Why high oil prices aren't creating an economic boom in Canada

The sky high price of gasoline is pushing many Canadians to their financial limits. Usually when this happens, the pain at the pumps is offset by a burst in growth for the Canadian economy. High oil prices used to mean a surge in investments and hiring. 

Not this time.

"Typically when oil prices are rising, Canadians get a bit of relief at the pump as a result of a higher Canadian dollar," said CIBC's chief economist Avery Shenfeld. 

"In this case the Canadian dollar is not following oil prices, in fact it's moving in an opposite direction at the moment and that's adding to the pain a lot of households are feeling."

The loonie generally goes up because there's an expectations that Canada's oil sector is about to go on a spending spree, but this time it's being a bit more cautious despite some record profits.

Less investment appetite

The last time the global price of oil surged this high, starting in 2008, there was a surge in investments and a hiring boom. Commodity expert Rory Johnston says years of low prices and low profits have made companies wary of moving too quickly this time.

"There's a lot of scarring that occurred over the past decade," said Johnston, author of the newsletter Commodity Context and managing director at Price Street Inc.

The boom bust cycle of oil is well known. When prices are high, companies dig new wells, buy new equipment and hire new employees. They do everything they can to squeeze out as much profit as they can while prices are high.

But like everything else, oil markets are governed by supply and demand. Prices surge because there's not enough oil to keep up with demand. As companies produce more oil, that gap in supply shrinks and prices fall.

The global price of oil fell in 2015 and remained persistently low for years. It tried to rally in 2019 but then the pandemic hit. Oil prices collapsed into negative territory and investors were clobbered.

Johnston says those low prices were particularly felt in relatively high-cost jurisdictions like Western Canada.

"On top of everything else, [Western Canada] was facing pipeline constraints and environmental push back," said Johnston. "I think what you saw was a gradual transition toward less investment appetite in the oil sands in any given price scenario."

Record-setting profits

Higher oil prices are still a net positive for the Canadian economy, said CIBC's Shenfeld, but things are different this time.

"When they're caused by disruptions in the global economy they are not as powerful as when they are caused by strength in economic activity around the world," he said.

As the price of oil has skyrocketed these past few months, oil companies have heaved a sigh of relief that they're finally posting profits again. Saudi Aramco reported a record-setting $40 billion profit in the first quarter of 2022. Canada's Cenovus posted its best first quarter ever with $1.6 billion in profit.

"We are getting better revenue and wicked profitability, given the fact that they're not investing a ton of money right now," said Johnston. 

But the bust part of the cycle now weighs heavily on the minds of oil companies and their investors.

"There's much more of a tendency to be careful, to be cautious, to be sure these high prices are here to stay before plowing in as much money as we did during the last up cycle," said Shenfeld.

Demand flexible, but steady

So will the high prices stay? These past two years have been some of the most tumultuous and volatile in modern history. It's easy to wonder if maybe things have changed.

"I have an allergic reaction as an economist to any claim that this time is different," said Brett House, formerly the deputy chief economist at Scotiabank.

He says there were many rash predictions that COVID-19 changed things forever. But more than two years in, those predictions aren't panning out.

He says it's clear the work-from-home phenomenon is not going away anytime soon, which gives some consumers more choice about how much they need to travel.

"What's different potentially is the flexibility of demand in response to high oil prices," said House. "We're a bit less inelastic than we were previously."

Not everyone can work from home, obviously. And not everyone who can work from home will do so — even when gas prices hit all new highs.

But if some of them do, that would reduce demand and allow the market to work its way back to balance more quickly.

But that comes down to our own habits. And as CBC columnist Don Pittis pointed out this week, even in the face of staggeringly high gas prices, for now at least, Canadian driving patterns are holding steady.