Lower gas prices offer upside
‘Positive shock’ softens blow
It sounds like something from a first-aid course.
But “positive shock” is actually something that might soften the economic blow to places like Saskatchewan from declining oil prices, says Paul Ferley, assistant chief economist for RBC.
In Regina Monday, he said there’s no doubt Saskatchewan — and, to a much greater degree, Alberta — will feel the pain of lower oil prices, with less employment (caused by less drilling and exploration) and smaller royalties collected by governments.
But lower oil prices eventually mean lower gasoline prices “and that’s a real plus for consumers,” said Ferley, adding it’s the equivalent of a sizable tax cut.
While some consumers will pay down debt, others will spend it — to the benefit of retailers and the taxman. “That’s not going to offset the cutbacks in energy investment, but in Saskatchewan it’s going to be an important offset.”
Lower oil prices also will be a “positive shock” — that phrase again — to the U.S. economy, which “has already shown some pretty good traction” he said, adding that as we move into 2015’s second and third quarters, “with these lower oil prices playing out, it should get an additional life.”
The same will apply in the Euro Zone, though it’s is not improving anywhere near as fast as the U.S., and in China, where economic growth this year is predicted at between 6.5 and 7.0 per cent — stunning anywhere but China, where economists still remember the good ol’ days when growth soared into the double-digit range.
So China is growing more slowly, “but it still provides some demand for pulse seeds and such, which is important for Saskatchewan and the ag sector,” Ferley said.
“It’s important to keep in mind that lower oil prices are a positive shock for the Chinese economy — and, as well, it should see some benefit in terms of the strength of demand from the U.S.”
Also, lower oil prices bring down the Canadian dollar, which makes our exports more attractive to foreign buyers, especially those in the U.S., our largest export market.
RBC predicts an average crop yield in Saskatchewan this year, with “maybe a slight increase in acreage seeded.”
Put all this together, “and we’re assuming a slight gain in agricultural output,” Ferley said.
That might seem like faint praise, but remember this: last year’s crop seemed smaller than it really was because it was compared with 2013’s megacrop.
Turning to potash, he said RBC is “cautiously optimistic” about the mineral and its price. He notes reports of a flooded mine in Belarus and the erosion of the standoff between Russian and Belarus potash producers, which has kept down prices. “That suggests maybe production isn’t going to be as strong as it has been, creating a little bit more room for producers here in Saskatchewan to fill in the gap.”
Long term, RBC predicts oil prices will average $65 this year and $74 in 2016 as the oil-producing states that sparked the oil price drop feel the impact on their own national budgets.
At that point, they’ll “probably opt eventually to start cutting back on production to get those prices up a bit.”