Should Canadians be cheering for lower or higher oil prices?
Oil prices fell sharply Monday after OPEC countries in Qatar failed to reach an agreement on halting production. But when it comes to the prices of crude, should Canadians be rooting for a $30 or $40 barrel?
CIBC deputy chief economist Benjamin Tal says Canada should actually embrace lower oil prices.
In an analysis published Friday, Tal said that when crude prices bottomed out around $26 in January, the loonie was at 69 cents U.S. Now oil is hovering around $40 and the loonie has jumped to above 78 cents U.S.
He notes that for Alberta, a $40 barrel “is not a game changer,” as it’s not high enough to convince producers to think about increased capital spending.
“You get the negative of a stronger dollar without the positive of higher oil prices,” Tal told Global News. “If the [price of oil] goes to $80 that is a different story, but it is not there.”
Tal warned that the recent surge by the loonie could damage the gains made by exporters – specifically in manufacturing – made in the wake of the weak currency prices against the U.S. dollar.
“Only recently have we started to see some positive signs coming from non-energy investment and production as corporate Canada started to respond to the dollar depreciation,” he writes.
“So maybe, after all, at this point, $30 oil is better than $40.”
However, on Friday, Bank of Canada Governor Stephen Poloz dismissed the idea that a rise in the price of oil was a bad thing for the Canadian economy because it could make exports less competitive by inflating the Canadian dollar.
“A drop in oil prices is unambiguously negative for the Canadian economy, all things considered,” Poloz said, according to Reuters.
Ambarish Chandra, a professor at the University of Toronto, says there are always “winners and losers depending on what the oil price is.”
“When oil prices are higher it helps governments in particular but also helps consumers, a stronger loonie equals better purchasing power,” he told Global News. “When oil prices are weaker the usual argument is that exporters, especially manufacturers, can do better.”
“What I think is a problem increasingly in the last few years is just the volatility the uncertainty around what the price of oil is going to be.”
The failure of a weekend meeting of major oil-producing countries in Doha, Qatar, to agree on production limits led to an initial drop in the price of oil. Saudi Arabia said it wouldn’t back a deal if Iran, which is trying to increase output as international sanctions are lifted, failed to join.
As of mid-afternoon, Brent crude was up 20 cents, or 0.4 percent, at $43.30 a barrel after falling $3 earlier in the session, while U.S. crude was off 31 cents, or 0.8 percent, at $40.05 a barrel.
The Canadian dollar was also positive, up 0.13 of a U.S. cent at 78.03 cents US.
*With files from the Canadian Press
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