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.
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.