Low Crude Oil Prices and Their Impact on the Canadian Economy
Study Released March 07, 2016
Study No. 156
The decline in crude oil prices over the last year and a half is one of the most complex shocks for any economy and one that is important to measure and understand. This report measures potential impacts on the Canadian economy if low oil prices persist into the future. At the global macro level, the positive effects of a decrease in crude oil price on energy-importing countries will likely more than offset the negative effects on exporting countries resulting in a net positive impact on global growth. For exporting countries, like Canada, however, the real complexity appears beneath the surface, where the drop in commodity prices mobilizes sectoral and regional forces that can take years to play out. These include higher consumer spending in response to lower energy costs, lower spending due to higher prices on imported goods and services (as a result of the falling Canadian dollar), falling investment and employment in the economy’s resource sector, and rising investment and employment in the non-resource sectors.
The purpose of this report is to present economic impacts on the Canadian economy stemming from two short-term scenarios, spanning 7 years: a Reference Case, where the oil prices are forecasted to grow from current levels to almost $73.00 per barrel (in 2014 dollars) and a Low Case, where oil prices reach only $51.00 per barrel by 2021. The modelling of these impacts is done using CERI’s Input-Output model to measure the impacts on major macroeconomic variables such as GDP, employment and tax revenues. The modelling results indicate that the net effect of low crude oil prices on Canada is negative. And as a rule of thumb, for every Canadian dollar gain in WTI price, Canadian GDP would gain almost $1.7 billion, on average.