There has been much speculation that lower-priced oil is the handiwork of Washington, with its intended victim being Moscow. However, the decline in oil prices affect every nation. Canada is no exception, and this article examines the heavy toll Canada's economy has to pay for US escapades in oil price manipulation.
This article originally appeared at Financial post
The global community has more unsafe neighborhoods than gated ones and no nation is safe anymore, including Canada. This means that nation-state models are challenged and must recalibrate all the time.
For example, last August everything changed, economically speaking, for Canada when oil prices collapsed. This has driven Alberta — Canada’s biggest economic and job creation driver — into a near-recession and the Canadian dollar into a decline. A good guess is that both oil prices and the Canadian dollar will remain in the dumps for some time.
Then there’s geopolitics. Everything changed in Canada in October when two separate Islamist-related terrorist attacks in Montreal and Ottawa underscored the need for better protection at home and abroad. This has correctly convinced and led Ottawa to beef up laws and to increase their help to coalitions in the Middle East that are trying to eradicate ISIS and al-Qaida forces embedded in failed states.
Like it or not, this is a new normal. Canada faces serious economic headwinds for a few years at the same time as it must shoulder more of the global policing burden. Opposition party leaders try to blame the Tories for these outcomes, but they miss the mark. Canada will never be a superpower — and isn’t trying to be one — but, like Australia, has to pull its weight in the global community.
The biggest financial worry is that oil markets drive Canadian export income and economic growth, and what is the outlook for prices. This week, oil politics veered sharply when the Saudis and Gulf states pre-emptively attacked Yemen to prevent its takeover by extremists. This was not acquisitive but police work to insure that its supply chain — waters that pass near Yemen — won’t turn into a choke point.
The initiative — soon to be followed by an invasion of Yemen — scared markets and sent oil prices upwards slightly before they settled back. Meanwhile, another bearish event looms for oil prices if the March 31 deadline between the allies and Iran about a nuclear non-proliferation deal is concluded successfully. And in anticipation of a successful agreement, tankers filled with 30 million barrels of banned Iranian oil sit offshore waiting for the green light to ship the stuff to markets. Iran’s economy has been crippled by sanctions.
So the prospect of higher oil prices, given Saudi’s success in protecting supply chains, and Iran’s impending flood of oil, does not look very jolly for Alberta, Canadian economic growth or the Canadian dollar.
Then there’s the Czar in Russia. Recently, Vladimir Putin’s principal and popular critic was boldly assassinated, and Putin laid to rest any notions that a rational and fair solution in Ukraine could be reached when he said in a televised interview he would have used nuclear weapons to regain Crimea if needed.
A British newspaper reported last week: “The President [Putin] said: `We were ready to do it’” when asked if he would have used nuclear weapons to take back Crimea. ‘I talked with colleagues and told them that this [Crimea] is our historic territory.’
Not surprisingly, there are now reports that he plans to locate nuclear weapons in Crimea to insure Russia’s expropriation and scare everybody in the neighborhood.
This makes Ukraine, also a failed state, ground zero when it comes to the future well-being of all neighborhoods. Putin’s comments are designed to, and should, put to rest any notion that the U.S. or anyone should arm Ukrainians to fight Russians on their soil. That would be equivalent to handing out knives in a gunfight and escalating the issue.
Clearly the line has been drawn and Ukraine won’t become a member of the European Union or NATO anytime soon. Kiev has met its match, thanks to more than a generation of its own incompetent and corrupt leadership. This may be a discouraging statement to Canadians who have been rooting for Team Ukraine, as I have, but reality is that Putin is as reckless as his statements about atomic warfare. The only hope is a Russian Revolution 2.0.
Sanctions on Russia are also bearish for oil prices because these force Moscow to pump as much oil and gas as possible.
All of which is not jolly news for Canadians. We face lower oil prices, lower revenues and lower exports while at the same higher military and security costs going forward. It’s an unfortunate paradigm shift, but it does deliver one bright spot. The Canadian dollar’s decline is a windfall for Canadian businesses exporting to the U.S. resources, services or physical goods.