Oil Spells Trouble For Canada

Most of the larger oil producers have had a tough year on account of the steep decline in oil prices which has impacted everything from employment to national budgets. For major exporters like Russia and Saudi Arabia, this dependence on energy exports has necessitated the drawdown of vast foreign currency reserves in order to prop up the economy and offset the emerging budgetary gaps. As a major commodity producing region, Canada has not been immune from the broad amount of commodity deflation occurring across the globe. When combined with developments in the energy patch, its own domestic industry is coming under pressure due to the downturn in external demand and weakening outlook as other countries quietly devalue and engage in price competition to protect market share. The result has been substantial losses in the Canadian dollar which show no signs of slowing in spite of the uncertainty facing the neighboring United States.

The Fundamental Picture

While Canada has largely skirted the most devastating impacts of the 60% plus decline in oil prices, an extended period of low prices do not benefit the underlying fundamentals for Canada as evidenced by the latest uptick in unemployment and downtick in inflation. Unemployment in general benefited from the gains in raw materials during the commodity super cycle, with certain areas like Alberta benefiting from oil prices that exceeded $100 for much of the past few years. For tight oil plays like the oil sands which require higher extraction costs, these projects operated well above break-even points. However, with the downturn in oil prices, many of the geographical regions that saw a rapid rise in fortunes witnessed an equally swift reversal in prosperity. Although many projects are still operational owing to more efficient production measures, layoffs continue to grow as companies look for any form of cost saving measures.