Cheap oil could be good for Canada, Royal Bank says

Perhaps an era of cheap crude won't be so bad for Canada after all.

A new bank forecast argues the financial blows of low oil prices on the Canadian economy could be more than cancelled out by the weaker loonie and additional consumer spending on both sides of the Canada-U.S. border.

The prediction, contained in a Royal Bank of Canada report released Monday, is an outlier among many expert assessments that have projected low crude prices to be a net negative for Canada.

The bank analysis pointed to a combined effect of three "offsetting positive outcomes" from low-priced crude: a boost for the U.S. economy; the lower Canadian dollar's benefit to exporters selling to the stronger U.S. market, and more spending by Canadians thanks to cheaper fuel.

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The paper's authors, however, are careful to underscore a key risk to the projection: cuts to business investment in Canada's important oil and gas sector.

They warned reductions to oil-production investment are "more certain to occur" than the positive, counteracting forces of lower-priced crude.

"Will consumers spend the savings realized at the gas pumps? Will Canadian exporters more aggressively seek out markets for their goods benefiting from the strengthening U.S. economy and a weaker Canadian dollar?" authors of the RBC Economics report ask.

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"Our current Canadian forecast assumes that both consumers and exporters will respond to these incentives that will slightly more than offset the expected weakening in oil-sector investment."

Conservative estimates

Paul Ferley of RBC, one of the authors, told CBC News the report attempts to assign dollar amounts to the way the oil shock will play out in Canada.

"I get concerned when a negative sentiment takes hold," he said. "There is emphasis being placed on the negatives in terms of lower oil prices and the results in households and businesses becoming very conservative on spending that they don't take advantage of some of the benefits in terms of lower energy costs."

Ferley said the bank was very conservative in estimating the benefits and is well aware of risks such as a continuing oil glut that could result in oil prices heading still lower.

"Clearly ... energy investment will be negatively hit with these lower oil prices," he said. "The threshold for a lot of investment projects is just not being met. Those projects are to be cut or scaled back or eliminated."

The flip side is the potential for stronger consumer spending and stronger exports.

"But it's a positive in terms of areas of the economy like exports. This should strengthen the U.S. economy; it will provide lower energy costs and should provide support to the U.S. economy," Ferley said.

Exports already show signs of picking up in the second and third quarter of 2014, he said, and the falling Canadian dollar should help.

RBC based its prediction on an assumed average price of $65 US per barrel in 2015 and US$74 in 2016.

Last week, crude hit a five-year low when it slipped below $53 US per barrel, a steep drop from its $107 US perch in June.

That rapid drop in oil prices has been creating concern in some parts of Canada, as it threatens the bottom lines for oil-producing provinces as well as the federal government.

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In November, Ottawa's fall economic update warned cheaper crude could drain $500 million from federal coffers in 2014 and $2.5 billion per year between 2015 to 2019. It also said it could slash Canada's nominal gross domestic product by $3 billion in 2014 and $16 billion annually from 2015 to 2019.

Ottawa watching

Last month, federal Finance Minister Joe Oliver said his department was keeping a close watch on the shifting prices, but insisted Ottawa would still attain its long-promised budgetary surplus in 2015-16.

Bank of Canada governor Stephen Poloz has also examined the potential oil-price fallout, cautioning it could slow the pace of the country's GDP growth by a third of a percentage point.

The RBC report said lower oil prices will have significant impacts on government budgets in oil-producing provinces.

But it argues these provinces Alberta, Saskatchewan and Newfoundland and Labrador have seen big increases in revenues from price increases in recent years, putting them on relatively strong footing to absorb the shocks of a prolonged decline.

Other provinces, meanwhile, are seeing benefits from the low crude prices in the form of cheap gasoline and the falling loonie, which is creating a better climate for their manufacturers and exporters.