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OTTAWA – The Bank of Canada is adding the downward drift in prices for oil and other commodities to its catalogue of threats to economic growth.
In a one-page statement on his latest interest-rate decision Tuesday, Governor Mark Carney mentioned oil or commodity prices four times. To many economists and analysts, this was a clear hint of growing concern as oil prices, while still historically high, inch downward to $80 (U.S.) a barrel – considered an unofficial breaking point at which investment in energy projects could stall, putting jobs at risk.
Mr. Carney, who left his main interest rate at 1 per cent Tuesday and will release a full quarterly forecast on Wednesday, noted that the “sizable reduction” in commodity prices owing to slower global growth is keeping inflation in check and could mean cheaper gasoline well into next year. However, he also cut his 2012 and 2013 projections for the economy, in part because the consumption and business investment he is counting on to drive growth will be held back by “the effects of lower commodity prices on Canadian incomes and wealth.”
Oil still costs close to $90 a barrel on global markets, a far cry from a low of $35 reached during the thick of the 2008-2009 financial crisis. Still, prices are down 10 per cent from the start of 2012, as demand from big emerging markets like China cools off, and as anxiety linked to the European debt crisis pushes investors away from commodities and toward relatively risk-free securities such as the U.S. dollar.
Should oil fall below $80 a barrel, the current slowdown in energy-related investment could turn into a freeze.
“That $80 threshold seems to be an important mark,” said Mark Chandler, head of Canadian fixed-income and currency strategy at RBC Dominion Securities, citing oil-and-gas analysts who recently returned from visits with exploration firms in Alberta’s oil patch. “If prices stayed at [current] levels, you’d still be at the high-water mark for a lot of projects, so maybe it’s not that damning. But there’s not as much cushion as there was before.”
Indeed, in mid-May, Réal Cusson – a senior executive with Canadian Natural Resources Ltd. – told The Globe and Mail that companies would flirt with trouble if the price of crude dipped to $85, which explains why some, such as Calgary-based producer Crescent Point Energy Corp., have already started to put off drilling projects.
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