The closer the U.S. gets to energy independence, the worse things will get
By Ben Brunnen:
CALGARY, AB/ Troy Media/ – Much is being said of the Canadian dollar trading at around a two year low of late and what it means for the Alberta economy. Traditionally, Alberta manufacturers and exporters would benefit because their products will be comparatively cheaper and Canadian oil producers who trade in U.S. dollars but pay Canadian salaries and expenses would also see a benefit.
However, these are by no means automatic benefits. In fact, I see these dynamics fundamentally changing.
The depreciated dollar really has nothing to do with the Canadian economy. Perhaps the most significant reason for the depreciated Canadian dollar is strong economic growth and the prospect of tighter monetary policy in the U.S. With strong housing starts, increased consumer and investor confidence and an unemployment rate that is finally below Canada’s, the U.S. is expected to experience its best economic year since the recession. So much so that the Federal Reserve has decided to begin tapering its quantitative easing program, which will likely raise long-term interest rates. These factors combined are driving up the value of the greenback relative to the Canadian dollar, while the Canadian economy can’t seem to get out of second gear.
But the U.S. unconventional oil and gas revolution has fundamentally changed Canada-U.S. exchange rate economics. Low natural gas prices and abundant supply have helped create a resurgence in U.S.-based manufacturing, known as re-shoring, due to lower input fuel costs that make it more economical to operate the facilities, and this trend is expected to continue for the foreseeable future. Combined with lower wages, proximity to major markets, higher productivity, reduced supply chain risk and a strong buy American sentiment, U.S. manufacturers have a distinct advantage over Canadian producers – one that will take more than fluctuations in the exchange rate to derail.
Alberta will be especially vulnerable. The manufacturing sector accounts for 7.5 per cent of the provincial economy and a large part is chemical and petrochemical manufacturing – a key area of resurgence in the U.S. According to the American Chemistry Association, over 100 chemical industry investments have been proposed or are underway since the recession, valued at $72 billion.
The exchange rate economics of Alberta’s oil sector are also changing – albeit more gradually. The development of unconventional resources in the U.S. is displacing demand and/or depressing prices for Alberta crude. While it is on a small scale thus far, the marginal effect is less benefit to Canadian producers resulting from a growing Canada-U.S. exchange rate differential. Longer term, the closer the U.S. gets to energy independence, the worse things will get.
The only way to address these challenges is to diversify Canada’s export markets. The federal government has made some headway in this regard, through the negotiation of a number of trade agreements with strategic partners. The Canada-EU Trade Agreement, the most significant in some time, is estimated to remove over 99 per cent of tariffs between the two economies and will give Canadian firms greater access to one of the largest and sophisticated markets in the world. Other notable recent activities include trade and/or market access negotiations with China, India, Japan, Brazil and South Korea, not to mention the Trans-Pacific Partnership.
But agreements are just the first step. To actually generate economic activity, companies need to build meaningful relations in destination markets to grow their businesses and well as sufficient domestic infrastructure (e.g. pipelines, ports, roads, air terminals) to transport their products market. And this is where we are at today.
While there is not much we can do in the short term except respond to U.S. market forces, in the long term watch for the Canadian exchange rate to matter in far more global markets.
Troy Media columnist Ben Brunnen is a policy, economic and advocacy consultant with over 10 years of experience working on public policy, economics and government relations issues.