Is The Slumping Oilpatch Dragging Canada Into Recession? That is Only Part of the Story

By: David Yager, National Leader Oilfield Services, MNP

Article originally published on August 5th for EnergyNow. and it can be found here: http://energynow.ca/is-the-slumping-oilpatch-dragging-canada-into-recession-david-yager-mnp-llp/  

The Globe and Mail headline August 1 declared, “Canada in ‘mild recession’ after economy shrinks five months in a row.” In May Canada’s GDP shrank by another 0.2%, continuing a pattern that began in January.  While the slump in the oilpatch is well known, the biggest single decline was in manufacturing, which contracted by 1.7% compared to only 0.7% for mining and oil and gas extraction. Two consecutive quarters of economic shrinkage is the technical definition of a recession. But with the October 19 federal election officially underway as of August 2, it is unlikely the federal government will admit this is the case.

With the Canadian dollar hitting multi-year lows and the lowest prices in years for gasoline, diesel and jet fuel (notwithstanding tax increases), one might assume the sectors of the economy not reliant on the oil industry would be doing quite well. Only three years ago, NDP and federal opposition leader Thomas Mulcair blamed the economic problems of central Canada’s manufacturing and industrial sector on high oil prices, massive oilsands investment and a Canadian dollar at par with its U.S. counterpart.

In a CBC interview in May of 2012, Mulcair charged Canada had a petro-dollar and the country was suffering from so-called Dutch disease, whereby the success of the oilpatch comes at the expense of the rest of the country. Western Canada’s booming oil-driven economy was “hollowing out” central Canada’s manufacturing sector.

This problem is certainly solved. Maybe.

Muclair’s accusations were disputed by then-federal Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney. Carney called Mulcair’s comments “far too simplistic” while Flaherty added, “I think his logic is off and doesn’t make sense.” With the dollar down nearly 25%, oil prices over 50% and an NDP government in Alberta, Mulcair hasn’t raised the petrodollar issue recently.

So what’s going on in the rest of the country? Does Mulcair have any idea how the economy works or what drives it? Does anybody know? While most in oil and gas would willingly answer “no” to the first question, everyone should be worried if the answer is also no for the second.  Apparently, the positive impact of the oil and gas industry on the Canadian economy is still not widely appreciated.

When most folks think of manufacturing, they think of automobiles. Lower fuel prices and a sinking loonie should benefit Canada’s automotive industry and they do. In June, vehicles sales in Canada were up 1.2% from the previous year but lower fuel prices are pushing drivers towards bigger vehicles. While car sales fell by 11.7%, in June truck sales rose 11.5%.

The Conference Board of Canada is very optimistic about Canada’s automotive industry. In a June 24, 2015 report it wrote, “Thanks to record North American sales and the lower Canadian dollar, Canada’s auto manufacturers will likely see their highest profits in years in 2015, according to The Conference Board of Canada Spring 2015 Industrial Outlook reports. Industry profits are forecast to reach $2.3 billion in 2015, up from $1.3 billion in 2014.

• A weaker loonie will increase Canadian auto makers’ profits to $2.3 billion this year as domestic vehicle production becomes more competitive.
• Auto and motor vehicle parts production is expected to grow by 2.5% in 2015 but remain relatively flat in 2016.
• Strong economic fundamentals, ultra-loose credit conditions, and low gas prices are fueling North Americans’ appetite for motor vehicles.
• Sales of light trucks have been particularly strong and continue to be responsible for the majority of the growth in sales.

“With more than 80 per cent of the vehicles produced in Canada exported to the U.S. market, the lower Canadian dollar is a boon to the industry’s bottom line,” said Fares Bounajm, economist, with The Conference Board of Canada. “The lower exchange rate means that cars made in Canada fetch a higher price in Canadian dollars when they are sold in the U.S.”

So what’s the problem with Canadian manufacturing? In the Financial Post on July 31, several economists were interviewed under the title,“The quarter (Q2) is looking ugly: What economists are saying about Canada’s shrinking economy.” Dr. Sherry Cooper, chief economist of Dominion Lending Centers, responded, “What is particularly troubling about this one is that the main culprit for the decline in May GDP was manufacturing, a sector that was supposed to be boosted by the weak Canadian dollar.”

But on August 1 in a Globe and Mail article, Mike Holden, director of policy and economics at Canadian Manufacturers and Exporters, figured the oil industry downturn was the biggest problem. He said, “The oil and gas sector accounts for 25% of all of our capital spending. It’s not the largest driver of manufacturing activity in Canada, but it’s been responsible for a lot of the growth in recent years. You cut out that growth driver and suddenly you’re left in a situation that looks like this.”

This is congruent with what the oil industry and Alberta have been saying for years while seeking approval for pipeline construction and fighting a continuous uphill battle for the legitimacy of oilsands development. The oil and gas industry in general and the oilsands in particular drive job and wealth creation right across the country. But where? And by how much?

This is where all governments fail in understanding how the oil industry really works. While anybody can count the direct jobs lost by following the news and totaling announced layoffs, the impact on the indirect support sector remains a mystery. Even in Alberta. The province’s monthly Labor Force Statistics simply reprint Statistics Canada data. The oil industry doesn’t even rate a separate line. In June 2015, the report had 158,800 people working in the category of “Forestry, Fishing, Mining, Oil and Gas,” down 20,900 from 179,700 in June 2014.  This is only a fraction of the lost jobs as anyone who works in this industry knows.

Statistics Canada industry and employment categories provide no granularity on the various support industries. Manufacturing is only one example. Transportation is another. Previous studies by MNP and Petroleum Services Association of Canada (PSAC) have shown when drilling and completing deep horizontal wells, 20 to 30% of the direct employment comes from hauling equipment and supplies to and from the location. Yet Statistics Canada has only one category called “Transportation and Warehousing.” This is classified as a support service, not a key element of a “goods producing sector.” According to the province, Alberta employment rose 14% in that sector in June 2015 to 143,600 jobs, compared to 125,900 in June 2014. With oil prices down 50% and every oilpatch activity metric off sharply on year-over-year basis, 17,700 new jobs in this area is not intuitive.

When PSAC undertook ground-breaking studies in 2010 and 2015 to determine just how big the oilfield services industry was in Canada, it included various essential elements of the oilfield supply chain not classified by governments as supporting or driven by oil and gas. But almost every time these figures are presented, one level of government or another responds, “This does not match with our data.” That’s because after more than a century of Canada being a significant producer of oil and natural gas, governments still don’t truly understand its impact on the economy.

That the oil industry appears to be right about its economic benefits and the rest of Canada wrong is a hollow victory. The oilpatch has been saying for years it is a national economic driver impacting every region of Canada through direct and indirect employment, the purchase of goods and services, and paying billions in taxes in all provinces at all levels.

As Canada flirts with recession, in part because of the dramatic downturn in the oil and gas industry,   hopefully this will lead towards more enlightened decisions on royalties, taxes, and pipelines.