After an early morning plunge, oil prices bounced back on world markets Tuesday.
Despite the bounce-back, with oil remaining below $60 a barrel, oil-dependent jurisdictions are feeling the pain. (All prices U.S. dollars)
A CIBC World Markets report totted up the likely damage:
“The government sector stands to lose some $10-13 billion even if oil hangs on to a $70 average,” said the report, issued Tuesday. “Of that, Ottawa’s hit would be on the order of $5 billion.”
And Tuesday’s price for West Texas Intermediate oil was nowhere near $70, plunging below $54 a barrel and bouncing back over $57 before settling about where it started, at $55.93 a barrel in New York trading.
Politicians were already looking ruefully at forecasts that looked more and more outdated.
Newfoundland finance minister Ross Wiseman said his province’s deficit will soar to $900 million — 70 per cent higher than estimated last spring — because of slipping oil revenue, Canadian Press reported.
The province had budgeted for oil at $105 a barrel. Oil revenue accounts for one-third of its budget.
Meanwhile, Prime Minister Stephen Harper acknowledged that the lower prices reduce his government’s room to manoeuvre.
“You should be under no doubt that the government will balance its budget next year,” he said in Quebec City after a local announcement, Canadian Press reported yesterday. “We are well within that range. Even with dramatically lower oil prices, we will balance the budget.”
“This will obviously reduce some of our fiscal flexibility but it will not by any means stop us from reaching a balance and at the same time making the important investments we’ve made.”
Ottawa announced Nov. 25 it would post a $1.6-billion surplus in 2015-16. That was lower than a $1.9-billion estimate two weeks earlier.
The CIBC report said the latest price slump is “unprecedented.” Previous oil price retreats have been triggered by slack demand, the report says: This one has been caused by surging supply.
Daniel Yergin, vice chairman of Englewood, Col.-based consultancy IHS Inc., put it this way in an interview with Bloomberg Television:
“This is a new world in which there is no price setter. Oil is trying to find its bottom.”
The current slump is also different because Canada exports a much greater share of its production than it did before, so the economy is more exposed to world price gyrations.
CIBC sliced half a percentage point off its prediction for Canada’s economic growth in 2015, reducing its outlook to 2.2 per cent growth in GDP from 2.7 per cent.
The world oil market has been unsettled by rising shale oil production in the U.S., which has slashed its imports and left more oil looking for buyers.
Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) has been unwilling to slash production.
“We are not going to change our minds because the prices went to $60 or to $40,” United Arab Emirates oil minister Suhail al-Mazrouei said at a conference in Dubai Monday. “We’re not targeting a price; the market will stabilize itself.”
CIBC cautions that the impact of low oil prices will be uneven in Canada.
Ontario, with its manufacturing base, comes out a net winner, as it pays less for energy, and sees its biggest customer – the U.S. – benefit from savings on its oil trade deficit:
“In fact, Ontario could be poised to lead the country in real GDP growth in 2015, with Quebec also due for a notable acceleration.”
Consumers who drive will also cheer, CIBC says. Every $2 drop in the price of crude lowers the price at the pump by about one cent a litre.
“Even if oil rebounds to average $70 next year, the savings could provide Canadians with the equivalent of a $10 billion boost to incomes.”
Things won’t go as well for Alberta, Saskatchewan and Newfoundland, however; in those three provinces, the oil and gas sector accounts for 25 to 30 per cent of economic activity.
But the sluggish oil price will keep inflation low for everyone, CIBC says That will relieve pressure for an interest rate increase until late in 2015.
Oil stocks, which have been beaten up along with the crude price, recovered Tuesday. Talisman jumped $2.87 to $8.84 after agreeing to a takeover by Repsol. Suncor was up $1.64 to $33.01 and Imperial up $1.25 to $47.78.
It’s not just Canada.
Venezuela remains under pressure from the falling oil prices,
Olivier De Timmerman, a portfolio manager at KBC Asset Management SAD in Luxembourg, told Bloomberg that the low prices are reducing Venezuela’s revenues to the point where it will have trouble paying bond holders.
“Venezuela doesn’t want to default,” he said. “They can still avoid it for a time but we’re getting closer to the edge of the cliff.”