Triple-digit oil prices could turn the Canadian economy on its head
What will triple-digit oil prices mean for the Canadian economy? Well for starters, it’s going to catapult Canada to the front ranks of major world oil producers. Triple-digit oil prices have transformed Alberta’s tarsands from a once marginal, high cost, oil resource into the world’s third largest oil reserve, behind only those in Venezuela and Saudi Arabia. Production has already soared to over one and half million barrels a day and is widely expected to double by the end of the decade. Counting conventional production, Canada could soon be producing as much as four million barrels a day, a level of oil production comparable to Iran.
For some Canadians that will be a blessing. For others it will seem more like a curse.
Oil has already redefined who the have and have-nots are among the provinces. The offshore oil industry has suddenly made Newfoundland, the perennial basket case of the Canadian federation, a have province. At the same time, triple-digit oil prices have made Ontario, the largest oil consuming province and historically the source of most of the country’s equalization payments to poorer regions, a have-not province.
But the reversal of provincial fortune triggered by the rise in oil prices, and the attendant rise in Canadian oil production, has just begun. Not only do triple-digit oil prices themselves create great gaping disparities between oil producing and oil consuming provinces but the knock-on effects may be even more powerful.
One of the most powerful of those knock-on effects is the impact of oil on the external value of the Canadian dollar. As the loonie continues to morph into a full-blown petro currency, triple-digit oil prices will take the currency to levels it has never been before. That in turn will have profound regional implications.
A loonie that trades at a double-digit premium to the U.S. dollar won’t pose much of a problem for oil exporting provinces (providing they have a pipeline to connect them to world markets), but it will have a crippling impact on the auto industry and other manufacturing industries in Ontario and Quebec. And those provinces will have little recourse. The Bank of Canada, already powerless to halt the loonie’s rise, will have even less influence on the currency in the future as oil prices and oil exports play an ever more dominant role in the Canadian economy.
But there may be an even more powerful fiscal impact from triple-digit oil prices. Triple-digit oil prices will swell royalty revenues for the Alberta treasury. But the very same prices will be a yoke around the Ontario economy and its tax base, leading to revenue shortfalls for a province already grappling with a huge deficit.
In America, states aggressively lever their fiscal advantages to compete against each other for industries, offering significant tax incentives to companies to relocate. And industries, as well as labour, have responded. Texas, with ample oil revenues, has no state income tax, a factor that has allowed the state to lure to high-tech industries and jobs from much higher tax jurisdictions like California.
Could these true and tried tactics soon come into play north of the border? The tandem of triple-digit oil prices and soaring oil production from the tarsands may soon give Alberta the fiscal wherewithal to cut taxes while the deteriorating fiscal position of oil consuming provinces force them to raise taxes.
Petrodollars have already created tax disparities in Canada. For example, energy royalties have long allowed Alberta the luxury of having no provincial sales tax. Could even more petro revenues soon allow it to significantly reduce either its corporate or personal income tax, while stagnating economies in provinces like Ontario force their provincial governments to move in the opposite direction? The recent Ontario budget, which cancelled a planned corporate tax cut and imposed a two per cent surtax on personal incomes above half a million dollars, may be only the first of many tranches of tax hikes awaiting the Ontario taxpayer.
Even more troubling to Ontario is the prospect that Alberta could soon be in a position to lure financial and other footloose service industries to seek greener pastures out west. Create tax wedges like those seen in the United States and all of a sudden the Bay Street headquarters of Canadian banks, insurance companies and big legal firms could moving west, just like the headquarters of Canadian oil firms left Toronto for Calgary years ago.
As elsewhere in the world, the flow of petrodollars will create tension and conflict in Canada. Managing the very disparate impacts of triple-digit oil prices on the Canadian economy will soon become Ottawa’s most pressing challenge.
By Jeff Rubin
Jeff Rubin is the author of award-winning book Why Your World is About to Get a Whole Lot Smaller and has the recently published The End of Growth.