In this week’s look at Canadian economic events and trends, the Merchant Advance Capital blog examines one of the major themes making waves in Canadian economic forecasts: the sharply declining price of oil. Aside from its direct impact on the vast energy sector, the effect of oil prices on small businesses is not to be overlooked – ramifications both positive and negative may be felt at the local level by individual business owners as well as in the economy at large. Read on to find out more.
Understanding the Context
A bit of background: Oil prices have slumped nearly 60 percent since peaking in June of 2014, driven lower by ample supplies from the U.S. shale oil boom and the Organization of the Petroleum Exporting Countries’ decision not to cut output. For the first time in decades, North American production of crude oil will exceed that of Saudi Arabia.
Canada, of course, is a country whose economic fortunes are tied to the energy sector in many ways. The direct effect of falling oil prices is felt most negatively in those provinces that are major energy producers: in Alberta, Saskatchewan and Newfoundland and Labrador for example, firms in the energy sector are bracing for significant losses.
Oil prices also generally correlate with the overall performance of the economy and currency: the Bank of Canada announced in recent days that it will be dropping its target interest rate by a quarter of a percentage point to 0.75%, a decision said to be largely influenced by the changing cost of energy and its slowing effect on the rate of overall economic growth.
Small Business Effects
Your location within Canada could have a lot to do with your business’ outlook on the changing economic climate. As reported by CFIB’s Business Barometer analysis, business owners in energy-producing provinces felt a more sizeable decrease in confidence while heavy consumer provinces (like BC, Quebec, and Ontario) were less affected.
Though the effect of oil prices on small businesses (and the economy at large) is overall predicted to be negative, various businesses could in fact benefit from savings derived by the changing market for energy. A recent RBC report has noted that weaker activity in sectors tied closely to oil and gas extraction will be offset, at a national level, by stronger exports and business investment reflecting stronger growth in the U.S. economy and a weaker Canadian dollar. Some examples relevant to small business include:
- The operating costs incurred by any business involved in trucking, logistics, or transportation.
- The cost of heating and of petroleum-derived packaging.
- The cost of domestically purchased machinery as well as its operation.
- Export-based businesses may see an increase in demand from American purchasers.
- Retail businesses may see a trickle-down increase in activity as consumers pass on their savings on energy costs in the form of increased discretionary spending.