Economist: declining oil prices will have mixed effects on Canadian economy

CALGARY — Canada's resource-centred economy will feel the effects of declining oil prices in a big way - for better and for worse.

Crude oil for October delivery settled below US$91.15 a barrel on the New York Mercantile Exchange Tuesday - down from its all-time high of US$147.27 set in July.

Earlier in the session the contract dipped below $90.51, its lowest level since Feb. 8.

Now that crude prices are falling, fewer dollars will flow into government coffers as oil-producing provinces collect less in royalties, said TD economist Derek Burleton.

Ottawa will also get less in the form of tax revenue from those whose livelihoods depend on the oil industry.

"On the surface it's a negative," he said.

But there are some indirect "offsetting benefits" from lower oil prices, especially in Central Canada, where the manufacturing sector has taken a major hit.

"As oil prices fall the Canadian dollar falls with it. That's another area that provides some relief to the struggling Central Canadian economy," Burleton said.

Manufacturers have had a tough time this year selling their goods south of the border because of Canada's high dollar, but Burleton notes the continuing downturn in the U.S. economy might still dampen its demand for Canadian exports.

At the provincial level, the impact is more direct as provinces like Alberta see a major shift in royalty revenues, said University of Alberta economics professor Joseph Doucet.

"The government of Alberta has no control over world oil prices, nor does it have any control over the Canadian dollar. And those two factors really dictate what the what royalty revenues will be," he said.

"But we can try to anticipate and use the revenues wisely."

The provincial budget tends to include very conservative forecasts of what the price of oil will be, he said.

"They do that so that they have more flexibility during the year."

Resource revenue for the 2007-2008 fiscal year was C$11 billion, according to a release on the government of Alberta's website. Starting in January, the industry will be charged 20 per cent more in oil and gas royalties.

Consumers may be hoping to see the effects of crude prices filter down to them in the form of lower gas prices, but it is not so cut and dry, said Jason Toews of Gasbuddy.com.

It appears to many consumers that any major swing in crude ought to translate right away into pump prices, since oil is the main ingredient in gasoline.

But gasoline itself is a traded commodity that is bought and sold in the marketplace for different reasons than crude.

"The problem isn't with crude oil prices, it's a problem with supplies of refined gasoline," Toews said.

Two hurricanes this month caused Gulf Coast refineries representing about a fifth of U.S. capacity to shut down production, which had ripple effects on the supplies of gasoline throughout the continent.

Add to that the demand spike that took place as a result of panic buying on the part of traders, wholesalers and everyday consumers.

Ahead of hurricane Ike last week, gas prices shot up by as much as 13 cents in some Canadian markets and have on average lingered above C$1.40 per litre.

Once this "blip on the radar" passes, Toews said consumers will begin to see some relief as cooler weather ramps down demand for gasoline and the cheaper crude price finally filters down to the retail level.

"I expect gas prices to go down to probably around the $1.10 per litre range this winter," he said.

The gasoline that is being sold today is being made from crude oil that was bought in some cases several months earlier.

"There's always a lag time from when they pump the crude oil and actually ship it to the refineries, refine it into gasoline and sent it to the stations," Toews said.

But Toronto-area Liberal MP Dan McTeague said there appears to be some gouging taking place on the part of the industry, since pump prices seem to go up much quickly when crude oil does than when the reverse takes place.

"From January to June, every time there was an increase in the price of crude, even though the delivery was not for three or four months, we, in fact, subsidized the anticipated increase at a moment's notice," said McTeague, a longtime gasoline-price watchdog.

"The real question is if it was possible to do that as crude went up, why is the same not applicable on the way down? And if we're going to have the rules change suddenly, then the oil industry owes Canadians several billions of dollars."

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