian economy’s outlook? Upon returning to the U.S., I did some research. What I found leads me to the conclusion that Canada is now among the most vulnerable large economies in the world. Here’s why.

First, household credit. The seemingly conservative Canadian population has been voraciously consuming debt at a breakneck pace. Total household debt (C$1.82 trillion) now exceeds GDP (C$1.6 trillion), approximately C$1.3 trillion of which was for residential mortgages. Further, household debt is now greater than 160 percent of disposable income – meaning it would take about 20 months for a family to pay off its debt if interest rates were 0 percent and they spent 100 percent of their disposable income to do so. Uh oh! The consumer clearly seems stretched, so much so that McKinsey recently suggested Canadian financial instability driven by a rapid consumer slowdown was not unlikely. By the way, that’s exactly what happened here in the United States when the debt music stopped and there weren’t enough consumer chairs to go around.