Eye on the Economy: Plunging oil prices expose cracks in Canada’s economy

How the markets turn. Just a short while ago, there was speculation oil prices reaching $200/ barrel. Now it has plummeted to below $50, what does it mean for the economy and workers?

Plunging oil prices have already spooked the Harper government enough to delay tabling their federal budget until at least April and led to Bank of Canada to cut its key lending rate in a surprise move, while Alberta Premier Jim Prentice has introduced immediate measures to limit spending. Instead of panicking, shouldn’t we have seen this coming and been better prepared?

Bank of Canada Deputy Governor Tim Lane explains how oil is just like hogs. When prices are high, money flows into oil everywhere, including billions into oil sands projects only profitable when oil is at least $60-$100 a barrel. This investment into oil, as into piglets, leads to a big increase in supply and then a decline in prices. We figured out the boom-bust Hog Cycle 80 years ago; the Oil “super cycle” works the same way, but on a much bigger scale and with geo-politics involved. Except for the last decade and the 1975-85 decade, the real price of oil has averaged well below $50 since WWII so we shouldn’t expect it to rebound back above $70 anytime soon: Canada’s oil-spiked boom time party is over.

That’s why, to start, Suncor has laid off 1,000 workers and oil patch investment is already down by over $7 billion. Oil and gas directly employs less than 2% of Canada’s workforce and represents just 8% of our GDP, but it generates jobs elsewhere and represents a much larger share of corporate profits, the Toronto stock exchange, the federal government’s corporate tax revenues and Alberta’s total revenues. And, unlike Norway, we’ve done very little to save the wealth from our resources for future years, let alone generations, or used it to diversify our economy.

Beyond a bare fiscal cupboard, the oil price drop has revealed just how foolish the Conservatives have been to make us so dependent on the oil sands and pipeline “rip it and ship it” economy and how badly their provincial counterparts have run Alberta, writes David Climenhaga.

The oil price decline will produce winners and losers, as outlined by the Conference Board and others. The federal government will lose about $4-$5 billion annually in revenues, while Alberta calculates their revenues will decline by $7 billion. Lower oil prices will reduce economic growth in Alberta by an estimated 4% and in Saskatchewan and Newfoundland by an estimated 2%, but it will increase economic growth of Ontario, Quebec and PEI by close 1% and other provinces by about half that. Lower oil prices will put over $20 billion back into the pockets of Canadian households, reduce costs for other businesses, provide a big boost for the US economy and with the drop in the value of our dollar, be a boon for other exporters.

Because the federal Conservatives spent $5 billion on income splitting and other tax cut promises last Fall, their expected surplus has now disappeared in a plume of smoke. This could mean more spending cuts and austerity to achieve their promised balanced budget.

But even former Bank of Canada governor, “deficit wrestler” David Dodge says it makes more sense to run a deficit than to make the situation worse by prematurely forcing a balanced budget. Konrad Yababuski agrees, saying it’s more important to balance the economy than balance the budget.

Bottom line: Despite the job and economic losses over the short term, the oil price decline provides an opportunity for Canada’s economy to become more balanced, diversified, stronger and sustainable over the long run.

  • Job losses. Target’s exit from Canada will involve one of the largest layoffs in Canadian history, with 17,600 workers losing their jobs. They’ll be joined with former employees of Sony, Mexx and other retail stores also closing up shop in Canada.
  • One big union (of unions). In his 196-page decision over who will represent 25,000 health care workers following the Nova Scotia amalgamation of health districts, James Dorsey backs the unions’ positions and proposes that CUPE, NSGEU and Unifor create an amalgamated union of unions.
  • Wage gains will be modest for unionized workers, with base pay increases expected to average 1.5% in the public sector and 2.2% in the private sector, according to the Conference Board’s Industrial Relations Outlook 2015.
  • Growth slows. Economic growth will slow in Canada this year and next, and be slower than expected around the world, according to the International Monetary Fund’s World Economic Outlook, released on Tuesday. The stand-out is the US economy, which is expected to strengthen and grow at a rate 50% faster than Canada.
  • Inequality causing slower growth, social unrest. Income inequalities have widened and are delaying the economic and jobs recovery and increasing the potential for social unrest, emphasizes the International Labour Organization in its World Economic and Social Outlook – Trends 2015
  • Extreme inequality will be on the agenda as the world’s wealthiest and powerful gather in Davos, Switzerland. Oxfam released a report showing that by next year the top 1% will have the same wealth as the remaining 99% of humanity. To reverse extreme inequality Oxfam says we must invest in vital public services, ensure a living wage for all and stop corporate tax dodging.
  • Taxing wealth. In his annual State of the Union address, US President Barack Obama calls for increased taxes on the wealth of the top 1% and breaks for middle income workers. Not a chance, say the Republicans.
  • Trickle down. Aetna CEO Mark Bertolini was so impressed by Thomas Piketty’s Capital in the 21st Century book about the problems of rising inequality that he told his executives to read the book and is raising the lowest wage at the $50 billion health insurer from $12 to $16/ hour. This will give over 5,000 workers a substantial raise, but they still make just a fraction of his salary.

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