Economists see more good than bad for Canada's economy as oil prices rise

CALGARY – Economists see more good than bad for Canada’s economy as recent tensions in Iraq drive up global crude oil prices.

Scotiabank commodity market specialist Patricia Mohr says the increase has a “two-pronged impact,” but the benefits should outweigh the drawbacks.

“Of course on the positive side, it really bolsters earnings for Western Canada’s oil industry, but also the oil industry in Newfoundland and Labrador,” she said. That, in turn, brings more tax and royalty revenues to government coffers.

On the downside, crude is a big factor in gasoline prices. So the higher it goes, the more consumers are pinched.

“But I would guess that the positive impact on earnings and also on our merchandise trade performance would offset the negative impact on consumers of higher gasoline prices,” said Mohr.

Todd Crawford, senior economist at the Conference Board of Canada, agrees the higher prices will be good for the bottom line of industry and government alike, but not necessarily on a sustained basis.

The long-term outlook for oil is little changed, he said.

“In general, when we have a higher risk of conflict in that region of the world, it tends to put an additional premium on oil prices,” he said.

“It’s not really related to the underlying fundamentals of oil right now, which are still very strong, but wouldn’t have supported the $4 and $5 per barrel jump that we’ve seen, say, in the last 30 days or so.”

“So in reality, the status quo hasn’t changed. This is just an additional risk premium that results in a flow of financial benefit, but not necessarily an impact on the real Canadian economy.”

A rise in oil prices also tends to drive up the Canadian dollar, which can be a drag on exporters.

“Exports were incredibly weak in the first quarter, so it’s really not the best time to see this,” said Crawford.

“And of course it has a roundabout impact on our monetary policy. We’re sort of out of room to cut our interest rates any more. So there’s no monetary policy that can lessen the impact of higher oil prices on our Canadian dollar if there is a goal to keep the Canadian dollar trading at around 90 cents (US).”

Oil prices have climbed to 10-month highs in recent weeks amid rising sectarian tensions in Iraq. To date, the violence has not had a substantial impact on crude output there, but it’s been causing market jitters.

West Texas Intermediate oil for August delivery, the main North American benchmark, was trading at around US$106 per barrel on Tuesday.

The head of the Organization of Petroleum Exporting Countries, Abdullah Al-Badry, said market speculation is to blame for the increase in prices as Iraq is “still producing as normal,” with 95 per cent of its capacity in the country’s south unaffected by the violence.