OTTAWA — The federal government is ordering an in-depth analysis on how slumping oil prices will affect the wider Canadian economy over the long term, the Star has learned.
Natural Resources Canada has ordered the study with an unusually quick turnaround, showing a sense of urgency as oil prices remain under $30 (U.S.) a barrel.
“As a result of the oil price decline, Canadian economic growth slowed in 2015. Lower oil prices are also having a significant impact on government revenues in oil-producing provinces; namely Alberta, Saskatchewan, and Newfoundland and Labrador,” read a notice posted online by NRCan Thursday.
“There is a need to better understand the ‘macro’ impacts of the price decline on Canada’s industries and economy over the long-term.”
The government is already aware of the direct problems caused by the oil slump, which saw prices decline 60 per cent since July 2014.
The department noted that direct spending in the oil sands alone is expected to decrease from $34 billion in 2014 to below $18 billion in 2016.
In January 2015, the Parliamentary Budget Officer examined the impact of lower oil prices on the federal government’s bottom line.
With the assumption that oil remained at $48 (U.S.) a barrel, the PBO estimated federal revenue would be reduced by an average of $7.6 billion annually. Lower oil prices partially reduces government expenses, but even with that offset the PBO estimated there’d be a $5-billion annual hole in Ottawa’s budget.
The PBO did not factor in the possibility of $30-barrels, but that’s the reality the new Liberal government faces as they prepare to table their first budget. Finance Minister Bill Morneau simply said it’s important to “pay attention to the economy” when asked about oil prices earlier this week.
At the World Economic Forum in Davos, Switzerland on Wednesday, Prime Minister Justin Trudeau said that while natural resources remain an important part of Canada’s economy, the country’s growth is not dependent on the extractive sector.
But speaking to reporters at a cabinet retreat in New Brunswick this week, Natural Resources Minister Jim Carr said the Liberals intend to establish an interim review process for oil and gas projects within weeks. The interim process would mean projects begun under the previous Conservative government would not have to start again from scratch.
“We don’t control the price of oil, it’s an international situation. Commodity prices are at a low and it’s a situation that we’re having to deal with,” Carr said. “We understand there are consequences for people and for families and we’re working intensely and collaboratively across the government for an interim process for projects that are currently under review.”
The report, expected to cost as much as $50,000 and be delivered in mid-March, will be asked to look first at the impact on domestic oil production and the resulting hit on federal income tax revenues, provincial royalty regimes, capital spending in the oil and gas sector, and employment in the industry.
Indirect economic consequences of low oil prices will also be analyzed, including the effect on national and sub-national GDP, what low prices mean for pipeline projects and refineries, and how cheap oil influences other sectors such as construction, manufacturing and liquefied natural gas.
The report will form part of the discussions when provincial and territorial natural resources ministers meet with Carr in Winnipeg this August.
A spokesperson for Carr said in a statement the report will augment the work already being done by the department.
“The global downturn in commodity prices has affected all major producing countries,” Micheline Joanisse wrote in an email. “We know that this is producing hardship across the country particularly in the oil patch.”