Canada’s Reliance on Crude Oil to Curb Trade Deficit

Written By: Richard Koch – Forex Focus

Global crude-oil production has risen about 30 percent this century; expanding from around 75 million barrels per day in 2000 to 95 million barrels in 2016, with the top 10-producing countries accounting for more than 60 percent of the total production.

Based on the stats provided by Natural Resources Canada, the country is the fifth-largest producer of crude oil in the world after the United States, Saudi Arabia, Russia and China. Canada produces close to 4 million barrels of crude oil per day, contributing close to 5 percent of the total crude oil produced globally. In addition, Canada is estimated to have close to 200 billion barrels in oil reserves, the highest after Saudi Arabia and Venezuela.

A large part of Canada’s oil production, consumption, exports and reserves are derived from the country’s oil sands, developed by private-sector players; they account for more than 90 percent of the proven oil reserves, with the rest of the reserves available in the form of tight oil and offshore oil. In addition, Canada is an oil-surplus country, exporting more than 60 percent of the oil produced domestically, with a substantial amount transported to the United States and the rest to Europe and Asia. Oil imports into Canada account for about 20-25 percent of the total exports, with the US meeting more than 50 percent of the import requirements.

Although regulation of the oil industry lies with the provincial governments, oil exports are regulated by the National Energy Board in Canada.

Illustration of the top oil-producing countries in the world in 2016

Source: National Energy Board, Canada

Based on IMF (International Monetary Fund) stats, Canada is placed at 17^th in terms of nominal gross domestic product (GDP) constructed on purchasing power parity (PPP). The size of Canada’s economy was around $2 trillion dollars at the end of 2016, and according to the latest GDP numbers released by Statistics Canada, the Canadian economy expanded at 0.6 percent in May 2017 compared to the previous month, largely led by advances in the oil, gas and mining industries, which accounted for around two-thirds of the country’s GDP growth. For the full year, the economy grew at a pace of 4.6 percent, the quickest in almost two decades.

Canada’s GDP generally covers four major sectors:

• The service sector accounts for about 70 percent of the country’s GDP and includes education, healthcare, telecom.

• Real estate is comprised of renting, leasing.

• Manufacturing includes refineries, factories, chemical plants.

• Mining, quarrying and oil and gas extraction.

Crude-oil exports as a percentage of international trade 

Canada exported about 3 million barrels of crude oil per day in 2016, an increase of 70 percent from 2007, according to the National Energy Board (NAB). Of this, about 74 percent of the oil exported was heavy crude, with export volumes rising more than 110 percent from 2007. Light crude oil, which accounted for the remaining 26 percent of crude-oil exports, recorded a moderate rise of 15 percent from 2007.

The United States is the largest market for Canadian crude, with the neighbouring country purchasing almost 99 percent of the total crude oil exported from Canada in 2016 and the five-year average ranging between 97-99 percent. With crude-oil exports rising year-over-year, the value of the exports did not rise proportionally, with Canada’s crude-oil export bill declining about 11 percent to $50 billion in 2016 compared to $55.8 billion the previous year, as lower crude prices and a weaker dollar cramped the export value of crude.

Canada’s gross exports in 2016 amounted to about $400 billion, contributing to more than 23 percent of the country’s economic output. Of the total exports, the share of crude oil was about 12.5 percent to the gross export value, thereby augmenting the role of crude oil in Canada’s external trade.

According to the Canadian Association of Petroleum Producers, a privately managed group, the oil industry in Canada is the largest private-sector investor, with estimated investments of $44 billion in 2017. Although investments have declined sharply from the $80 billion investments undertaken in 2014, nevertheless the industry has continued to see investments in spite of the sharp fall in crude-oil prices over the last couple of years. With crude-oil prices hovering near all-time lows and the markets very unpredictable, a large number of international oil giants that had once made Canada their second home have pulled out, thereby placing production at risk. The industry that employs close to 500,000 people across the country could also see large-scale job losses if prices don’t rise quickly enough.

However, the Canadian Energy Research Institute has indicated that oil production in Canada is likely to scale up by about 600,000 barrels per day in 2017 and by another 200,000 next year, as a number of projects that were being developed prior to the oil-price slump are nearing completion.

Crude-oil prices have remained in the $30-50 dollar range since August 2015. And with most of the major producing countries competing with each other to preserve their market share, it is only a matter of who blinks first.