BUSINESS
05/20/2018 10:47 EDT | Updated 05/22/2018 10:35 EDT

$100 Oil Possible By Next Year, Bank Of America Says. Is That Good Or Bad For Canada?

As an oil exporting country, we stand to gain. But as a country that does a lot of driving, we risk pain.

  • Vancouver gas prices could hit $1.85 a litre if oil hits $100: McTeague
  • Positive effect on oil-producing provinces could be muted
  • Shift to alternative energy could accelerate

A report from Bank of America Merrill Lynch, released last week, predicts the world could return at least temporarily to the good (or bad) old days of US$100-a-barrel oil by next year.

Though that's hardly a consensus view, it's a clear sign that analysts are taking seriously the possibility that our current era of relatively low oil prices is coming to an end. The North American benchmark price for oil closed above US$71 a barrel Friday, near four-year highs. The global benchmark, Brent crude, was above US$78.

Watch: The possibility of $100 oil

The cartel of oil-exporting nations known as OPEC has successfully slowed growth in the world's supply of oil at a time when demand is growing.

Increasing instability in the Middle East, as evidenced by the Trump Administration's withdrawal from the Iran nuclear treaty, has also put upward pressure on oil prices.

So what would $100-a-barrel oil, or generally higher oil prices, mean for Canada? As an oil exporting country, we stand to gain. But as a country that does a lot of driving, we risk pain. Here's how it breaks down.

Drivers will get hit harder than last time oil prices were high

Oil sat above $100 a barrel for years until 2015 or so, but this time around, if it hits those levels again, gas prices in Canada are likely to be higher than they were last time.

In fact, Dan McTeague, senior petroleum analyst at GasBuddy.com, notes that gas prices are already close to where they were last time oil was at $100 a barrel, and oil was trading at "just" US$71 a barrel this past week.

McTeague predicts the average gas price in Canada would rise by 25 cents from current levels if oil were to hit $100 a barrel and market conditions remained the same.

That would mean a national average of $1.60 a litre. Greater Toronto would see prices at $1.65, while Montreal would hit $1.70 and Vancouver could see upwards of $1.85 a litre, McTeague said.

Earlier on HuffPost Canada:


The main factor is the lower Canadian dollar. The loonie used to move more in tandem with oil prices, but because Canadian oil trades at a deep discount to global oil prices, the loonie won't move up as much with oil prices as it would have before, McTeague said. A lower loonie means higher prices at the pumps.

(Canadian oil is trading at a discount to global oil prices due primarily to the rail and pipeline bottlenecks the industry is suffering from, analysts say. The difficulties in delivering the product means sellers have to offer the oil for less.)

Other things are also pushing gas prices higher these days, McTeague told HuffPost Canada, including the various carbon taxes that provinces have implemented in recent years, as well as higher profit margins at refineries.

But McTeague is among those analysts who doesn't see $100 arriving as early as next year. "It would be too much for the world to handle," he said.

Oil-producing provinces will do better, but won't benefit as much as last time

The most immediate effect of rising oil prices will be an increase in national income, Scotiabank economist Derek Hold told Bloomberg last week. There will simply be more money flowing into the economy if Canadian exporters get more per barrel.

But investors may not be as willing to put money towards new oil projects in Canada.

Canada's industry is experiencing problems, ranging from the pipeline and rail bottlenecks that are keeping Canadian oil from reaching markets, to the U.S.'s corporate tax reforms that created a more friendly environment for oil producers in the U.S.

That means there's no guarantee of a pick-up in oil investment (and therefore oil production) in Canada as oil prices rise, Bloomberg reported.

And, given that there has been a great deal of automation in Canada's oil patch since oil prices fell, it's entirely possible that hiring in the oilsands won't be as strong as it was last time, either.

Upward pressure on inflation and interest rates

Even Canadian mortgages might be impacted, if rising oil prices push costs upwards.

Increasing fuel costs including the rising cost of diesel will drive up costs for transportation firms, airlines and energy-intensive industries like manufacturing. That could spill over into the prices of consumer goods.

($100 oil by next year) would be too much for the world to handle.Dan McTeague, GasBuddy.com

If that inflation were to rise above the Bank of Canada's target of two per cent — roughly where it is today — the bank would be under pressure to raise interest rates, thereby putting pressure on Canada's very indebted households.

But many analysts say the Bank of Canada is very aware of the the risk to households from higher borrowing costs, and it isn't likely to react aggressively to rising inflation, especially if it's just "pass-through" from higher gasoline costs.

"They are balancing this out against very, very stretched household finances," TD Bank economist Brian DePratto said, as quoted in the Toronto Star.

A faster shift away from oil

Higher oil prices may be good news for oil producers in the short term, but in the longer term, they could be bad for producers, says Fatih Birol, executive director of the International Energy Agency.

In an interview with The Economic Times of India, Birol said oil prices that are higher than current levels would push consumers to look for alternatives.

"Electric car deployment may accelerate and more efficient use of oil and energy will be seen, all leading to a falling share of oil," Birol said.

"There are several major countries that may want the prices to be higher still but ... I can say that prices higher than the existing level may not be good news for the producers themselves."

He also suggested prices at those levels would not be good for the global economy as whole.

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