The Contrasting Impacts of Plummeting Oil Prices
By Peter G. Hall
Vice-President and Chief Economist Export Development Canada
Plunging crude oil prices have dramatically changed the economic growth landscape. Canada knows this all too well – anything related to oil seems to be in freefall, while outside of energy, industry is expecting a bonanza. The effect is being felt across the global macroeconomy. Oil exporters are counting their losses, while net importers are already projecting handsome dividends. As an imminent rebound is unlikely, how will the price plunge change world growth? And how is Canada expected to fare?
Let’s start with the bad news. Oil net exporters, like Canada, are bleeding cash. The biggest net exporter is Saudi Arabia, at 8.4 million barrels per day. At a world price of $60 per barrel, that’s costing them about $100 billion annually. Russia is second, with a net hit of $87 billion annually. The rest of the Middle East loses another $100 billion, with Nigeria and Venezuela also making the top list of money losers. Canada is feeling the pain, significantly, but industrial diversification is saving us from a far more negative result. If it is any additional solace, we don’t even make the top 10.
Panning through the extensive list of global net exporters, it is clear that while non-oil Canadian exports go to these destinations, with the exception of Russia, these account for 1.8% of total Canadian exports. In Russia’s case, exports are being hampered already by sanctions, and as such, are limiting the direct impact of the oil shock on trade activity. Overall, it’s not a great news story, as individual exporters that have had success in oil-rich markets will suffer. But on the whole, the net damage to Canada will be limited. As bad news goes, we’ve seen worse.
How about the good news? The flipside is that net importers are saving money – buckets of it. At a $60 average price for West Texas Intermediate crude, the US – the world’s top net importer in 2013 (the latest annual data we have) – saves over $100 billion annually. Add another $50 billion if the price averages $45. Much of this gets passed on to consumers in lower pump prices. If it were all passed on, it adds up directly to about 0.8% of US consumer spending – a huge one-year boost. The impact of this on Canada’s top customer is likely already translating into higher imports of Canadian goods. It doesn’t hurt that our dollar is now about 20% cheaper than a year ago. Estimates of the impact on the US economy this year range from 0.3 to 0.6% on total GDP growth, and that could be conservative. For the world’s top economy, already seeing a decent revival, and for Canadian exporters, not bad news at all.
Some of Canada’s largest traditional trading partners make the top 10 list of global oil net-importers. Among them, Japan is next to the US, totally dependent on external supply, and at $60 oil, set to save $50 billion this year. South Korea and Germany each save just under $30 billion on their national bill, and France is good for another $20 billion. These funds will clearly spill through the economy and have a magnified positive effect. It could hardly come at a better time for Europe, and Canada should gain in export sales.
Oil cost-savings are substantial across a broad swath of the emerging world. China depends on the rest of the world for 6.6 million barrels a day of crude oil. With prices down by over $30 per barrel this year, it is estimated it will save a whopping $77 billion. India, next on the developing market list, looks to the rest of the world for 2.8 million barrels per day, generating equivalent savings of $33 billion annually. Savings aren’t miniscule in non-oil-producing South and Central America, and oil-producer Brazil still depends on external supply to fill its economy’s needs. The list of oil-dependent emerging nations goes on and on.
The benefits of these lower prices vary with the individual internal market structures. Many emerging nations subsidize local fuel prices, to shield citizens – mainly the poorer ones – from global price fluctuations. As such, pass-through of savings to consumers won’t be as direct as for OECD nations in a good number of cases. However, it is interesting to note that several governments are taking advantage of low oil prices to reduce or eliminate subsidies. One way or another, emerging economies will benefit. Either their consumers will have more purchasing power, or their governments will have added fiscal flexibility, and consequently a lower overall risk profile – boosting their appetite for foreign goods and services.
The bottom line? Canada’s energy sector service and equipment exporters are in for tough times, and cash flows for oil and gas exporters will tighten significantly. This is already beginning to spill red ink on Canada’s trade and fiscal statistics. However, Canada’s non-energy sector exporters should see a substantial boost. Look for stronger demand growth for a whole range of Canadian products emanating from the advanced markets that are net oil importers and where lower oil prices translate directly to the gas pump. Emerging market oil importers will be a mixed bag, but in general exports to these destinations should see some lift this year. This will be modestly offset by declining demand from the big oil exporters. It is fair to say that on balance, the oil price swoon is a piece of very well-timed private market stimulus for the world economy.