Canada will be one of the hardest hit nations within the developed world if oil remains below US$50 for the following 5 years, barely eking out one per cent growth annually, economists say.
“In a world of ultra-low oil prices, Canada’s growth model must change,” said Emanuella Enenajor, senior United states economist for Bank of America Merrill Lynch. “But it isn’t clear what sector will fill the shoes that energy once wore.”
The bank’s report took it’s origin from a roundtable discussion of economists and strategists looking at the “lower for longer” scenario for oil prices.
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While BofA economists believe that oil will settle at US$75 or US$80 in the long run, today’s spot and futures markets suggest prices could stick at US$25 for the next five to 10 years.
Tuesday oil tumbled again as price volatility climbed to close the greatest levels in seven years and Goldman Sachs warned of wider swings in the future.
West Texas Intermediate for March delivery slipped US$1.09, or 3.7 percent, to US$28.60 a barrel.
“What if today’s spot and forward financial markets are right and global oil prices remain stuck at US$25 to US$50/bbl range for the next Five to ten years?,” BofA asks. “What will the planet economy seem like.”
History shows that low oil prices for extended are actually great for growth, the financial institution said, producing a large group of winners (China, India, Asia, Spain, Poland) and a select few of losers, which includes Saudi Arabia, Russia, Nigeria and Canada.
Because Canada is a net oil exporter, the negative impact of low prices exceeds the advantages of cheaper gas prices, Enenajor said.
Moreover, the hit is not linear. At below US$45 oil, new investment in oilsands projects comes pressurized; at US$35 oil, many existing projects start losing money.
“To put things into perspective, we estimate that the 10% drop in energy extraction cuts 0.5 percentage points from GDP growth directly and roughly 0.8 percentage points indirectly,” she said. “So the risks are very substantial.”
And so what can fill that void? Appears like nothing.
Canadian manufacturing is pressurized from global competition and subdued U.S. growth, and also the boost from the Canadian dollar will fade if oil prices stay low and stable for some time, Enenajor said.
“The technology sector is continuing to grow impressively nevertheless its tiny 1% GDP share suggests it can’t carry the weight,” she said. “I think the most likely scenario is chronically weak growth in the reduced 1% range.”
