Canada faces double-edged sword in rising price of crude

As one of the world’s largest oil exporters, Canada stands to realize a net benefit from rising crude prices, but it’s also a double-edged sword, increasing costs for other parts of the economy.

Oil prices in North America have climbed since late last year, with the commodity hitting a new three-and-a-halfyear high Thursday, hovering around the $71(U.S.) a barrel for West Texas Intermediate, the U.S. benchmark.

Prices rose as tensions in the Middle East increased after the U.S. withdrawal from the Iran nuclear deal this week. The U.S. said it would reimpose sanctions on Iran, which could ultimately reduce the total global oil supply by 0.5 per cent.

Adding to the tensions this week, Iranian forces in Syria traded missile fire with the Israeli army.

Canada’s economy is reaping more of the benefits of higher fuel prices due to a narrowing of the gap between the country’s heavy oil and America’s WTI light crude, although economists say the windfall may be short-lived.

The heavy oil benchmark, Western Canada Select (WCS), was selling for $30 (U.S.) per barrel less than WTI in late February, but the discount has narrowed to about $17 after companies reduced output in the first quarter, said Scotiabank commodity economist Rory Johnston. He expects Alberta oilsands and other producers will ramp up to close the price gap.

That price discount partly reflects transport and export constraints on Prairie oil. Johnston called the easing of the gap transitory, “but right now, we are enjoying a lot of the increase.”

Western Select, with heavy oil bitumen and upgraded synthetic crude accounts for about 62 per cent of Canada’s 4.9 million barrel daily oil output.

Meanwhile, more expensive oil means increasing costs for transport firms, airlines and for manufacturing regions, including Quebec and Ontario. Economists also note that manufacturers that support oil production can realize spillover gains.

Rising oil prices add to national wealth in the form of investment and tax revenue, but they also add inflationary pressures. Still, BMO senior economist Sal Guatieri said prices haven’t risen enough to move the needle on central bank interest rate hikes plans or to shift consumer consumption habits.

Some economists see only a modest impact on growth due to the oil price rally, with Guatieri noting that gains have been muted by the fact that the economy is already near full employment, while the WCS/WTI price differential remains high compared to the historical rate of about $10 per barrel.

As a result, he said the positive and negative impacts of the oil rise may not be as dramatic as in the past.