Oh, Canada…

IMG_0189The CBC is reporting that despite there being a global supply glut in oil, Canada is pumping it out at full bore, then storing it in tankers in the hopes that they can sell it for more money someday. Of course, this is putting downward pressure on the Loonie, but it’s also erasing Canada’s long enjoyed trade surplus, and creating a spike in imported food prices, especially from the United States. But that’s all…

First the oil. If I made TVs for a living, and I had a warehouse full of TVs that I couldn’t sell for cost, would I keep making TVs? Of course not, if I didn’t want to go bankrupt. Yet Canada keeps producing oil when it can’t sell the oil it has. Sure it keeps people in jobs, but at the same time, the manufacturers are taking a beating loss for every gallon they put into storage tanks. Will the government of Canada subsidize the wages of oil workers or just pay unemployment benefits? Either way, the Canadian government (and by default, taxpayers) are going to pay for continued oil production in a supply glut.

Storing oil in oil tankers (sea, rail, etc) is something that the hedge funds starting doing recently. Basically, hedge funds “hedge,” by buying oil cheap, storing it, and hope to sell it for a profit someday. The difference between hedge fund managers and Canadian oil producers however, is that Canadian Oil producers have way more skin in the game. Production costs are estimated to be around $68 (U.S.) per barrel, and the price is already well below that. Canada is actually producing oil at a loss, and then storing it in tankers.

Next is the net exports (or trade surplus). Canada has enjoyed a net trade surplus for a while, even managing to keep it strong through the Great Recession. That’s easily disappearing. Sure, storing oil in tankers (because no one wants to buy expensive oil over cheap oil) means they’re not exporting as much, but any devalued currency anywhere in the world means trade surplus erasure with the stroke of a market ticker. And the Bank of Canada has been of no help.

Back in January 2015, I wrote about how the Bank of Canada effectively devalued the Loonie by lowering key interest rates for no apparent reason. On the surface, it appeared as though Canada’s central bank was fearing deflation, but it never materialized. And I’m sure the Canadian Central Bank will credit itself for staving off deflation by lowering interest rates when 1% had been working so well for them for 4 years. I doubt however, that the Canadian Central Bank will take credit for the inflationary pressures coming from a devalued Loonie.

There is no question that Canada could have faced deflationary pressures with the price of oil dropping. However, back in January, there was no evidence that deflation was on the horizon. Since then, gas prices in Canada seem to be the only commodity effected.

So the result is…a devalued Loonie + vanishing trade surplus = inflation. The CBC is also reporting that the price of imported produce is up 150% in the first quarter of 2015. That’s not just the result of a vanishing trade surplus, but also as a result of a devalued currency. The last I looked, the price of cauliflower was not tied to the price of oil.

Canada needs to raise key interest rates back up to 1%, either subsidize the oil, or subsidize the tens of thousands that are about to be out of a job (through unemployment benefits). The bottom line is that there is no fundamental reason for the Loonie to be as weak as it is, and there’s signs that inflation in commodities is happening.

When the price of goods and services spikes, that’s macroeconomic inflation. When the price of basic food items spikes because of bad monetary policy, that’s an “Oh, Canada” moment.

This entry was posted in Demand, Economics, Labor, Macroeconomics, Markets, Public Policy. Bookmark the permalink.

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