Oil prices not so slick as Canada enters recession period

Statistics Canada’s economic data has revealed Canada has been in a recession for the first half of this year. The good news is, the worst of it may have already passed, Chair of the Department of Economics Constance Smith said.

Smith teaches in the area of macroeconomics, particularly topics of international economics. Economists generally define a recession as two consecutive quarters (six months) of negative growth in Gross Domestic Product (GDP). Specifically, economists measure real GDP, which takes into account inflation, as currency strength varies from country to country.

“The interesting thing about it is that often you don’t even know … until quite a bit later when the actual recession began,” Smith said.

The data that revealed Canada is in a recession was released Sept. 1, but the numbers were for the first two quarters of the year, from January to June 2015. This indicates Canada was in a recession for the first half of the year, Smith said.

GDP is the dollar value of all goods produced and services provided within a country in a given timeframe. For goods, this only counts for new items produced, meaning the secondhand market is not included. A recession means the total value of a country’s and services new products has been decreasing for at least six months. Oil production contributes a great deal to Canada’s GDP, but when oil prices are lower, the value of oil contributing to GDP is as well.

The economic data released on Sept. 1 showed that Canada’s GDP had decreased, or had negative growth, for the past two quarters. This timeframe follows the period where gas prices at pumps in Edmonton plummeted as low as $0.69 per litre in January.

It’s still uncertain what will happen this quarter. Some economists argue the worst of the situation was earlier this year, and by June things were starting to look up, Smith said. This may suggest the trend will be even more positive by the end of the year.

For those who have just graduated and are looking for jobs in the oil industry, finding employment may be difficult. But for current students of the U of A, there is likely little to worry about — the economy has time to improve before they graduate.

“If you’re third-year, say, I would say ride it out, because a year or two from now, when you graduate, the oil price may come back up … and so things will have stabilized,” Smith said.

Despite the political arguments surrounding the economy, the party in power has limited impact. Prices of oil change on a much larger scale, according to global supply and demand. The political party in power can affect how prices affect Canadians, though.

“The thing that the Alberta government could do, and the federal government to an extent could do, is realize that prices go up and down all the time, and plan ahead — maybe have a buffer,” Smith said. If it saved 10 to 20 per cent of its revenues every year, the government would have something to dip into during the bad times, she said. This wouldn’t help the global price of oil, but it would help lessen its impact on day-to-day life.

In the last few years, the Albertan government hasn’t contributed as much to the Heritage Fund as it maybe should have, especially when oil was priced at around $100 per barrel, Smith said. The Heritage Fund is Alberta’s long-term savings fund, which supports government programs, especially in slow economic times.

Saving revenues from taxes and royalties when the prices were so strong would help stabilize the Canadian economy in times when oil prices halve to nearly $50 per barrel, Smith said.

Though Alberta has been criticized for relying so heavily on oil in the past, its capitalizing comparative advantage, which is reasonable, she said.

“It does make sense for Alberta to take advantage of what we do well,” she said. “We can’t just say ‘No, we’re not interested in oil, we don’t want it, ’ because it is important for our economy … It just doesn’t make sense to ignore that resource when you have it.”

One Comment

  1. The last government was too busy buying votes to do much saving, much like the current government. Though the government may not be able to do much about the oil price, they can do quite abit to help companies weather the down times…

    Increasing taxes 20% isnt one of those things, neither is not producing a budget or opening up a royalty review to add uncertainty into the equation.

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