Canadian Dollar Outlook Weakens
Last year’s epic crash in crude oil prices rocked the Canadian energy sector to its core, decimating the Canadian dollar ahead of 2016. Now, a provincial government in Canada passed a piece of environmental legislation that could drive the “loonie,” a nickname given to the Canadian dollar, further into the ground. Based on the latest Canadian dollar forecast, the loonie could hit $0.50 in 2016.
Canada’s oil sands projects are located in the western province of Alberta, which recently elected a new government. There are three major political parties in Canada, and the one that recently swept to power in Alberta is furthest to the left.
As such, Alberta’s political priorities are vastly different than they were a year ago. Oil and natural gas were considered hugely important, central to the Canadian economy and, consequently, the Canadian dollar. However, the left-wing leaders of Alberta are more concerned with saving the sky than people’s jobs. They want to impose a massive carbon tax.
Don’t get me wrong; I’m an environmentalist myself. I love camping and hiking and there’s a part of me that burns at the thought of Canada’s gorgeous landscape getting ravaged through natural resource extraction. But I also live in the real world. In a year when the Canadian economy has already slipped into recession caused by low energy prices, does it make sense to further crush the oil industry?
Forget how you feel about the oil sands projects; ask yourself whether the Canadian economy can withstand a further blow to its energy sector. I’m not so sure it can.
Badly Timed Carbon Tax Threatens the Loonie
Canada is a major exporter of natural resources. Crashing oil prices have already cost the industry 37,000 jobs in Alberta, so if those firms also face a massive carbon tax, more cuts will follow. (Source: “Alberta carbon plan a major pivot in environmental policy,” The Globe & Mail, November 22, 2015.)
This isn’t a case of fat-cat CEOs looking to protect their profits. This is an industry in peril. The Canadian oil sands were running on thinner margins than drilling and shale projects elsewhere in the world, so what happens to them now?
To be sure, Alberta’s carbon emissions grew absurdly fast between 1990 and 2003, having jumped 53%. To curb that growth, the provincial government is implementing a $20.00 tax on each tonne of carbon emissions. The policy will go into effect in 2017, rising to $30.00 per tonne in 2018.
The new tax is estimated to draw $3.0 billion in revenue by 2018, which is a laughable assumption. Many of Alberta’s oil producers won’t be around to pay that tax, because they’ll either be packing their bags or buried six feet under the price of oil.
After all, staying alive at $40.00 a barrel was intensely difficult for most Canadian firms, but it’ll get tougher with the looming threat of a carbon tax. The only hope is for crude oil prices to rebound.
The Downfall of the Canadian Dollar
Even that fragment of hope is disappearing. Iranian oil will soon be added to the global supply of crude, which will keep prices low for the near future. It’s all but certain that we won’t see $100.00 oil for a long, long time.
So what is the endgame? Well, most analysts think oil production will shrink in order to rebalance supply and demand. In reality, that means the bottom end of producers, those closest to insolvency, will get pushed out.
Since getting oil from the Alberta fields is already an expensive process, Canadian firms were at risk. With the carbon tax on the horizon, most Canadian oil companies are now facing annihilation. Dark days lie ahead for the workers of Alberta and the Canadian dollar.
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