Falling oil, falling economy
Author: Anders Ireland – contributor/Chief Investment Officer at UR Investing Portfolio Managment
At first glance, the low price of oil is beneficial to students as it lowers one of their largest bills, the price of gas. Everyone enjoys the fact that filling up is nearly 50 per cent cheaper than what it was just over a year ago. However, do students truly understand the impacts that low oil has on a country like Canada?
Canada has a large reliance on the energy sector to stimulate the economy with over a third of our GDP coming from this sector. Since the start of the decline in the price of oil in Nov. 2014, oil has fluctuated dramatically and now sits at a range that Canadians have not seen in over a decade at approximately $30 per barrel. This has left millions worldwide without jobs and the Canadian economy in a position of weakness that it is not accustomed to. This can be an intimidating thought for students coming out of university who are looking to start their career in Western Canada, as there seems to be no bottom to the falling oil price.
Canada hit a wall and something needed to be done to stimulate the economy. The Bank of Canada took the first steps by lowering interest rates by 0.25 per cent in January and July of 2015 in an attempt to spur spending, increase exports, and produce jobs. The main repercussion to lowering rates was the depreciation of the Canadian dollar, which means exports become increasingly more attractive to other countries, especially the United States, Canada’s leading importer. It has been over a year since the first interest rate cut from the Bank of Canada and we can now see signals that the lower dollar is helping fuel exports. The Bank of Canada has said numerous times that monetary policy cannot be the only source of assistance and that the government must step up its efforts in order to help the Canadian economy. This can be seen in the newly elected Liberal platform to inject millions into the economy in the form of infrastructure spending.
Now, where does this put a new grad looking to find a job? This means being flexible in the industry you seek to work in as well as the location if one is moving out of Saskatchewan. In areas where the oil industry is more prevalent such as Alberta, Saskatchewan and Newfoundland, direct and indirect markets are being impacted by a decrease in investment as a result of the decline in oil prices. The low oil prices affect more than just the employees of oil companies, as Canadians in many industries are being laid off. In summary, for new grads, this means being educated on the current economic conditions and leaving your options open to different industries and markets may prove to be quite beneficial.
This is not all bad news, however, since the price of oil will eventually rebound as it always does. Oil is too heavily relied on across the globe for it to remain at its current low price. The price of oil cannot continue at such a low for long as many oil companies operate at a break-even point of $40 to $60 per barrel. This will, in turn, create a large amount of consolidation within the industry resulting in mega cap companies. The depressed state of the Canadian economy is forecasted to continue through 2016 and well into 2017 until we see a turn in the price of commodities, especially oil. Although you may enjoy low gas prices, think again when celebrating filling up with gas at $0.70/litre.