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Impacts of Falling Oil Prices on Canada's Economy

Essay by   •  May 17, 2016  •  Research Paper  •  1,394 Words (6 Pages)  •  1,073 Views

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Impacts of Falling Oil Price on Canada's Economy

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Abstract

Oil prices have been going down since June 2014. The impacts of this trend have been felt globally with some countries rejoicing at the situation while others are crying for their losses. The countries that consume more oil that they sell are actually benefitting from the falling oil prices while the countries that depend on oil as one of their chief exporting commodities are feeling the pinch. Canada is a major oil exporter and such it has felt more negative impacts of the falling oil prices than it has the positive effects. The Canadian economy is set to suffer even more if the current situation of oil prices persists.

Keywords: oil prices, impact, Canadian economy

Global oil prices have been on the decline since June 2014 (Moran, 2015, p. 113). The prices even saw a more declining trend since a meeting by the OPEC in November 27, 2014, where the member states agreed to one accord not to cut their production (Moran, 2015, p. 114). Uncertainty in Greece and dawdling economic growth in China have further pulled down prices of almost every commodity from oil and coal to gold and iron core (Baumeister & Kilian, 2015, p. 67). Oil prices are set to decline even further following the lift of sanctions on Iran which implies that they are set to start supplying their oils into the global market (Ianchovichina, Devarajan & Lakatos, 2016, p.12). While the United States and the other countries are likely benefiting from the declining oil prices because they are consuming much oil than they sell, Canada is a net exporter of oil and heavily relies on this sector and as such is set to suffer a great deal (Podobnik, 2015, p. 252). This paper analyzes the impact of falling oil prices on the economy of Canada.

The Impacts

The economy of Canada is complex and diverse and the impacts of the lowering oil prices are as well expected to be the same. Some of the industries and regions within this economy will get hurt while others will most likely benefit. Recent studies, as will be highlighted in this paper, have pointed out the most likely impacts of the falling oil prices on the Canada’s economy.

There are no study that have specifically pointed out the effects of falling oil prices on the oil output in Canada. Baumeister and Kilian (2015, p.81), however, carried out a study to find out the effect that the falling oil prices will have on the oil wells and bitumen facilities. These researchers used secondary sources like journals, periodicals and magazines to obtain statics on the oil wells and bitumen facilities during the time when oil prices are falling and when they are normal.  Baumeister and Kilian (2015, p.84) conclude that the operational oil wells and bitumen facilities will most likely keep on pumping crude as large sums of capital have already been invested in those operations and there is need to recover those costs. This study did point out that even with the falling oil prices, the Canadian oil output will keep rising due, partly, to the accomplished new projects that are gradually sprouting.

Elder and Serletics (2008, p. 852) researched the economic impacts of oil price uncertainty in Canada. They hypothesised that in Canada, the increase in oil price uncertainty would cause the decline in output, which was in accordance with the situation in the United States.  In order to do the analysis empirically, they employed different kinds of monthly output data from Statistic Canada. By using the maximum likelihood method to regress the structural VAR model, Elder and Serletics concluded that increasing uncertainly of oil price would cause the decrease in goods production, as well as the mining and oil and gas extraction (Elder & Serletics, 2008, 856). In addition, they also discovered that the falling oil price could also lead to the decline in output.

Podobnik (2015, p. 257) set out on a venture to study the impact oil falling oil prices on two account: the impact on inflation and the impact on the Gross Domestic Product. He studied various government reports on the inflation and GDP of Canada at different times when there is a prolonged decline in the global oil prices. In regards to inflation, Podobnik (2015, p. 260) concludes that the plunge of the oil prices is expected to drive the inflation down to the minimum, at least for some time. About the GDP, Podobnik (2015, p. 262) summarizes his findings that the total economic output of Canada will remain constant even with the falling oil prices. His major argument is that while some industries are shrinking, others are experiencing positive growth and this provides a balance that would help maintain the GDP. These studies indicate that there is not much to worry about in regards to inflation and the decline in Canada’s GDP.

One of the major detrimental side-effects of the oil boom is the damage that it had on the trade performance of Canada. Oil and other energy exports did grow rapidly. To understand the impacts of the falling oil prices on the position of Canada on the international trade, Baumeister and Peersman (2013, p. 1087) performed a study on the performance of Canadian exports other than oil, like manufactured goods, services and tourism among others. The researchers went through various documents in the ministry of International Trade of Canada to determine the trends of trade in such goods in the wake of the falling oil prices. Baumeister and Peersman (2013, p. 1109) came to realize that the Canada’s export rate has declined to a larger extent. They got to understand that the trade balance of Canada got pulled in opposite directions such that there was a huge surplus in energy, but an extremely large deficit in any other thing. The researchers again came to notice that even at the time when the oil prices were soaring high, the energy revenues were not sufficient to pay off the huge deficits in the non-energy goods and services. Consequently, Canada began to feel huge deficits in the international payments. With the falling oil prices, the deficit is getting worse. This study shows the effects that the falling oil prices will most likely have on the Economy of Canada in terms of international trade.  

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