TJ JAN 3 ECONOMICALLY DRIVEN Will cheap oil benefit our province? DAVID CAMPBELL Unless you have spent the last six months marooned on a remote Fijian island, it is likely you will agree the top economic story in 2014 was the precipitous drop in the price of oil during the latter part of the year. Regardless of whether the price drop was driven by an overproduction of shale oil in the United States or the Saudis flexing their muscle to show the Yankees who is the real boss, the plummeting of oil prices caught just about everyone looking. According to the United States Energy Information Administration, the futures price of crude oil in July 2014 was around $100/barrel. By the end of 2014, that same oil could be purchased for $54/barrel. Oil is now trading at its lowest price since 2009. This has caused a flurry of speculation about the future. How long will $50/barrel oil last? What will be its effect on the global economy? What will be the impact on Canada? Because Canada is one of the larger producers of oil in the world, lower prices will have negative impacts particularly in the oil producing provinces but eventually spilling over into the wider economy. At the same time, lower energy prices also bring positive benefits. A recent story in the Globe & Mail suggested Canadians could save $12 billion during 2015 just from the lower cost of gasoline at the pumps. Manufacturing-intensive provinces, such as Ontario and Quebec, will benefit from the decline in the value of the Canadian dollar resulting at least partially by the drop in oil prices. According to the Bank of Canada on Dec. 31, 2013, one Canadian dollar was worth 94 cents in U.S. currency. By the end of 2014, a loonie was worth only 86 cents U.S. In my opinion, the low price of oil will be a mixed blessing for the New Brunswick economy. The lower price of energy should lead to a modest boost in consumer spending across the province. According to Statistics Canada, the average household across the province spends about $3,000 per year on gasoline and other fuels for vehicle operation. All else being equal, a sustained 30 per cent reduction in the price of gasoline at the pumps would save New Brunswick households $200 million per year freeing up this money to be spent in other areas or to reduce household debt. The current environment should help boost the competitiveness of our manufacturing sector, although in the short run I do not expect it to trigger a significant new round of investment. There are too many uncertainties right now facing New Brunswick’s manufacturing sector particularly around access to workers. The tightening labour market is the biggest long-term risk to the province’s manufacturing sector as well as other export-intensive industries. On the down side, the lower price of oil could impact the future amount of transfer payments the provincial government receives from Ottawa. This is only a concern if the price remains consistently low into future years. It could also mean fewer jobs for the thousands of New Brunswickers that work in the oil patch and in Western Canada generally. They will return to a province with not a lot of local job prospects. If the low oil prices delays development of the Energy East pipeline, it will also hurt New Brunswick’s short-term economic outlook. For what it is worth, my own opinion is that oil prices will rise back up to around $65/barrel during 2015 and likely go marginally higher in 2016. I do not expect the price of oil to surpass $100/barrel again for a long time unless there is some crisis as the abundant supply of shale gas around the world provides an easy alternative to oil. New Brunswick’s economic and demographic challenges are significant. It will take more than a drop in oil prices to fix what ails our economy. DAVID CAMPBELL davidwcampbell An economic development consultant based in Moncton
Posted on: Sat, 03 Jan 2015 21:40:14 +0000