What Canada will look like with $40 oil

It’s looking like a dreamy summer for roadtrippers.

According to TD Economics’ latest Commodity Price report, oil could hit US$40 a barrel in the second quarter of 2015.

“While crude oil prices appear to have stabilized over the last two months, more weakness is likely in store,” says the report. “The market is amply supplied, and storage in the U.S. is expected to bump up against full capacity within the next few months, which should lead to another leg down in oil prices.”

But while the bargain barrel prices won’t hurt the wallet when it comes to filling up the car, long-term effects will be harder to spot says Ambarish Chandra, assistant professor of economics at University of Toronto’s Rotman School of Management.

“Oil is fundamentally volatile, we know that, so I wouldn’t be shocked if it spikes again but if it does stay at this level for awhile, I think of exchange rates first,” says Chandra.

For starters, Canada will be exporting less oil products and what is exported will bring in less revenue, hurting the dollar.

“The loonie would be relatively weak for awhile,” he adds. “For a lot of Canadian households it just means foreign goods become more expensive, travel to the U.S. will be harder and less attractive, the same with foreign travel.”

In theory, local goods may be less expensive but Chandra points out companies are sluggish when it comes to adjusting their prices to match lower transportation costs.

“Prices are sticky, they tend not to move,” he says. “They don’t want to change prices and then have to change them back again three months later or six months later knowing the price of oil is volatile.”

He points to the airline industry as a prime example.

“People keep expecting airlines to lower their prices, because after all they raised them in response to the higher price of oil,” he says. “I wouldn’t be shocked if the drop in oil prices doesn’t effect airline prices at all.”

While cheaper fuel and a weaker loonie could give Ontario’s beleaguered manufacturing sector a slight boost – making the decision tougher for large corporations like GM of Canada which is hemming and hawing about pulling out of Oshawa – a recent survey by the Bank of Canada shows cheaper oil has reduced sales expectations and hurt hiring outlooks.

According to the survey, only 40 per cent of the companies surveyed expect to hire more people in the next year versus the past 12 months while 40 per cent will hire the same amount and 20 per cent will hire less.

But the weaker outlook and lower oil price bodes well for consumers keeping an eye on interest rates from the Bank of Canada.

“They will be less likely to raise the interest rates,” he says. “Not that they’re going to raise them anytime soon.”

Ultimately, he suspects oil will bounce back before consumers even notice the effects of cheaper oil on their day-to-day routine.

“It’ll take a very long time for any (changes) to be felt,” says Chandra.