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.
Posted by: Frank | May 13, 2021 3:52:54 PM
The vast majority of Canadians today don't know a Canada without socialism. Socialism costs money. Demands placed on government for services and voters that falling prey to politicians promising the moon force governments into debt. The left screams for limited use of fossil fuels and stricter enviromental laws while promising more and more from an ever expanded government dependent on revenue from royalties and taxes generated from resource development. HELLO!!!! Wake up time. It doesn't add up. "You can't have your cake and eat it to." as they say.
Triple digit oil is here to stay. The Keystone XL is already started construction. The investments being made in this industry will be paid back largely by inflation in the same way it happened in the mid 70's like it or not. Canadian oil production will double by 2035 get use to the idea and be happy that your pension cheque won't bounce.
Posted by: Frank | May 13, 2021 4:16:52 PM
Oh!!! I forgot to mention ...... that by 2035 the bulk of Baby Boomers will have passed on. The revenue the Canadian government enjoys from resource royalties will be enjoyed in the form of health care, education and a full range of services by new Canadians being born right now in other parts of the world. This is what socialism has done for Canada. We will witness the transformation during the next 25 years. Pray that triple digit oil is here to stay and oil production doubles so that the quality of your retirement and your stay in the old age home is at least as comfortable as parents enjoy today. Hmmmm......!!!
Posted by: bob | May 15, 2021 12:50:58 AM
Pump price in BC is close to $6.00 a gallon. Without salary increases, how long before the 'roof' caves in?
Posted by: SP | May 15, 2021 5:20:07 AM
It is quite possible that banks would move to Alberta with the price of oil as high as it is. I mean look at all the other massively stupid things they have done in the recent past alone. Regarding oil revenue as a source of income and not a windfall could prove calamitous for Canada. What happens if there is another set of US leaders elected that aren't in the back pocket of big oil? Think Clinton Era oil prices. Worse still Imagine war with Iran. Price shoots up and Europeans and Japanese perfect electric - hybrid/Natural gas or Hydrogen fueled cars. Price shoots up and then collapses permanently. Quebec used to make lots of money from Asbestos, how is that working out as a stream of income now? Imagine tar sands related pollution lawsuits.
Oil money and transfer payments are clear examples of what is wrong with the 'Canadian experiment' Instead of using oil money to advance the whole society (like Norway) it is being used to tear the country apart while the young drown in student debts without families and the elderly look forward to a very old age in a society comprised of new immigrants with vastly different standards of care for the elderly.
Enjoy the 'windfall'.
Posted by: Frank | May 15, 2021 8:55:21 AM
1 in 4 Canadian adults are obese. The health care system is slowly being destroyed. Canada has the lowest productivity in the G8. We are socialists living off the resources of the country. The fabric of the country is socialist. Even the PC's are right wing leftists. California has as many government employees as Quebec but a population the size of Canada. We are governed by a spineless bunch of politicians dictated to by left wing academics. Pray every night that "Big Oil" and "Big Business" can sustain the government's lust for taxes and royalties.
The problem isn't huge price oil prices. The problem is the huge number of people with with BMI 30+ who do nothing but complain while politician invent new ways to grab their votes.
Ride a bicycle, go for a hike, turn off the TV!! It's good for the country.
Posted by: Allen | May 15, 2021 9:24:09 AM
Triple didget oil prices are not good for anybody and fortunately oil will soon be taken off the market after the next American election. It is one of the main election platforms there and it will happen. There is more than enough oil in the world to last for ions. The big secret to bringing manufacturing back to Canada is cheap oil and hydro not tax breaks. The biggest enemy in Canada at present is finacial planners and ecconomists. Once again over the past few months they have helped wipe out a lot of Canadians life savings with bad advice that only profits them. they go hand and hand with greedy Corporations and the incompetant Canadian Governments that we have suffered over the years. Here's a tip from an average guy. The market will crash within the next 2 months.
Posted by: Frank | May 15, 2021 2:17:39 PM
Saudi controls the world price of oil. They can lower the price. Will they make oil cheap? No. The idea of Canada competeing with China, Mexico and India for manufacturing jobs is laughable. If Canada puts up trade barriers to protect our jobs our purchasing power drops along with our standard of living. This would be political suicide for any government. Manufacturing is gone. Canada cannot compete with $1 per/hr skilled labour. I just read a report in the office today. One of the oil sands contractors is hiring 400 tradesmen from the Philippines. Why???? Because Canadians will not work for the money being offered to them. Social benefits are so cozy we simply won't work when we can get government handouts. The NDP defends the Canadian right to decide what type of work we will do. Yeah right ...... sit at home on UI or wait for $40 per hr.
Posted by: Ken | May 15, 2021 3:48:09 PM
@ Frank, you don't have a clue on poltics or business in Canada.
Posted by: Bernie | May 15, 2021 4:42:05 PM
High demand, high wages and an even higher price we pay for destroying the enviroment. Way to go, we should all be proud of ourselves. I wish the price of oil would plummet to $10 a barrell and then the oil sands would be nothing but a ghost town. It should only take a thousand years to fix what we have destroyed in the last 25 years.
Just Saying folks, just Saying
Posted by: Tyler | May 15, 2021 5:31:03 PM
Gosh, some of these comments sound like they are coming from highschool students. Anyways, I would strongly recommend Jeff Rubin to anyone interested in economic current affairs. "Why Your World Is About To Get A Whole Lot Smaller" was a great read and doesn't require a great deal of prior knowledge of the subject area. With natural resources being the domain of the provinces, Canada is sure to experience a great deal of conflict in the future due to the fact one of these provinces is awash in one very important and profitable resource to the detriment of most of the other provinces. What I would like to see happen is for the windfall money garnered from these non-renewable natural resources to be spent on education and development of next generation 'green' technologies that will help secure a stable future for all. When you have a world that consists of 'have's and have nots, not just in Canada but around the world, this creates a recipe for conflict and disaster.
"In a democracy, people get the government they deserve." - Aristotle
Posted by: Western Guy | May 15, 2021 6:59:05 PM
@ Bernie
Have you ever been to the oil sands? I have. Do you have any comprehension that primarily all of the sites being developed now are SAGD which doesn't disturb the ground at all? Furthermore that the original open pit operations use a very small percentage of area (New York city cover more area and probably puts out 100X the pollution).
Also I know the oil obviously pollutes but can you truly blame the supplier or should you blame the consumer? If there weren't as many people the world wouldn't need as much oil and the environment would be cleaner. So really pollution is being driven by over population, not from trying to supply those people with a decent standard of living. Basically don't shoot the messenger.
Alberta is becoming the leading province of Canada. We have the highest GDP per person, the highest growth, and are the only fiscally balanced province. Since 1867 Ontairo and Quebec have dominated confederation. This wasn't unreasonable as they were the economic and population powerhouses. However as the momentum slowly shifts to Alberta those provinces are going to have to wake up and share the power in Canada.
For all of you that complain about Alberta remember that if you push us too hard we will leave and then you will be left with a country that is truly floundering in debt.....
Posted by: Jeff | May 15, 2021 8:35:45 PM
Hydrocarbon production occurs in many of the provinces and territories of Canada. Alberta leads the way in overall production. The benefit to all Canadians in terms of economic prosperity and quality of life are very significant. The author of this article/book only seems to lament the fact that Ontario's traditional grip on power is being eroded and shifted to the west. It's just a fact of life - people/power will go to where the opportunity is - thats how things work. One province fades as another rises, what's the big deal? He talks about how Ontario used to help other provinces by making transfer payments - Alberta has been doing that for decades and have contributed more than Ontario ever has. That's because Alberta has oil money - does he want Alberta to quit?
As far as pollution goes, I have been to both the oilsand areas of Alberta and the atutomobile manufacturing areas of Ontario and I can tell you which one is cleaner - heres a hint - it's not Ontario.
Posted by: Canadian Girl | May 15, 2021 9:49:59 PM
Oil producers do not create the demand - they respond to it. There is a global demand for oil and will be for the foreseeable future - look how well green technology has panned out for Ontario! We should all be using wind power - sounds great, but don't put one of those turbines anywhere near me. Yeah, I'd use green technologies but not if they cost me more.
The reason manufacturing is suffering in Ontario has much less to do with the rise of the loonie than it does with our - yes, that includes you - insatiable need for cheaper goods. Whatever it is, it can be manufactured cheaper in China. How much more are you willing to pay for Canadian-made goods? When push comes to shove, I'd bet not much. There's a reason places like Walmart do well - we want more and we want it for less.
As long as goods are being manufactured in China, shipping companies will need oil - lots and preferably cheap - to get all the things we can't live without to our nearest Walmart. Viva oilsands! We might as well have something that the world wants, cause it's sure not our manufacturing.
Posted by: yerallnuts | May 15, 2021 9:50:31 PM
It's EFFECT, not AFFECT in the title.
The key to dealing with petro prosperity is to ensure that the benefits are nation-wide, rather than localised in Alberta as they are now.
The key to unity in Canada is equality from sea to shining sea, in two languages.
Posted by: Alberta Windfall | May 16, 2021 12:11:25 AM
Alberta is now prospering with the high price of oil. But such was not always the case. It was not that long ago oil was under $20 a barrel and the Oil Sand Companies were operating at a net loss and were supported by the Alberta Tax Payer to keep the doors open. In fact it was the Alberta Taxpayer that helped pay for and develop the technology required to extract and upgrade the heavy crude from the oil sands, through the Alberta Research Counsel. Ottawa and the eastern provinces were asked to help fund the research needed to develop the oil sands. And the response was get stuffed from the Trudeau Liberals, to add insult to injury a National Energy Program was tabled that cut foreign investment in the oil sands and put Alberta in to a 20 year long recession additionally a moratorium was levied that blocked any pipelines bringing western crude east of Manitoba to help open markets in eastern Canada now that many foreign ones were now not accessible due to the NEP.
Now the western oil producing provinces are prospering due to the foresight of a few smart Alberta Premiers and the sacrifices of the Alberta tax payer. And the rest of the nation expects their piece of the pie. Well to be really blunt....tough. The opportunity was handed to them many years ago to reap the potential rewards and instead every thing was done to stifle the development of the oil sands. Yet now the same provinces that had a hand in stifling oil sands development cry foul.
They created the situation they are now in, so they can just reap the reap the rewards of their effort.
Just as Alberta will now reap the rewards for their sacrifice and foresight in years gone by.
Posted by: Frank | May 16, 2021 10:52:04 AM
The key to dealing with petro prosperity is to ensure that the benefits are nation-wide, rather than localised in Alberta as they are now.
The key to unity in Canada is equality from sea to shining sea, in two languages.
yerallnuts:
Very nice thought. Tell that to Quebec. Ask them if they want to participate in equalization payments and consider Hydro Quebec as being under the National Energy Program.
Posted by: Bobby44 | May 17, 2021 12:59:52 AM
Get used to it boys - we've left the farm and you can not s;:1t on us anymore. What is good for one is good for all. Do not think if you tear down one it somehow improves another. Got that Mucair?