Oil prices have been sent into a freefall this week, shedding 13 per cent since Monday.
A decision by the Organization of Petroleum Exporting Countries to keep output at 30 million barrels a day rather than cut back and put a floor under prices, means there’s not much to lift crude out of its slide in the near term.
Here’s a look at how the plunge is – and will – impact various areas of the economy, and the economy itself.
Fuel costs can consume as much as a third of an airline’s expenses. Jet fuel costs were down around 20 per cent before this week’s fall in oil prices and carriers should be saving even more as a result of the most recent plunge. Those savings will give Air Canada and WestJet room to adjust prices lower too if they see customer demand slowing.
Consumers (for now)
The biggest beneficiaries, in the short term, are consumers, who are about to see noticeably lower fuel prices at the pump. U.S. estimates suggest households will save as much as $400 a year in gas costs they can use on other things, or save for a rainy day. Fuel prices are expected to drop by at least two cents a litre this weekend, with further declines to come.
As a net exporter of oil, Canada’s dollar swings up and down with crude prices. As oil has fallen, so too has the loonie – now trading down now around 87 cents U.S. The downdraft in the currency is making cross-border trips or journeys abroad less attractive for Canadians, and trips to Canada more attractive to foreigners whose currency can suddenly buy more here.
“The recent decline in the value of the Canadian dollar will provide a much-needed boost to domestic,” David Madani at Capital Economics says.
“What is saved at the pumps will be spent at the malls,” is how CIBC chief economist Avery Shenfeld put it. And the timing of events perhaps couldn’t be better, with the holiday shopping season now underway. One caveat: Consumer confidence, already not altogether upbeat, could be rattled further by the calamity in oil markets.
Canada’s two most populous provinces are already benefiting from a stronger U.S. economy, a lower dollar and lower energy costs at the pump. If oil’s decline gives more cash back to the U.S. consumer and stirs up more demand from them, industry and consumers alike in Ontario and Quebec will see their fortunes resurrected further.
Alberta, Saskatchewan, Newfoundland
The corollary to Ontario and Quebec’s reversal of fortunes (for the moment) is the dented fortunes for oil producers in Alberta, Saskatchewan and Newfoundland. BMO said Friday those provinces – who have posted red-hot economic growth in recent years compared to the rest of the country – could see growth revert next year if oil remains low.
Growth could even trail other provinces like Ontario, BMO chief economist Doug Porter said.
Energy shares have bled this week, with stock prices among TSX-listed oil producers falling by double digits. Ouch.
The Canadian dollar has slid to five-year lows this week, and it could have been worse. “Arguably, the surprise is that the currency has not suffered even more,” BMO’s Porter said. BMO estimates the loonie weakens by three to five cents for every $10 drop in oil.
“The only thing holding the currency back from even deeper damage has been a run of surprisingly upbeat domestic data,” like robust jobs gains and economic growth through September and October.
“Real GDP growth will get dinged,” Porter said. In the economically all-important oil patch, project development will slow as cheap oil makes investment hard to justify. That means lower job gains, and maybe losses ahead for the oil sector and the many industries it feeds.
For every 10 per cent drop in oil, economic growth is shaved by a tenth of a percentage point. That means more than a third of a percentage point of economic growth, or a sizable chunk, is on the way to disappearing. Not quit recessionary, but it could push growth below 2.0 per cent (read: sluggish).
“Corporate profits, government revenues, and even personal income growth will be pinched by the drop,” BMO said.