OTTAWA—Already facing the economic fallout from the coronavirus outbreak and weeks of rail blockades, the federal Liberals must now factor in a global oil price war as they prepare their maiden minority budget.
Canadian markets were rocked Monday as oil prices collapsed, yanking the Toronto Stock Exchange and Alberta-based energy equities down with them. The precipitous drop triggered market-wide circuit breakers designed to impede panic on major North American exchanges and was caused, in part, by Saudi Arabia and Russia feuding over oil production levels.
But while Canada didn’t create the problem, the country’s dependence on natural resource industries means Ottawa will have to deal with it against wider market disquiet about the effects of the global coronavirus outbreak.
“It is clear we’re in a very volatile position,” Finance Minister Bill Morneau said, speaking on Parliament Hill after the rough day on the stock market.
He said Canada can handle the fallout, stressing the country has a strong banking system and world-class health care. The national debt, when compared to the size of the overall economy, also leaves room for spending measures to help workers, companies and troubled sectors like tourism and energy, Morneau said — though he refused to specify what Ottawa will do.
“I want Canadians to know that we have capacity to deal with challenges exactly like this,” he said. “We will respond appropriately in the time of challenge.”
Monday’s market rout saw the S&P/TSX composite index drop by more than 10 per cent to its lowest level in 14 months, the biggest single-day decline since 1987. The plunge was led by huge declines in energy stocks. Calgary-based Cenovus Energy was down 52 per cent on the day. Crescent Point Energy, which is also headquartered in Calgary, dropped by 43 per cent.
While Morneau did not say how the crash will affect the Liberal government’s upcoming 2020 budget, their spending plan last year projected West Texas Intermediate (WTI), the North American benchmark crude price, at $60 (U.S.) per barrel. That measure plummeted by 25 per cent Monday to close at $30.24 (U.S.).
The Parliamentary Budget Officer (PBO), Canada’s independent fiscal watchdog, estimated in December 2018 that a $15 drop in the price per barrel of oil would Lower Canada’s nominal GDP by an average of $37 billion per year — and add an average of $3.5 billion to the federal government’s deficits between 2019 and 2023.
“We are extremely concerned,” said Seamus O’Regan, the federal natural resources minister, when asked about Monday’s market drop.
“Canada is the fourth-largest oil exporter in the world. I don’t need to tell you that. Days like today are not easy,” he said.
The oil collapse followed the breakdown of the so-called OPEC+ agreement on Friday, a three-year-old pact between Russia and members of the Organization of Petroleum Exporting Countries. Russia reportedly refused to join its OPEC partners by rolling back production to stabilize the price of oil.
That prompted Saudi Arabia — the largest oil exporter in the world — to signal it would slash its own oil export prices in a bid to undercut Russia’s share of the global market, as headlines spread across the globe warning of an all-out “price war.”
Speaking to reporters in Calgary on Monday, Alberta Premier Jason Kenney said the feud — which stands to increase oil production even as global demand wanes — puts his province in “uncharted territory” that could be “devastating” for the national economy.
Along with previous demands to support oil well reclamation projects and increase federal fiscal stabilization payments to Alberta, Kenney suggested this could include accelerated spending on infrastructure. Kenney said he will push the federal government to take action to protect the oil sector and Canadian economy when first ministers meet in Ottawa this week.
“The fiscal plan is obviously going to be affected by these massive developments,” Kenney said of his recent budget, which based revenue projections on a price of oil that was almost double where it closed after Monday’s collapse.
“We will see… how the federal government responds to this very serious challenge, and at some point we will come back with an update,” he said.
Get more politics in your inbox
Make sense of what’s happening across the country and around the world with the Star’s This Week in Politics email newsletter.
“We’re not asking for any special favours. I assume that this federal government intends to act to protect the Canadian economy.”
Kevin Milligan, professor of economics at the University of British Columbia, said the impact of Monday’s price collapse will be most felt in Alberta. That’s particularly the case after the United Conservative government in Edmonton tabled a budget on Feb. 27 that projected revenues from a $58-per-barrel price of oil, Milligan said.
That was already ambitious at the time, and is now completely out of whack after Monday’s oil price free fall, he said.
“They may have to redo it. I mean that seriously,” Milligan said. “A multibillion dollar hole in the Alberta budget has just opened up.”
At the federal level, Milligan said the impact on revenue projections is smaller because Ottawa doesn’t collect direct royalties from oil production like Alberta does.
But there will be an effect nonetheless, which Morneau will need to consider as he prepares this year’s budget, Milligan said. Private sector forecasts for economic growth, which the federal budget projections are based on, will be “vastly different than they were two weeks ago,” Milligan said.
“It’s going to be very difficult to be doing their planning,” he said.
In Ottawa, the federal Conservatives accused the government of spending too much while the economy was performing well. Pierre Poilievre, the party’s finance critic, also blamed the Liberals for policies he argued have stifled Canada’s oil and gas industry, including a tanker export ban on the north coast of British Columbia and last year’s revamp of federal rules to assess proposed projects.
With a current budget deficit of $26.6 billion, Poilievre charged there is no room to spend money to help recover from an economic slump.
“These Liberals spent the cupboard bare, and all we have is a leaky roof as we enter this winter storm. We are weak and vulnerable as a result of Justin Trudeau’s irresponsible decisions,” Poilievre said on Parliament Hill.
The PBO recently concluded Ottawa could “permanently increase” spending by $41 billion without increasing the debt-to-GDP ratio beyond the 2018 level of 28.5 per cent.
JOIN THE CONVERSATION
Is the fallout temporary? Will stocks recover quickly or will it take time? Share your thoughts