Canadian economy has never been more dependent on energy as oil soars: BMO

Canada is slipping away from its image as an oil state, but its economy is moving the other way. The latest research note from BMO Capital Markets examines Canada’s merchandise trade balance for 2021. Canada produced its first surplus since 2014, long ago when oil topped $100 a barrel. This is no coincidence, with energy prices being one of the main contributors to the surplus. The energy trade surplus is now so large that the last quarter accounted for more than 5% of gross domestic product (GDP).

Canada’s merchandise trade registers its first surplus since 2014

Canada posted its first international merchandise trade deficit in months. In December, the trade deficit reached $138 million, which means that there were more imports than exports. It was the first deficit since May, breaking a six-month streak. Although the minor deficit is “considered essentially balanced”, says Statistics Canada (Stat Can).

Canadian Merchandise Trade Balance

Canada’s net monthly international trade balance. Positive numbers indicate a surplus and negative numbers mean a deficit.

Source: Statistics Canada; Live better.

A minor monthly decline barely dented the annual surplus, which has not been seen in over half a decade. The year ended with a surplus of $6.6 billion in 2021, the first surplus since 2014 and the largest since 2008. Both of those years have been important for energy prices, and it’s not is no coincidence.

Energy now accounts for over 5% of Canada’s GDP

“Unsurprisingly, much of this big turnaround in trade was driven by energy commodities…as was the case in 2014, when oil was last at $100,” Kavcic wrote. His calculations show that the energy surplus reached $104 billion in 2021, more than double the $51 billion in 2020. This equates to 4.2% of Canada’s GDP, up from just 2.3% in 2020.

Energy became a much larger part of the economy in the fourth quarter as oil prices rose. “In the fourth quarter alone, the energy surplus reached $33 billion, a record both in dollar terms, but also even as a percentage of GDP (we estimate it at just over 5%),” he said. -he declares.

The Canadian economy is expected to become more dependent on oil

The Canadian economy is expected to become even more dependent on oil as prices rise. BMO calculations show that WTI averaged $77 in Q4 2021, down from $90 today. This is expected to skyrocket the share of energy in the economy. “Crude oil accounted for 78% of the energy surplus, with the rest coming from (in descending order of importance) natural gas, coal, electricity and nuclear fuel.”

The growing dependency can be a bit of a problem, the bank suggests. Increasingly, investors are using environmental, social and governance (ESG) criteria to evaluate investments. As this demand for ESG-friendly products grows, the oil industry faces negative pressures. “Of course, the other key point here is that the Canadian economy is now more dependent than ever on energy trading, in an ESG world,” notes the economist.

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