Lower oil prices could mean $13B in losses for Canada, CIBC warns

A dump truck works near the Syncrude oil sands extraction facility near the town of Fort McMurray, Alta. on Sunday, June 1, 2014. (Jason Franson / THE CANADIAN PRESS)

The federal and provincial governments stand to lose a combined $13 billion on plummeting oil prices, CIBC economists warn in a new report, which suggests that Ottawa and the provinces may have to rein in spending to hit previously announced budget targets.

In their report, entitled “No Barrel of Fun: What Weaker Crude Means for Canada,” economists Avery Shenfeld, Peter Buchanan and Warren Lovely say the hit to federal government coffers would be about $5 billion, even if crude prices rise slightly and hover around $70 per barrel.

While Ottawa’s gas tax share is fixed, it could lose a further $2.5 billion in revenue by taking in less corporate GST and personal taxes, they warn.

This could limit the room for new initiatives in the upcoming budget, “or even force some yet-to-be-announced restraint on the spending side to pay for tax relief already unveiled,” the economists write.

The federal government has rolled out a number of tax-related initiatives aimed at Canadian families ahead of next year’s election, leading to speculation that it plans to call an early vote in the spring.

The government has estimated it will take a $2.4-billion hit in 2014-15 under its new income-splitting initiative, for example, and another $1.9-billion hit in 2015-16.

Meanwhile, at that $70-per-barrel price, the hit to Alberta’s revenue could be $7 billion in 2015/16, while Saskatchewan, as well as Newfoundland and Labrador could each lose between $400 million and $700 million in revenue.

The economists warn that deep spending cuts or tax hikes in the near term would only exacerbate the economic drag.

“’Deficit’ may be a bad word in Alberta, but if ever there was a time to run a budget shortfall and dip into reserve funds, it’s now,” the economists write.

“There’s more than sufficient fiscal flexibility in Alberta and Saskatchewan to withstand a year or two of revenue vulnerability, given the balance sheet that characterizes both provinces.”

Newfoundland and Labrador faces a “more challenging” situation because of its outstanding debt, and the government there faces “more difficult choices” for dealing with a revenue shortfall, the economists say.

Canada ‘more exposed’ to oil prices

Unlike during previous drops in oil prices, Canada is a much bigger player in the energy supply industry and is therefore “much more exposed now to oil’s story,” they write.

The energy sector accounts for nearly 10 per cent of Canada’s GDP, “but in the oily corners of the country -- Alberta, Newfoundland and Labrador, and Saskatchewan -- that sector’s weighting is closer to 25-30 per cent.”

So while the economic hit from falling oil prices will be heavier in the big energy-producing provinces, cheaper energy prices, the depreciating dollar and interest rates that remain low will benefit the manufacturing intensive provinces in central Canada, namely Ontario and Quebec.

“We staked out a much more positive view of Ontario’s relative growth prospects back in the summer as the U.S. economy accelerated and the (Canadian dollar) eased, and our conviction around that call has only grown,” the economists write. “In fact, Ontario could be poised to lead the country in real GDP growth in 2015, with Quebec likewise due for a notable acceleration.”

World will ‘need oil from Canada’

On the upside, the economists write, the energy price drop won’t last, as the world will continue to need oil from Canada, Brazil “and even costlier sources,” suggesting a return to prices above $80 per barrel in the coming years.

As well, there’s little threat of Canada dipping into a recession over oil prices, given that 75 per cent of Canada’s exports lie outside the energy sector, they noted.

Meanwhile, consumers are among the big winners amidst low oil prices.

Each $2 drop in crude prices shaves about a cent per litre from prices at the pump, the economists note. “So even if oil rebounds to average $70 next year, the savings could provide Canadians with the equivalent of a $10 billion boost to incomes.”