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Driving Canada's Economic Recovery Post-Covid-19 Through the Oil and Gas Sector

June 1, 2020
By: 
A. Jai Persaud (PhD)
Adjunct Professor
Telfer School of Business, University of Ottawa
Former Associate Director
Science, Technology and Innovation Council Secretariat
Former Senior Economist and Senior Policy Advisor
Natural Resources Canada
Uma Kumar (PhD)
Professor
Sprott School of Business, Carleton University
Vinod Kumar (PhD)
Chancellor's Professor
Sprott School of Business, Carleton University
Former Director
Sprott School of Business, Carleton University
Ajax Persaud (PhD)
Professor
Telfer School of Business, University of Ottawa

The oil and gas sector could play a key role in Canada's economic recovery post the Covid-19 pandemic. However, the rebound of oil markets, innovation and government involvement will be crucial in achieving this objective.

The oil and gas sector contributes significantly to Canada's economy and well-being of Canadians. The energy sector accounted for 10% of GDP, $130B in exports, and over $70B in investments in 2018 (1). The sector also employs hundreds of thousands of workers in skilled and unskilled jobs. Over 95 percent of Canada's oil and gas exports go to the U.S., contributing to North American energy security. The availability of energy and other resources in Canada has contributed to the attainment of a high standard of living of Canadians, and has helped Canada develop a strong competitive economy, and deal with the disadvantages of a small open economy.

Covid-19 brought the world's economies to almost a screeching halt. Covid-19 resulted in unprecedented threats and challenges not only to health but to economies around the world, including Canada and the U.S., Canada's largest trading partner. Many businesses have shuttered, schools remain closed, job losses have increased and are in the millions, GDP has slowed, travel has become minimal, and working from home has increased substantially. For Canada, unemployment increased to 13 percent in April, and GDP dropped by 2.6 percent in the first quarter of 2020 (2, 3).

The significant drop in worldwide economic activity was felt in the oil markets quickly and dramatically. Oil demand fell by 29 million barrels per day or about 30 percent, down to the levels experienced in 1995 (4). Oil prices also plunged despite efforts by OPEC to shore up prices and at one point, prices went into negative territory due to lack of storage capacity to accommodate the glut in supply, as has never been seen before for an industry that is highly cyclical (5). The price for West Texas Intermediate (WTI) has recently recovered to U.S.$34/bbl but well below the U.S. $57/bbl in 2019. The U.S. Energy Information Administration (EIA) sees prices further improving to $43/bbl in 2021 (6).

The Canadian oil and gas sector requires relatively high prices to be profitable. The drop in oil prices dealt a significant blow to the industry that was already suffering in the last year. Canada's oil and gas sector, which is highly capital intensive, operates in a market-oriented environment and is a price taker. Prior to Covid-19, the sector was already experiencing regulatory uncertainty, reductions in investment, and environmental pressures, including reducing greenhouse gas emissions, lack of transportation capacity, and pipeline construction hurdles.

The Canadian economy and other economies around the world are beginning to open up with great caution. There is significant uncertainty as to when things will return to normal. A lot of hope is resting on a successful vaccine. Threats also exist of a second and third wave of the virus before a vaccine is found. Even if a vaccine is found, the view is that economies will not rebound overnight. Further, it is expected that working and schooling from home, and less travelling will become more prevalent. A slow recovery will likely result in only gradual growth in energy demand and oil price. Improvements in world oil demand and higher oil prices are crucial for Canada, given that it is a high-cost producer.

The oil and gas sector is highly innovative, investing significantly in research and development, and the adoption of leading-edge technologies. The pressures to innovate will become more crucial to lower costs in a competitively low-price market-oriented environment. Innovation will be important for addressing environmental issues including reducing greenhouse gas emissions, which will remain a public policy issue for the foreseeable future, notwithstanding that there has been a reduction in emissions due to Covid-19.

The government introduced various programs in the hundreds of billions of dollars, including the Canada Emergency Response Benefit (CERB), and Canada Emergency Wage Subsidy (CEWS) to help Canadians who do not have a paycheck, and businesses to retain their workers. The government has also introduced the Business Credit Availability Program to help businesses access credit (7). The Bank of Canada has also lowered its prime lending rate. The government has introduced programs to help specific sectors such as the oil and gas sector, which will benefit from $1.7B for cleaning up of orphan and inactive wells, and $750 million for a new Emissions Reduction Fund (7, 8). The government has also recently announced the new Industry Strategy Council to address the impact of Covid-19 on specific sectors (9). Government spending, due to Covid-19, could cause Canada's budget deficit to rise to $250B by 2021(10).

The oil and gas sector has historically provided a sustained contribution to the Canadian economy. The sector will be well placed as an engine of growth to help rebuild the economy, create jobs and drive economic prosperity. The sector also has projects ready to go (11). In this period of rebuilding and reviving the Canadian economy, it would be a good time to look at how the energy sector can create greater value for its resources and move up the value chain such as further developing petrochemicals; and also developing leading-edge sustainable energy technologies that can be used in the sector as well as marketed worldwide . It is opportune time to also examine the involvement in the sector through various forms of investments, direct incentives for innovation, and collaboration, which reflect synergies with other areas of the economy while, at the same time, maintaining a market-oriented policy focus in the sector.

References
(1) https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/energy-factbo...
(2) https://www150.statcan.gc.ca/n1/daily-quotidien/200508/dq200508a-eng.htm
(3) https://dailyhive.com/vancouver/canada-recession-coronavirus-cd-howe-bus...
(4) https://www.iea.org/reports/oil-market-report-april-2020
(5) https://www.statista.com/statistics/466293/lowest-crude-oil-prices-due-t...
(6) https://www.eia.gov/outlooks/steo/
(7) https://www.canada.ca/en/department-finance/economic-response-plan.html#...
(8) https://www.osler.com/en/resources/regulations/2020/fighting-on-two-fron...
(9) https://www.canada.ca/en/innovation-science-economic-development/news/20...
(10) https://nationalpost.com/news/canada/federal-deficit-to-hit-250b-in-2021...
(11) https://www.torys.com/insights/publications/2020/05/whats-next-for-canad....