Is Cheap Oil Good Or Bad For The Canadian Economy?

Canadians have spent the last couple of weeks breathing a collective sigh of relief – the burden of high gas prices having been somewhat lessened. In the short term, paying less to fill up your tank is certainly something we can all get behind, but what about the long term impact low oil prices has on our economy? If you haven’t had a chance to read your local newspaper’s business section lately, you might not realize the implications the drop in the price of a barrel of oil has on Canada and it’s provinces.

First of all, I’m not an analyst or economics major. I’m just a Canadian driver who got to wondering what impact a significant price fluctuation of a major commodity would have on our country. I’ve scoured the internet, read articles produced by several news agencies, and summarized what I’ve found.

Expansion of extraction projects will slow or cease altogether

According to an article published by the Globe and Mail on January 5, the current price level of oil makes it impractical for expansion to occur in the oil sands because the cost of the extraction process is so high that expansion “would no longer make economic sense”.

Oil sands oil is already among the most expensive to produce, so in order for expansion to be a viable option, oil needs to command a high market price – and until it does, companies won’t be investing in the infrastructure required for expansion. It’s almost a domino effect – no new infrastructure means fewer jobs being created in the sector. Several global oil giants have already put oil sands projects on hiatus or cancelled them altogether; not something those championing Canada as the next energy superpower are likely too happy to hear.

Low oil prices means a lower Canadian dollar

For shoppers heading south of the border, a low dollar is not something you want to hear about. But a low dollar can help other areas of our economy, specifically favouring foreign investment, especially where our largest trading partner is concerned, the United States.

With a low dollar, the American greenback has more buying power in Canada; making it a tempting landscape for many American companies to expand their operations in the Great White North. Who knows, it may very well entice General Motors and Ford to increase their Canadian manufacturing divisions, stemming the loss of manufacturing jobs in hubs like Ontario.

Some banks, though not all of them, are optimistic about the overall effect low oil prices will have on the Canadian economy. Even though the Canadian economy could stand to lose billions of dollars in the energy sector, the Royal Bank of Canada claims in a recent assessment that such losses could be off-set by increased household spending, an influx in foreign investment, and a surge in demand for Canadian export goods.

At the very least, we’re saving a bit of money at the pump – maybe that’s enough for now.

 

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