Lower oil prices could slow Canada’s wealth creation in 2007 and 2008, says Global Insight. However, output growth would not be affected due to potent positive offsets to the negative impacts on the oil patch.

In its January forecast for Canada, Global Insight assumed that crude oil prices will average US$63 (West Texas Intermediate, per barrel) in the first quarter and US$64 in 2007 and US$65 in 2008. However, oil prices have fallen to a US$50–55 range so far this year.

Assuming oil prices stay below forecast, and natural gas prices follow, Canada’s trade balance would slide, the firm suggests. Global Insight says that the trade surplus in energy, mostly oil and gas, stood at $51 billion in the third quarter of 2006. A 17% reduction in prices would lower the surplus by about $9 billion per year. This implies a direct hit on national wealth of $9 billion—not insignificant, but tiny (0.2%) compared with Canada’s net worth of $4.8 trillion at the end of the third quarter.

If consumers, businesses, and governments decided to completely offset the negative hit on wealth by cutting spending, the impact on gross domestic product would be much larger (0.6%), as current production, which GDP measures, is about three times smaller than the net worth, it notes. “Fortunately, there are good reasons to expect that Canada’s total GDP would see very little impact of lower energy prices, although the influence on the industrial and regional components would be considerable,” it adds.

“The loss of wealth would be concentrated in the oil and gas sector, resulting in lower profitability and thus reduced activity. Employment, profits, exports, and government revenue from the oil patch would suffer. Real energy exports would be expected to fall 1.1% below the baseline this year and 2.6% below next year. Regionally, of course, Alberta’s economy would take most of the negative hit,” it says.

However, it expects that good news would counterbalance the ill effects on the oil patch. “The first piece of good news would be stronger external demand,” it notes. In particular, Global Insight would expect a 0.2% and 0.5% boost to U.S. GDP in 2007 and 2008, respectively. “In addition, the Canadian dollar would likely decline one U.S. cent from the baseline by 2008, further boosting Canadian exports. On net, Canadian export volumes would be unchanged relative to the baseline in both years,” it predicts.

“Another piece of good news would be stronger real personal disposable income due to lower gasoline and natural gas prices. As a result, consumer spending would be 0.1% and 0.2% higher than in the baseline this year and next, respectively,” it says.

On net, Canada’s economic growth would still come in at 2.1% in 2007 and 3.0% in 2008, as in the January forecast, the firm predicts. “The regional composition of growth, however, would be less lopsided. The weaker oil and gas sector would take the froth from Alberta’s economy, while the stronger U.S. demand and the weaker dollar would provide a welcome boost to Ontario and Quebec manufacturers. Meanwhile, consumers and businesses across Canada would benefit from lower energy prices,” it concludes.