Risks to Canada ‘substantial’ if oil stays below $50 for next five years, BofA warns

Canada is going to be among the hardest hit nations within the planet if oil remains below US$50 for the next five years, barely eking out one per cent growth annually, economists say.

“In a world of ultra-low oil prices, Canada’s growth model must change,” said Emanuella Enenajor, senior United states economist for Bank of the usa Merrill Lynch. “But it isn’t clear what sector will fill these shoes that energy once wore.”

The bank’s report was based on a roundtable discussion of economists and strategists exploring the “lower for longer” scenario for oil prices.

Related

Canadian energy companies selling off 'jewels within the crown' to help keep bleeding oilsands afloatOil tycoon T. Boone Pickens cashes out of crude as worst market in decades drags onWhy low oil prices may suddenly be a problem for the global economy

While BofA economists think that oil will settle at US$75 or US$80 in the long term, today’s spot and futures markets suggest prices could stick at US$25 for the following five to Ten years.



Tuesday oil tumbled again as price volatility climbed to near the highest levels in seven many Goldman Sachs warned of wider swings in the future.

West Texas Intermediate for March delivery slipped US$1.09, or 3.7 per cent, to US$28.60 a barrel.

“What if today’s spot and forward financial markets are right and global oil prices remain stuck at US$25 to US$50/bbl range for the next 5 to 10 years?,” BofA asks. “What will the planet economy look like.”

History suggests that low oil prices for extended are in fact good for growth, the bank said, producing a large number of winners (China, India, Asia, Spain, Poland) and a select few of losers, which includes Saudi Arabia, Russia, Nigeria and Canada.

Because Canada is really a net oil exporter, the negative impact of low prices exceeds the advantages of cheaper gas prices, Enenajor said.

Moreover, the hit isn’t linear. At below US$45 oil, new investment in oilsands projects comes under pressure; at US$35 oil, many existing projects start taking a loss.

“To put things into perspective, we estimate that the 10% stop by energy extraction cuts 0.5 percentage points from GDP growth directly and roughly 0.8 percentage points indirectly,” she said. “So the potential risks are very substantial.”  

And what can fill that void? Looks like nothing.

Canadian manufacturing is under pressure from global competition and subdued U.S. growth, and the boost in the Canadian dollar will fade if oil prices stay low and stable for a long time, Enenajor said.

“The technology sector is continuing to grow impressively nevertheless its tiny 1% GDP share suggests it can’t carry the load,” she said. “I think probably the most likely scenario is chronically weak development in the reduced 1% range.”