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Higher oil prices not always a boon for Canada

Tags: Canadian GDP, Oil
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The Canadian economy, as a net exporter of oil, will benefit from high oil prices -- that’s the common refrain.

But a new report from TD says the drivers behind oil's uptick are more important in determining whether the Canadian economy will benefit or be harmed by the soaring price of crude.

TD says that if prices rise more than 20 percent over a few months on “non-fundamental factors,” such as speculation or geopolitical concerns, the benefit of higher prices on the economy are outweighed by the increased costs to oil-consuming parts of Canada, and major trading partners such as the United States.

“A tipping point is reached when the minuses outweigh the positives,” Derek Burleton, TD deputy chief economist, says.

Burleton says the Canadian economy benefits more when prices rise on the back of strong global demand, which often coincide with economic growth and increased exports for Canadian companies.

Bank of Canada research backs up TD’s report, showing that a 10-percent increase in oil prices by “non-fundamental” factors trims about 0.8 percentage points off GDP growth, as producers view the run-up in prices as unsustainable and hold back investment.

One problem facing Canada is the spread between the price that producers are selling their oil for and the price many parts of the country pay to import oil, Burleton says.

While West Texas Intermediate (WTI) is the most quoted price for North American oil, Canadian oil is often priced at Edmonton Par Crude benchmark, which has been trading at a significant discount -- as much as $20 US cheaper earlier in the year, marking the widest spread on record.

Yet, much of the oil that is refined and imported back into Canada for household and business consumption is set by combining both WTI and Brent (European) prices, which are significantly higher.

So what about the current lofty prices of oil?

Burleton says the drawbacks have outweighed the positives, as the 30-percent run-up in WTI crude prices between October and the end of last year to $100 was caused by geopolitical concerns with Iran -- not strong economic growth.

“The net impact to Canada’s economic growth rate from the jump in crude oil prices over the past 6 - 7 months has been muted at best or has actually shifted into negative territory,” he says. “In this vein, the recent easing in the price of crude oil to below US$100 per barrel spells good news as it offers relief to major consumers, including Canadian households."

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