Uncertain Oil Prices Presentation to Informetrica Forecast Service Clients at Ottawa, June 13, 2006 Carl Sonnen
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Slide 1
Uncertain Oil Prices
Presentation to
Informetrica Forecast Service Clients
at Ottawa, June 13, 2006
Carl SonnenSlide 2
Summary
Scenarios: $100+/bbl or $40/bbl
• Long-term: economy adjusts so negative real
effects of higher price & positive effects of lower
price are modest
• Short-term: significant implications for growth
• Sectors: energy-intensive & trade sensitive goods
producers, & transport services most vulnerable;
oil & gas mining responds if price signal lasts
• Provinces: all provinces sensitive with Alberta
most likely to see offsets from oil & gas mining
We are examining, as impact statements, the implications of uncertain world oil prices.
From the current price of more than $60 (US per barrel of West Texas Intermediate) we
have assumed future prices could rise to $100 and more or fall to a low of $40.
An upsurge in the price of oil should trigger reductions in demand and encourage
producers to develop new capacity leading to a price reduction over time. That this will
take time is certain since users of oil-based products (and other energy) will need to act
(e.g., invest in more energy efficient capital) while producers will need time to explore
and then develop new capacity. The pace at which that will occur is uncertain, and in the
case of oil, is complicated by the imperfect nature of the global oil market.
Imperfect or not, there are implications for all economies. Thus direct impacts from the
price change also include implications for Canadian export and import markets and prices
of traded goods and services, U.S. interest rates, etc. Uncertain also is what the long-runequilibrium price should be after the adjustments have been made. It is important to
emphasize that such effects will be occurring globally.
Our headlines are as indicated in the panel:
• Our analysis presumes that while there are negative effects of higher oil prices
(and positive effects of lower prices) on U.S. economic activity, that economy
“adapts” so that in the long-term there are only modest differences in the overall
level of real economic activity. The same can be said for the Canadian economy.
After ten years, the difference between the lower level of activity (compared to
Base) in the $100 price case and the higher level of activity in the $40 case is
about 4 per cent for GDP at Basic Prices. In annual growth terms, this is
equivalent to 0.4 per cent, so in this sense the variation is “moderate”. But keep in
mind that a 4 per cent difference in the level of activity (equivalent to more tha n
one year of growth at potential) will be judged by some to be a “large” number.
• The transition from the current price to a higher or lower price would be
significant for growth, however. The variation in the annual growth for the three
years 2006-08 is more than 2 per cent.
• Foreign and domestic impacts lead to an especially strong vulnerability for non-
energy resource-based industries, and those in the highly qualified durables and
construction sector. After ten years, the variation in level of activity for the former
is 6 per cent, and for the latter 10 per cent. We have assumed that notwithstanding
reduced domestic and US demand for oil and gas, higher prices will lead to
increased investment and subsequent increases in production (and global exports).
But only if the higher price is durable! If so, we estimate that there will be initial
negative effects on energy production followed by a period of positive impacts
over the medium and longer term. In high price cases, a combination of weakened
performance in the resource and other goods industries and sensitivity to added
energy costs and transport prices yield notably reduced freight and personal
transport services. Lower oil prices have the opposite effect.• Economic activity in all (!!) provinces is sensitive to the price. In higher price
cases, since all provinces are composed of a wide variety of sectors that are
negatively affected there is a tendency for overall economic activity to be reduced
everywhere. Our results suggest the negative effects are most severe in Central
Canada given the large weight of highly manufactured durables in the two
economies. If higher prices produce more investment and output in the oil and gas
sector, then there are offsets for some provinces. Our results suggest event ual
overall positive effects for Alberta and Newfoundland. If the higher price is
temporary (lasts only a year or two) this offset is less likely to emerge, and long-
term overall activity in the two provinces is smaller. But the economies of other
provinces (and many sectors within the economies of Newfoundland and Alberta)
would be better off if the oil price has come back down from its temporary high.
Our results suggest that overall economic activity will be stronger in all (!!)
provinces if the oil price drops to the $40 range. We have assumed that at this
price, most of the oil sands and other oil and gas mining investment that would
occur in he Reference Case will still go ahead.
There is another headline. Results are sensitive to assumptions about policy and industry
response.
• We have assumed that there are interest rate and fiscal responses in both the U.S.
and Canada, but these are modest, uncertain and important to overall results.
• The responses we have assumed in the energy sector are open to review, both
nationally for each industry, and provincially, where the impacts on energy capital
projects are likely to vary from project to project, and therefore from province to
province.Slide 3
Higher/Lower Oil Price
at Nominal Prices
WTI Crude Price
140
120
$Nominal US per bbl
100
80
60
40
20
0
2006.1
2007.1
2008.1
2009.1
2010.1
2011.1
2012.1
2013.1
2014.1
2015.1
Base Hi_Short Hi_Long Lo_Long
The Base Case is informed by world oil prices through end-2005 and a consensus
expectation that prices will rise through the balance of this year, then fall off over the
next three years. From the end of 2009, real prices are unchanged so in nominal terms,
prices increase with the U.S. GDP deflator.
We have posited three alternatives:
• Hi_Short – The WTI price per barrel increases more rapidly in the short term
reaching $77 US late next year, after which prices fall back to the Base Case by
Q3 of 2008,
• Hi_Long – A more rapid rise in the WTI price is more durable, reaching $100 by
early 2010, after which the price rises in line with the growth of the US GDP
deflator.• Lo_long – The global consensus finally gets it right. The WTI price begins to fall
sharply from mid-2006 through to the end of 2007. From the lower level, prices
rise in line with the US deflator.
For the near term (to the end of next year) this provides an upper and lower bound for
prices that is close to the consensus “high” and “low” extremes. As for the lo nger term,
we simply provide boundaries that seem reasonable given the current discourse about
possibilities among experts.
By way of context, note that this is an “update” to alternatives produced in October 2004.
Our sense of ranges has changed dramatically since then. Our new, low price case is $8
higher than the high price case assessed in 2004. At $100, our durable, high price case
places this among the headline grabbing cases occasionally produced by financial houses.
Do workshop participants have a different view of the ranges? Our thinking includes the
following:
• The rapid growth of China, India, Brazil and others, and the 12+ per cent
depreciation of the U.S. dollar (weighted for its trading partners) has produced a
more energy- intensive global economic structure so that any demand-side retreat
should lead to an ”optimist’s” equilibrium price that is higher than would have
been the case only a couple of years ago. A downside to a US and other industrial
country business cycle could lead to a lower price (is $20 a barrel reasonable in
that circumstance?) but here we focus on the new optimistic equilibrium since we
can’t predict the severity nor timing of the cycle.
• The upper boundary described by the HI_Long case may be more uncertain than
the lower boundary. Leaving aside short and longer-term supply interruptions
(e.g., Iran withdraws as an oil supplier for several years), demand-side uncertainty
should be high. We assume, as a long-term condition, that industrial country
growth continues at a steady moderate pace, with relatively rapid growth of
economies (and energy- intensity) occurring in many large “emerging” economies.
A higher oil/energy price implies reduced demand since it is sustained (long-term
elasticities are at work), but the implicit assumption here is that structural changes
in global economy produce a circumstance in which demand growth outpaces thatof supply. At issue are whether the run-up in the price over the next 3-4 years is fast enough (could we get to $100 in 2007/08?) and whether real price growth will be “0” (in a high price case) after 2010.
Slide 4
Higher/Lower Oil Price
at “Real” Prices
WTI Crude Price
100
90
80
$ 2005 US per bbl
70
60
50
40
30
20
10
0
2006.1
2007.1
2008.1
2009.1
2010.1
2011.1
2012.1
2013.1
2014.1
2015.1
Base Hi_Short Hi_Long Lo_Long
This provides a “real” (at 2005 U.S. prices) of the WTI barrel. The “long” alternative
cases range from a low of $40 (reached fairly soon) to a high of $89 (reached in early
2010).Slide 5
Deviation from Base:
Large Spread
Oil Price as Impact
80
60
% change from Base
40
20
0
-20
-40
-60
2006.1
2007.1
2008.1
2009.1
2010.1
2011.1
2012.1
2013.1
2014.1
2015.1
Hi_Short Hi_Long Lo_Long
The spread between the “low” and “high” priced case in 2010 is about 2.5 times. This is
almost precisely how much the price of oil has increased from the mid-March 2003
invasion of Iraq to today.Slide 6
Key Factors Included
• A Global Phenomenon – impact on U.S.
economy simulated as to affect real
Canadian exports and imports, prices of
imports, interest rates, etc.
• Response of oil and gas supply to changed
demand in traditional markets and price of
oil and gasSlide 7
Major Canadian Export Market
US Real GDP
1.5
1
0.5
% impact
0
-0.5
-1
-1.5
-2
2006 2008 2010 2012 2014
HIL HIS LOL
The impact of changed international oil prices has been simulated with the
Macroeconomic Advisers (MA) model (WUMM2005), with the magnitude of results,
which are “modest”, confirmed by review of previous analyses undertaken by MA. The
panel summarizes the effect.
For the longer term, the impacts on the real U.S. economy, overall, are small. Put simply,
the economy adapts, so that while some sectors lose others take up the slack. Is this a
reasonable outcome? Remarks of Alan Greenspan, the former Federal Reserve Chairman,
before a Senate committee on June 6 support this. He said “The United States, especially,
has been able to absorb the huge implicit tax of rising oil prices so far”. But he was
warning that “we may finally be experiencing some impact”. That suggests an impact in
which sustained rapid price increases are initially absorbed with little effect, but grow
over time. Whether the model-based results we display are consistent with this is hard to
say. These indicate little impact in the first year, notable impacts on growth in years two
and three, and then some erosion as “adaptation” takes hold.We have supplied you with an EXCEL worksheet that details the effects on the U.S.
economy for each of the three oil price cases. Highlights include the following:
• Impacts in the first three years look like those of the downturn in a business cycle
– consumer spending on durables, and both residential and non-residential
investment are hit the hardest in an oil price increase, and benefit the most from a
drop in price,
• Longer term, there are lasting negative effects (from a durably higher price) on
real disposable income, government saving, and the U.S. Current Account, but in
the current context, the impacts are modest at most. A lower price has opposite
effect.
• Of likely critical importance to Canadian energy producers is the fact that the
change in relative prices of energy has major effect. U.S. imports of petroleum
and products falls off by increasingly large and significant amounts in the price
increase case – imports are down by 15 per cent in 2015. In our lower price case,
imports are up by more than 10 per cent.Slide 8
Canadian Exports
Canadian Real Exports
2
1
% impact
0
-1
-2
-3
2006 2008 2010 2012 2014
HIL HIS LOL
Roughly, the impact on Canadian exports mirrors the impact on U.S. economic activity
and imports. Effects are somewhat larger in years 2-3 (and even so are moderate) with
effects smaller over the longer term. Lower world oil prices produce some increased US
demand for Canadian goods and services, with higher prices having the opposite effect.
The impacts are concentrated in non-energy commodities. When the price change is
durable for a long time, impacts are spread across a wide range of commodities, with in
the higher price case, reductions in the range of 5 per cent common for resource-based
commodities, with smaller proportionate effects common for more highly qualified
manufactured products (machinery, transport equipment). Our results indicate very strong
impacts on exports (and imports) of travel services.Slide 9
Canada- “Double” Price Impacts:
Oil & Other Energy, plus Other Int’l Commodities
GDP Deflators
8
6
% impact
4
2
0
-2
-4
-6
2006 2008 2010 2012 2014
HIL: US LOL: US HIL: CAN LOL: CAN
This panel measures the impact on the GDP deflators for the U.S. and Canada for the
high and low “durable” price cases as per cent change s from the Reference Case for each
year from today through 2015.
The impact on prices, or overall unit costs of production, is much larger in Canada than in
the U.S. In a broad sense, then, the “competitiveness” implications for Canada appear to
be more severe. Why might this be the case?
In a higher oil price case, apart from the higher price paid by the U.S. for oil (most of
which is imported), prices for imports of other goods and services also rise – by 5.5 per
cent. Note, however, that these imports are equivalent to approximately 15 per cent of
U.S. GDP or total spending through the next ten years.Slide 10
Canadian Import Prices
Canadian Import Deflator
10
8
6
% impact
4
2
0
-2
-4
-6
2006 2008 2010 2012 2014
HIL HIS LOL
In U.S.-dollar terms, Canada’s non-energy import prices are rising (in a high oil price
case) by amounts roughly equivalent to those in the U.S. But in Canada, non-energy
imports are equivalent to double the proportion of those in the U.S. – that is, a share of
more than 30 per cent. That is, the external “price” shock is twice as powerful as that in
the U.S.
Induced effects on costs of production strengthen the impact. In 2015, unit labour costs in
the U.S. have increased by 2.4 per cent. In Canada, the impact is 3.2 per cent.
Put simply, this logic about the weighting of price and cost changes suggests a stronger
unfavourable effect on Canadian “competitiveness” and “real incomes” from a higher oil
price. Notice, however, that a lower world oil price works to Canada’s advantage, and
importantly, if the oil price shock is short lived, then this logic about “comparative”
effect carries little weight. Offsetting this, are possible implications for supply of oil, gas
and other energy products.Slide 11
Demands on Energy Producers
Durable, High Oil Price
10000
$97 Mns
5000
0
-5000
2006 2008 2010 2012 2014
End-Use (Trade) End-Use (Domestic)
Upstream (Trade) Upstream (Domestic)
The other key factor to consider is what happens in the Canadian energy supply system?
Here we distinguish effects on upstream producers (mining of coal, and oil and gas), and
downstream producers (electric and gas utilities, and refineries). For purposes of this
description, we ignore impacts on pipelines, and mining services, altho ugh effects on
these are reported in the accompanying workbooks.
In the durable, high oil price case, we increase exports of oil above those of the Base
Case levels by increasing amounts so that by 2015, real exports are 38 per cent higher.
We leave gas exports unchanged. We use the model to estimate effects on other
commodities.
A long- lasting reduction in U.S. demand for energy (the price effect) and a weakened
U.S. economy over the longer term yields reduced Canadian exports of other energy
commodities through the next ten years. But reduced Canadian demand for energy (the
price effect) lowers Canadian imports of energy commodities (notably for crude oil,refined petroleum products and coal). Trade impacts are positive for upstream producers
(principally crude oil) and modestly negative for end- use-producers.
For Canadian producers of end- use energy commodities, there is also demand damage in
reduced domestic requirements, the effects of which emerge over the first four years
and are then essentially unchanged. In evaluating the “reasonableness” of this impact
view, note that the model does not account for relative price impacts in industry demand
for energy, so that reduced demands from these are derived solely from their reduced
activity. Accounting for these effects would reduce demand for energy suppliers even
more, and to achieve such effects in the industrial sector would require energy-using
industries to increase investment in energy-saving equipment (and structures). Domestic
requirements for upstream commodities are reduced as end- use suppliers require fewer
inputs. An important uncertainty here is the extent to which the burden of such reduced
demand for crude (and coal) would be born by foreign or domestic suppliers.
Impacts depend on whether the price change is durable or short lived, and on whether the
oil price changes is a move to higher or lower prices. The able below summarizes the
impacts for the three cases we are examining.
Canada: Energy-Sector Demand Impacts Summarized
($Mns 1997)
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Case: HIL (High, Durable)
End-Use (Trade) -93 -299 -591 -948 -1297 -1479 -1536 -1565 -1595 -1624
End-Use (Domestic) -242 -1041 -2518 -3265 -3024 -2884 -3220 -3433 -3277 -3024
Upstream (Trade) 128 433 1243 2400 3439 4582 5728 6841 7896 8945
Upstream (Domestic) -222 -898 -1984 -2642 -2815 -2964 -3269 -3437 -3400 -3325
Case: HIL (High, Short)
End-Use (Trade) -93 -275 -226 -95 -51 -40 -27 -20 -28 -39
End-Use (Domestic) -245 -956 -1223 -949 94 620 227 -299 -323 -15
Upstream (Trade) 128 368 368 336 139 35 35 45 2 -66
Upstream (Domestic) -225 -836 -916 -577 81 346 91 -192 -180 6
Case: HIL (Low, Durable)
End-Use (Trade) 54 666 1219 1348 1284 1244 1237 1244 1256 1269
End-Use (Domestic) 227 1774 2834 2734 1906 1470 1548 1667 1694 1640
Upstream (Trade) -143 -738 -1374 -1841 -2015 -2145 -2325 -2498 -2636 -2754
Upstream (Domestic) 179 1610 2607 2607 2097 1849 1891 1961 1977 1953Slide 12
Energy Sector Output Impact
GDP: High Oil Price
4000 15
10
$97 Mns
2000
%
5
0
0
-2000 -5
2006 2008 2010 2012 2014
End-Use (Bar) Upstream (Bar)
End-Use (Line) Upstream (Line)
This chart focuses on the output effect in the energy sector that is consistent with the
foregoing view of effects on the demand for their products.
The principal message from a case that assumes lasting higher prices for oil and other
energy products is that effects on producers are likely to be initially negative (by small
amount) but with the possibility of sharp positive effects over the longer term. Also,
impacts are likely to be quite distinct in component energy industries. Our analysis
suggests negative effects for most downstream industries (whose markets are dominantly
domestic) with the possibility of positive effects concentrated in the upstream sector. To
achieve the higher exports of oil requires additional investment in oil and gas mining. We
assume these grow over time in the durable, high price case, reaching by 2015, and
additional $7 billion per year. Sat that point, each $ of oil price increase is generating an
additional $170 million in investment. In the low price case, there is a symmetric result –
investment shrinks on the same basis. In the case where price change is short-lived,
investment and output implications are small.Comparison of output effects on the sector are tabulated below.
Canada: Energy-Sector Real GDP Impacts Summarized
(% impact)
Case: HIL (High, Durable)
Energy Sector -0.2 -1.0 -2.0 -1.7 -0.5 0.6 1.2 1.9 3.0 4.1
End-Use -0.2 -1.1 -2.9 -3.8 -3.1 -2.7 -2.9 -3 -2.7 -2.3
Upstream -0.2 -1 -1.6 -0.5 1.4 3.3 4.8 6.5 8.5 10.4
Case: HIL (High, Short)
Energy Sector -0.3 -1.0 -1.2 -0.7 0.4 0.7 0.2 -0.3 -0.4 -0.1
End-Use -0.2 -1 -1.6 -1.4 -0.1 0.7 0.3 -0.4 -0.5 -0.2
Upstream -0.2 -1 -1.1 -0.5 0.5 0.8 0.3 -0.3 -0.3 -0.1
Case: HIL (Low, Durable)
Energy Sector 0.2 1.8 2.6 2.0 0.7 0.1 0.1 0.1 -0.1 -0.2
End-Use 0.3 1.9 3.3 3.3 2.2 1.5 1.5 1.5 1.6 1.5
Upstream 0.1 1.9 2.6 1.5 0 -0.7 -0.9 -1.1 -1.3 -1.6
The impact on the energy supply sector has important implications for the overall
economic impact. If we assume that our energy exports don't change by significant
amounts, then a principle potential direct impact on the real economy is minimized. Note
that the US impacts indicate a reduced demand for oil imports in a high price case,
suggesting the possibility of reduced Canadian exports to that market. On the other hand,
a higher world price suggests that Canadian producers would be investing and looking for
increased exports since, as well, Canadian demand for energy is being reduced by higher
prices. It may be reasonably inferred from this that the Canadian industry would be well-
advised to look at “third option” markets.Slide 13
Demand Impacts
Demand- High Price Demand - Low Price
0.5 2.5
0
2
-0.5
% impact
% impact
1.5
-1
1
-1.5
-2 0.5
-2.5 0
2006 2008 2010 2012 2014 2006 2008 2010 2012 2014
Final Domestic Demand Imports Exports Final Domestic Demand Imports Exports
These panels decompose the main demand effects of the high and low price cases.
In the (durable) high priced case, damage to the U.S., and relative loss of competitiveness
lead to a significant initial negative impact on exports, but as (by assumption) oil exports
are increased, the overall effect on exports erodes and eventually returns to Base case
levels. The initial loss of exports, and reduced real income from the oil price “tax”,
reduces domestic final demand, again by significant amounts. Negative impacts on final
domestic demand are long lasting, and are widespread across both personal consumption
and capital formation. Reduced imports mitigate the implications of this for domestic
producers.
In the low-priced case, a strengthened U.S. economy is reflected in increased Canadian
exports, where these positive effects are widespread across commodities. The exception
is in energy, where exports of crude oil are reduced (but by a small margin – 3 per cent).
Induced effects of this and increased real incomes following from reduced energy pricesprovide for a significant positive effect on domestic final demand. Imports rise to meet this added demand. In comparing the high and low oil price cases, note that there is an asymmetry to our assumptions about oil exports. In the high priced case, exports rise continuously building to a large (35+%) increase, while in the low priced case, we lower exports by only a small amount. We solicit “expert” opinion about this.
Slide 14
Growth Impacts
Growth Overview- High Price Growth Overview- Low Price
0 1.8
-0.2 1.6
-0.4 1.4
-0.6 1.2
% impact
% impact
-0.8
1
-1
0.8
-1.2
-1.4 0.6
-1.6 0.4
-1.8 0.2
-2 0
2006 2008 2010 2012 2014 2006 2008 2010 2012 2014
Labour Force Employment Labour Force Employment
Capital Stock Output per Employee Capital Stock Output per Employee
In the high priced case, GDP at Basic Prices is reduced by an average 3 per cent after the
short-term effects occur, while in the low-priced case, overall GDP is increased by 1.5
per cent.
Labour supply adjusts to changes in employment requirements to mitigate the effect on
unemployment but only partially – in the high priced case the unemployment rate rises,
while lower oil prices reduce the unemployment rate. With higher oil prices, reduced
capital formation and weaker “capital deepening” is reflected in lowered output per
employee. Lower oil prices have the opposite effect.
Recall here that we made the point earlier that the analysis includes no “special”
investment response to the higher oil price. That is, reduced energy demand is consistent
only with a “conservation” effect (i.e., lights are turned off, bathing is in cold water), but
there is no mechanism used to generate investment in equipment with additional energy
saving attributes. In degree as this should be an important mechanism for achievingreduced energy demand, the impact understates the demand-side (capital formation)
effects. (Endogenous linkage of The Informetrica Model to energy models at –Maple-C
and Energy2020 – provide a capacity to assess these kinds of effects, but this has not
been employed in this analysis.) Note, however, that
• the import content of such “new” capital is likely to be high, and
• it is likely the case (but debatable) that this new capital would net, overall,
produce a reduction in measured productivity.Slide 15
Sector Impacts
GDP by Sector- High Price GDP by Sector- Low Price
1 6
0 5
-1
4
-2
% impact
% impact
-3 3
-4 2
-5
1
-6
-7 0
-8
-1
2006 2008 2010 2012 2014
2006 2008 2010 2012 2014
Resource Cyclical Pvt. Svc. Social Svc.
Resource Cyclical Pvt. Svc. Social Svc.
The key messages in these panels, which illustrate the changes in GDP for major sectors
of the economy, are:
• All (or almost all) industries are adversely (or favourably) affected by the oil price
change.
• The most severe impacts in the case of a price increase, however, are concentrated
in industries supplying highly manufactured goods (electrical and non-electrical
machinery, transportation equipment) and construction services. A close second
behind these are trade sensitive, non-energy resource industries – agriculture,
forestry, chemicals and metals, including first-stage manufacturers.
Transportation service industries, who carry the freight of these other goods-
producing industries, and are directly sensitive to energy as a key input, are
among the most severely affected service industries. GDP of consumer-oriented
industries is reduced reflecting the modest reduction in real disposable income ofhouseholds. Social sector industries (health, education and public administration) are little changed. (We estimate that there would be initial small negative effects on government balances that are subsequently positive, assuming that upstream oil production is increased sharply.) If oil prices are reduced, opposite effects are likely, but again, with impacts on non-energy goods producers likely to be the strongest.
Slide 16
Regional Effects on Output
Own region perspective
Regional GDP- High Price Regional GDP- Low Price
0.5 4
0 3.5
-0.5
3
-1
2.5
% impact
% impact
-1.5
-2 2
-2.5 1.5
-3
1
-3.5
-4 0.5
-4.5 0
2006 2008 2010 2012 2014 2006 2008 2010 2012 2014
Atlantic Central Prairies BC & Territories Atlantic Central Prairies BC & Territories
This panel shows the percentage impact on GDP for regions of the country. The key
messages are the following:
• All regions of the country are adversely affected by higher oil prices, and
conversely, helped by lower oil prices. All provinces, and regions, include
industries that are helped/hurt by the price change.
• Provinces and regions are affected overall in degree as their industrial structure is
weighted heavily by industries that are relatively sensitive to the price change.
Central Canada is notably sensitive because of the especially large weight of
cyclically sensitive durable goods industries in the Quebec and Ontario
economies. In these results, Alberta, Newfoundland and Saskatchewan are
especially sensitive to our varying assumptions about impacts on the oil and gas
mining industry.Provincial detail is tabulated below.
Provincial Impacts - High, Durable Price
Gross Domestic Product ($1997 Mns) (% imapct)
Canada -0.3 -1.6 -3.2 -3.3 -2.6 -2.5 -3.1 -3.3 -3.1 -2.8
Newfoundland -0.2 -1.1 -1.8 -1.6 -0.9 -0.4 -0.2 0.1 0.7 1.2
Prince Edward Island -0.2 -1.1 -2.0 -2.2 -1.9 -1.9 -2.2 -2.3 -2.2 -2.1
Nova Scotia -0.2 -1.3 -2.4 -2.5 -2.1 -2.0 -2.4 -2.5 -2.4 -2.2
New Brunswick -0.2 -1.4 -2.7 -2.7 -2.1 -2.1 -2.6 -2.8 -2.7 -2.5
Quebec -0.3 -1.7 -3.6 -4.0 -3.4 -3.4 -4.0 -4.4 -4.2 -4.0
Ontario -0.3 -1.8 -3.6 -3.7 -2.9 -3.0 -3.8 -4.2 -4.0 -3.8
Manitoba -0.2 -1.3 -2.6 -2.7 -2.2 -2.1 -2.6 -2.8 -2.6 -2.4
Saskatchewan -0.2 -1.1 -2.1 -2.0 -1.4 -1.0 -1.1 -1.1 -0.7 -0.3
Alberta -0.2 -1.3 -2.4 -2.1 -1.3 -0.8 -0.8 -0.5 0.1 0.7
British Columbia -0.2 -1.5 -2.7 -2.6 -2.1 -2.0 -2.5 -2.7 -2.5 -2.2
Territories -0.1 -0.9 -2.3 -2.9 -2.4 -2.1 -2.4 -2.7 -2.7 -2.5
Provincial Impacts - High, Short-Lived Price
Gross Domestic Product ($1997 Mns) (% imapct)
Canada -0.3 -1.5 -1.9 -1.0 0.6 0.9 0.1 -0.5 -0.4 0.1
Newfoundland -0.2 -1.0 -1.0 -0.4 0.4 0.6 0.1 -0.3 -0.2 0.1
Prince Edward Island -0.1 -0.9 -1.1 -0.6 0.1 0.3 -0.1 -0.3 -0.3 0.0
Nova Scotia -0.2 -1.1 -1.3 -0.6 0.4 0.6 0.1 -0.3 -0.2 0.1
New Brunswick -0.2 -1.2 -1.6 -0.8 0.5 0.8 0.2 -0.4 -0.3 0.1
Quebec -0.3 -1.6 -2.1 -1.3 0.4 0.9 0.1 -0.5 -0.4 0.1
Ontario -0.3 -1.6 -2.1 -1.1 0.7 1.1 0.1 -0.7 -0.5 0.2
Manitoba -0.2 -1.1 -1.5 -0.9 0.3 0.6 0.0 -0.5 -0.4 0.0
Saskatchewan -0.2 -1.0 -1.3 -0.7 0.4 0.7 0.1 -0.4 -0.3 0.0
Alberta -0.3 -1.3 -1.4 -0.5 0.6 0.8 0.1 -0.4 -0.3 0.1
British Columbia -0.2 -1.3 -1.6 -0.6 0.6 0.8 0.1 -0.5 -0.3 0.2
Territories -0.1 -0.9 -1.7 -1.5 -0.1 0.8 0.6 -0.1 -0.3 -0.1
Provincial Impacts - Low, Durable Price
Gross Domestic Product ($1997 Mns) (% imapct)
Canada 0.3 2.2 3.3 2.7 1.4 0.9 1.1 1.4 1.3 1.3
Newfoundland 0.2 1.6 2.2 1.6 0.6 0.3 0.4 0.5 0.4 0.3
Prince Edward Island 0.2 1.5 2.1 1.7 1.0 0.8 0.9 1.0 0.8 0.8
Nova Scotia 0.2 1.8 2.6 2.1 1.1 0.8 0.9 1.1 1.0 1.0
New Brunswick 0.2 1.8 2.8 2.3 1.2 0.8 1.0 1.2 1.2 1.1
Quebec 0.3 2.4 3.7 3.3 1.9 1.4 1.5 1.7 1.6 1.6
Ontario 0.3 2.4 3.6 3.0 1.6 1.1 1.3 1.6 1.6 1.6
Manitoba 0.2 1.8 2.7 2.3 1.3 0.9 1.0 1.2 1.1 1.1
Saskatchewan 0.2 1.6 2.3 1.9 0.8 0.4 0.5 0.6 0.6 0.6
Alberta 0.2 2.0 2.7 2.0 0.7 0.3 0.4 0.5 0.4 0.3
British Columbia 0.3 1.9 2.8 2.2 1.1 0.7 0.9 1.2 1.1 1.1
Territories 0.1 1.1 2.4 2.7 1.8 1.1 1.0 1.1 1.1 1.1Slide 17
Regional Effects on Output
across-region perspective
Regional GDP- High Price Regional GDP- Low Price
5 45
0 40
-5
35
-10
30
$1997 Bns
$1997 Bns
-15
-20 25
-25 20
-30 15
-35
10
-40
-45 5
-50 0
2006 2008 2010 2012 2014 2006 2008 2010 2012 2014
Atlantic Central Prairies BC & Territories Atlantic Central Prairies BC & Territories
The previous panel indicated the per cent impacts on each region, providing a sense of
the extent to which those in a region or province may view themselves as sensitive o the
price change. These panels have a “national” perspective. It is customary to think that oil
and other energy prices are important to Alberta and other energy producing provinces.
This suggests that the major effects on the country are concentrated in Central Canada.Slide 18
“Macro” Considerations
• We have assumed no impact on the nominal
exchange rate
• Interest rates change in line with those of
the U.S. (by small amounts)
• There are no major “fiscal” responses
As an analytical convenience, the exchange rate is unchanged in the impact cases (partly
to isolate relative price and structural impacts from large “macro” responses). An
alternative, reasonable view, especially in a durable high oil price case where price
increases follow from rapid growth of global demand, would be to appreciate the
currency – possibly by large amounts – as energy and other resource commodity prices
increase rapidly. That would look like events of the last 2-3 years. The appreciation
would mitigate aggregate price increases and the loss of real incomes but would have
adverse effects on highly manufactured goods. It is not immediately clear that aggregate
real side impacts would be sharply different from those reported, but sector (and
provincial) distinctions would likely be sharp.
We have also assumed there are no major fiscal policy reactions (again to isolate
structural effects). But near term strong implications for growth suggest the possibility of
such action. The nature of such reactions (including whether it would “help” or “further
hurt” the economy) should be considered as problematic, and worthy a whole study byitself! The point to take away is that major changes to energy prices can easily trigger reactions in the economy that are potentially significant and hard to predict so that any distinct view of impacts is problematic, or more properly, needs to include a clear exposition of what is being assumed.
Slide 19
Points to Review
• Are price ranges sufficiently wide?
• Domestic and U.S. demand price sensitive,
indicating reduced demand for higher prices (and
vice versa). But price indicates firm
increased/reduced demand globally. Are our
supply responses in oil/gas/other energy
reasonable? Is response symmetric? Are there
provincial dimensions to this?
• Demand effects are a move up/down the demand
curve. Does Climate Change (CC) indicate other
responses – added capital? How is this different
from CC initiatives?
We have asked a number of experts to consider these questions and to provide comment
more generally. We’ll turn to them for comment first and then open the floor to comment
from other workshop participants.
Workshop Notes:
“Experts” (several branches at NRCAN, NEB):
• energy supply response (investment and subsequent production change) to higher
price is too robust – “resource” constraints.
• Supply response in low price case (ie. no major change in production/exports)
OK so long as price remains at $40 or more. Consistent with this, should review
investment in oil and gas to ensure that major changes from base case not
included
• Range of price alternatives reasonable.You can also read
