Bank of Canada Gov. Stephen Poloz stunned money markets Jan. 21 when he lowered Canada’s trend setting interest rate to 0.75 percent from 1 percent - a move that none of the 22 economists surveyed by Bloomberg had forecast.
The central bank explained that it had no choice at a time when the impact of low crude prices was “unambiguously negative” for the Canadian economy.
“We have an oil price shock, which will reduce the income flowing into Canada and lead probably to some increase in unemployment overall,” Poloz told a news conference, describing the rate cut as “insurance” that could be needed for two years.
Prime Minister Stephen Harper was less inclined to focus on the wider economic role of energy, arguing the industry “isn’t remotely the entire Canadian economy.”
He said there are many benefits to other segments of the economy, notably manufacturing, from cheaper oil and natural gas costs, although the oil-producing regions “are going to face some pretty significant adjustments.”
Just how “significant” was laid out in blunt terms by Alberta Premier Jim Prentice, who said low oil prices are removing the support structure under his province.
He suggested the current conditions are worse than the crude-price crash in the 1980s when Alberta lost 50,000 jobs, house prices dropped by 40 percent and many, mostly U.S. controlled, oil and gas companies abandoned Canada and did not start returning in even small numbers for many years.
CAPP sees C$23B cut
In the initial response to a gloomy outlook, the Canadian Association of Petroleum Producers forecast exploration and production companies will slash C$23 billion from their capital spending in Western Canada this year, lowering expected production in 2016 by 120,000 barrels per day.
In updating its short-term forecast, CAPP estimated capital spending will total C$46 billion compared with C$69 billion in 2014.
But it expects the oil sands sector will suffer the least, dropping to C$25 billion from last year’s C$33 billion.
CAPP President Tim McMillan said the downward trends will not change the need for the industry to build new pipelines across North America to expand and diversify export options.
“No question, the effects on the industry are sharp, but we continue to need all forms of transportation in all directions - pipelines in particular,” he said.
CAPP forecast that the number of wells to be drilled in Western Canada will decline by 30 percent from last year to 7,350 wells - a cutback that will extend to 2,300 support businesses across Canada. Job losses are projected to reach about 23,000.
The revised 2015 forecast for Western Canadian oil production is now 3.6 million bpd, about 150,000 bpd higher than 2014, before the budget cuts take their bite.
Conventional production is expected to be flat at 1.3 million bpd this year, while the oil sands will rise to 2.3 million bpd as projects come on stream from earlier investments.
Governments expected to lose C$14.3B
The Conference Board of Canada said the Canadian government alone will lose C$4.3 billion this year from the collapse of oil prices, while provincial revenues will drop by almost C$10 billion.
However, the board is more optimistic on the price outlook than other forecasters, with its economists reckoning that the market has likely hit bottom.
The report forecasts that West Texas Intermediate will climb above US$60 a barrel by the end of 2015, with an average price for the year of US$56, compared with US$93.20 in 2014.
The board said the Alberta economy could slip into recession, a claim rejected by Premier Jim Prentice, while Saskatchewan and Newfoundland (Canada’s other significant oil producing provinces) will feel the pain from lower royalties.
Suncor Energy, the dominant oil sands player, offered an even stronger ray of optimism when it rated low prices as a temporary inconvenience.
Chief Financial Officer Alister Cowan told investors his company will not delay its biggest long-term growth projects because it expects crude oil prices to double from current levels to a US$90-US$100 range within the next three or four years.
