Low Oil Prices and the Need for Diversification in Canada

Low Oil Prices and the Need for Diversification in Canada explained by professional Forex trading experts the “ForexSQ” FX trading team. 

Low Oil Prices and the Need for Diversification in Canada

An economic history of natural resource-based development in Canada earned the nation a global trademark of “hewers of wood and drawers of water.” Since, Canadian political economist Jim Stanford has introduced a more contemporary iteration of “hewers of wood and pumper of oil”.

Today, Canada is the fifth largest producer of natural gas and crude oil in the world and carries with it a long-standing tradition of being a net energy exporter.

The strong positive correlation between the Canadian dollar and the price of oil reflects the importance of oil and gas sector within the current Canadian economy.

The National Resources Defense Council states that “over the period of 2001 to 2013, the correlation between the Canadian dollar and the WTI oil price was 92 per cent.” Consequently, when the price of oil dropped below $30 a barrel in January 2016, the Canadian dollar reached a 13-year low at below 70 cents to the U.S dollar.  Although a weak currency has the potential to boost an economy, this has not been the case for Canada, as demonstrated by the current economic downturn. The low price of crude oil exposes the vulnerability of Canada’s economy to the boom and bust cycles of the oil and gas industry. A recent report released by the Ivey Business School found that quarterly GDP in Canada fell by 0.6% in response to oil prices dropping by more than $40 per barrel since August 2014.

Prices while slightly higher, as of March 2016, are still likely to remain low.

According to Goldman Sachs, the price of oil is projected to remain low for the next 15 years with a long term price of $50 a barrel. However, OPEC projected that the price of oil will gradually make its way up to $80 a barrel by 2020.

Despite this discrepancy and the general uncertainty surrounding long-term oil forecasts, the current impacts of cheap oil should serve as a wake-up call for Canada. The health of the Canadian economy requires diversification to limit the potentially hazardous consequences of over-reliance on the oil and gas sector in the long-term.

Canada has the third-largest proven oil reserves in the world, trailing behind only Saudi Arabia and Venezuela. However, 97% of the country’s oil reserves are tied up in oil sands located almost entirely in Alberta. The development of Alberta’s tar sands has faced intense scrutiny due to the social and environmental costs associated with tar sands production. The Sierra Club of Canada states that “tar sands development produces 4 times more greenhouse gas emissions than conventional oil.” According to Environment Canada, development of the carbon-intensive oil sands is considered the fastest-growing source of greenhouse gas emissions in Canada. The growth of the tar sands puts Canada on track to surpass the 2030 national target for greenhouse gas emissions set at COP21 by a whopping 56%. To close the emissions gap, Canada must take immediate and drastic action to reduce greenhouse gas emissions, in emissions coming from tar sands development.

A low price of oil could play a promising role in closing this emissions gap by forcing high-cost tar sands oil out of the marketplace. The breakeven cost for new in situ projects was found to be $84.99 per barrel with standalone mines requiring a greater $105.54 per barrel to ​breakeven. Even using the more optimistic OPEC prediction for 2020 oil prices, developing the oil sands will fail to be the lucrative investment it once was when oil prices were high.

The observed impacts of low oil prices on the Canadian economy serve as a reminder that despite boasting a modern industrialized economy, Canada is still tied to its origins of natural resource sector dependency. In the 20th century, Canada reduced its economic dependency on natural resource and effectively diversified its economy. However, over the past decade, Canada has reversed its economic trajectory away from greater diversification due to the steady increase in petroleum exports.

 This backtracking towards resource dependency is in part due to the rise in oil sands production. Going forward, it is evident that Canada must re-diversify its economy away from the oil and gas industry- in particular, the oil sands- if it is to remain healthy and stand a chance of meeting its climate change commitments. The low oil prices of this past year, in conjunction with an anticipated regulatory landscape supporting stricter emissions standards, send a strong signal that Canada must diversify to maintain a “resilient, stable and sustainable” economy.

Low Oil Prices and the Need for Diversification in Canada Conclusion

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