The perils of a petro-loonie
The problem with a “new normal” is that it seems to take so long to get everyone’s head around it. Change is always a tough thing for people to grasp, but given how common and how fast it has become, you might think we’d all be a bit quicker on the uptake.
Take the example of Canada’s currency, which has recently hit four-year lows.
There’s been much of the usual nattering about the benefit to the battered manufacturing sector (which, by the way, is having a pretty solid run, blowing past market expectations in November data).
There’s also been more of the usual the “petro-dollar” commentary that we saw as the loonie attained its lofty height in the past few years. Given our strong reliance on energy exports (oil account for almost a quarter of Canada’s total annual exports), Canada’s economic leverage to the price of oil is considerable. And when world oil prices soften, as they have recently, “petro-dollars” take a hit.
Granted, the Bank of Canada’s reluctance to move interest rates — and its alleged agenda of improving our competitiveness by letting the loonie languish — has also had a bearing on the currency’s decline. So too, has the evidence that we’re lagging the U.S. in terms of overall economic recovery. And then, of course, there’s the perennial cloud of our historically high consumer debt levels.
With all those tidy and familiar explanations firmly in hand, most folks will now settle in and patiently wait for the loonie’s return to strength and a repeat of the same cycle.
The thing is, the cycle to which we’ve all grown accustomed isn’t likely to repeat: Too many fundamental shifts have taken place for us to remain on charted economic ground.
There is a geopolitical shift underway in North America and it remains to be seen how it will affect Canada, its currency and its economic future.
As the U.S. moves toward greater energy self-sufficiency (according to the International Energy Agency the U.S. could become a net oil exporter as soon as 2030 because of new oil discoveries, new technology and conservation efforts), the traditional demand for Canadian oil and gas will be curtailed.
The problem is, Canada only has one customer for its energy exports: the United States. Not only does the U.S. need less of our energy going forward, the pipes that transport it across the border to market are already at full capacity. And there’s no indication that proposed mega-projects, like the Keystone XL pipeline, are going to get the green light any time soon.
(President Obama isn’t likely to approve Keystone before the upcoming mid-term elections in the U.S. And after that, he’s into his final year as president, and will probably pass the file on to his fortunate successor.)
That means Canada has to hustle to develop new markets and the means to access those markets. Asia is the obvious export destination for our energy — we’re as close to major Chinese ports as Australia. In other words, there’s no closer supply option.
However, Canada doesn’t have the access it needs to diversify its customer base. Although Enbridge’s Northern Gateway Pipeline proposal has won preliminary approval from the National Energy Board, it still has a long road ahead. That includes federal Cabinet approval (expected by June) and major negotiations with First Nations and other communities along the right-of-way.
All of this not only has a direct bearing on the money Canada earns and the jobs it creates, it also affects the willingness of foreign companies to invest in development. Even the longest-term thinker would balk at the prospect of sinking millions of dollars into projects that have limited market access. And Canadian companies don’t have the money to proceed without any foreign capital.
Another part of that continental geopolitical shift relates to price. The U.S. already slaps Canadian oil with a discount — they know it’s got nowhere else to flow. A growing number of states and regional municipalities are also imposing restrictions on oil imported from the oil sands.
As it is with pipeline construction into the U.S., each jurisdiction has its own rules and regulations. And that makes it much more expensive and time-consuming to do business.
Given that Canada is tagged with a “petro-dollar” and given the reality that our “new normal” looks relatively bleak, we had all better hope that manufacturing really kicks in big time. Because it could be a while before our oil-coated loon spreads its wings again.
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Sept. 19 (Bloomberg) -- Betty Liu reports on today’s top news headlines on “In The Loop.” (Source: Bloomberg)
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