The rout in oil prices isn't all negative for Canada's economy: CIBC World Markets

Falling oil prices give Canadians a big break at the pump as country wrestles with efficiency paradox

TORONTO, Jan. 15, 2015 /CNW/ - While the rout in oil has sharpened the focus on the economic fallout, Canada tops the list as the largest consumer of energy per capita among the Organisation for Economic Cooperation and Development countries, meaning that trends in the energy needs of consumers and industries alike paint a fuller picture of the country's economic outlook, finds a new report from CIBC World Markets.

"The dramatic collapse in crude has lines drawn between winners and losers," says Benjamin Tal, CIBC Deputy Chief Economist, who co-authored the report with Nick Exarhos. "And, though the nation's emergence as an energy powerhouse has the negatives coming into sharper focus, there will be spoils to be shared in Canada."

Canada is not only a major energy producer, but it also consumes more energy than any other major industrialized country, using more than 7,000 kg of oil equivalent per capita.

"It's cold here," says Mr. Tal. "Distances between major urban centres are relatively large, and the country's vast resource sector requires substantial amounts of energy for its operation."

The report points out that this level of energy consumption could have been much higher if not for the meaningful decline in the country's overall energy intensity. Canada's economy uses 25 per cent less energy per unit of GDP today than it did 20 years ago, but over the past decade, energy intensity stabilized, as energy consumption in the oil patch and manufacturing sectors virtually cancelled each other out, reflecting the past decade's growth in one and downsizing in the other.

By far the biggest user of energy is the transportation sector, accounting for almost 35 per cent of end-use energy consumption and 70 per cent of oil consumption in the form of gasoline, diesel and jet fuel, the report says. That holds true even with steady and substantial improvements in fuel efficiency.

But, these improvements in fuel efficiency have been tempered by more Canadians driving larger cars and light trucks. In the past 15 years, the number of cars in Canada has risen by more than eight million, four times the pace seen in household formations, and light truck sales have risen four times faster than that of smaller cars. The distance travelled per car over the same period has hardly changed, however.

"We call it the efficiency paradox. The more efficient it is, the more you use it," says Mr. Tal. "The entire improvement in energy efficiency was consumed by the disproportionate rise in the number of larger cars."

"In a world of rising oil prices, it's a bad thing, but when oil prices fall, it's good because Canadians get a big break at the pump," he says, adding that cheaper fuel prices will likely keep the trend of auto sales towards larger, though more fuel efficient, vehicles intact.

Canadian manufacturers, meanwhile, generally use electricity and natural gas rather than oil-based fuels so the drop in oil prices will have very little direct impact on the cost of production, the report says. That said, given that natural gas prices will likely remain low compared to electricity prices, certain manufacturing sectors that are natural gas-intensive, such as chemical fertilzer producers and the forestry industry, will be among the biggest winners, it says.

Mr. Tal also expects the impact of low oil prices on core inflation will be modest and too small to prompt an outright cut in interest rates by the Bank of Canada.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eijan15.pdf

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SOURCE CIBC World Markets