Case Study: Impacts Of Lower Oil Prices In Canadian Econoimy (Research Paper Sample)

Impact of Lower Oil Prices on the Economy of Canada
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The current world oil prices have greatly reduced after experiencing an upward trend in the prices in the recent past. The prices have decreased from $110 in June 2014 down top $30 in January 2016. The reduction in the oil prices has become experienced in all the countries in the world. The dropping oil prices have come up with different economic issues regarding the oil, which is a universal commodity that becomes traded in the global market. The oil exporting countries become negatively affected by the diminishing prices of oil given that they do not accrue greater revenues (Frankel, 2010). Canada is one of the oil exporting countries; its oil exports account for 10 percent of its gross domestic product. As such, the reduced prices of oil have influenced the economy of Canada in various ways. The rationale of the study is to find out the impact of the drop in oil prices on the economy of Canada and also to examine the measures that can get implemented to avoid the negative externalities in the commodity cycles. It also gets estimated that crude oil is the highest foreign exchange earner in the country; this situation further jeopardizes the strength of the Canadian dollar based on the reduced revenues from the exports of crude oil. The dependency on the crude oil from export by Canada is the most devastating factor given a slump in prices would affect its trades negatively. For countries like the US, who also have crude oil they become favored by the fact that they are high consumers of the crude oil and not high exporters like Canada. The drop in crude oil prices would become a benefit for countries like the US because of the increased consumption by the citizens for activities that would improve the countries' economy. There have been various factors pointed out as the main cause of the reduction in the prices of fuel in the world. There have been some revelations that the increased production of crude oil by the US has led to a surplus that has resulted in the world prices of oil. There have also been reports that the return of Libya in the crude oil production could also become a possible reason for the reduced prices because of the increased supply (Mackrael, 2015). Libya is a high production country that gets determined to produce up to three million barrels of crude oil on a daily basis. The crude oil market has also experienced a global backdrop of the aggregate demand, which could largely get attributed to the diversification of the energy production sources for various counties. Some countries have resulted in the utilization of nuclear energy for their production processes, thus reducing their crude oil demands. There is also an indication that the appreciation of the US dollar could be a possible reason for the drop in world oil prices because of the money markets that reduce the prices of the crude oil. These reasons become responsible for the reduced prices of fuel in the world. These factors, however, cannot become ruled out as short-term effects on the prices of crude oil as they might portray some elements of permanency in this highly volatile market. The majority of the countries, however, become supporters of the price reduction because they use oil in their production processes, but for the oil exporting countries, the situation gets viewed as a curse to their economies (Mackrael, 2015). The reduction in prices of crude oil tends to affect different sectors of the economy that become relevant in the growth of those economies. In Canada, the banking industry has become highly affected given that they have lending deals with the oil producers. The drop in the prices has resulted in a situation where the interest rates of the country have reduced tremendously over the recent past. The majority of the banks are eyeing for foreign markets so as to improve their performance. Besides all these factors, the study wishes to find out the impact of the reduction in the prices of crude oil on the economy of Canada, which is a large oil exporting country. The study also highlights the various measures that can get incorporated to control the commodity cycles that would get experienced in the economy.
The drop in the world oil prices poses a threat to the growth in the real income growth of the country given that the reduction in the prices would disfigure the country's terms of trade. The terms of trade get affected by the reduced exports that previously became earned from the high oil exports performed by Canada. As such, there is an imbalance between the exports and the imports, that is, lower exports to support the increasing demand for imports in the country. The imbalance results in an ambiguous situation in the country's terms of trade, hence, reduce their capacity to import more for the local income growth. The reduction in the real income growth would become a long-term impact on the country's economy, which could also affect its gross domestic product (Plumer, 2015). The long-term impacts would get felt given that the reduced exports of the company would lead to a situation where the purchasing power of imports of Canada diminishes, thus, leading to a reduction in the gross domestic income. The situation would, therefore, have a resulting effect on the country's domestic gross product that reflects the growth of the economy. The reduction in the prices of crude oil has provided a situation where the exports of Canada have reduced owing to the reduced revenues from oil exports. The reduction in the country's exports becomes a potential factor of depreciating the Canadian dollar against other strong currencies like the US dollar. A country's total exports play a significant role in boosting the strength of the currency because of the high foreign exchange earned in the process. A reduction in the levels of foreign exchange for Canada would, therefore, worsen the Canadian dollar, thus producing a tough economic situation because of the resulting high costs of imports. The depreciation of the Canadian dollar would trouble the local people's purchasing powers given that the Canadian dollar is going to weaken. As such, the importers in the country would have to pay more because of the diminished value of their local currency against the foreign currencies from where they import their commodities. The situation would further discourage importers from engaging in high-level business, which was the case before the drop in the prices of crude oil (Carneiro, 2007). The reduced currency value of the Canadian dollar would, consequently, have greater impacts on the economy given that the purchasing power of the citizens would reduce tremendously. The reduced purchasing power of the people in Canada would, thus, bring instances of inflation in particular commodities of the country because of the weakened Canadian dollar. The growing inflation would make life harder for the Canadians, as well as, the investors in the country. The growing inflation would become worsened by the reducing gross domestic income that would mean people have reduced incomes for spending on the available product baskets.
The growth in inflation would result in austerity situations where the citizens get terrorized by the increasing cost o living, which clearly demonstrates an economy under siege. The increasing levels of inflation would further reduce the purchasing power of the country's currency, thus, producing a reduced level of the country's imports which also affects its economy in a significant manner. The slowing rate of the investors in the country would also have a resulting impact on the country's interest rates. The drop in the investment levels would reduce the interest rates of the country, thus, making some sectors to suffer a big blow that would reduce their performance in the country. The circumstance demonstrates why the local banks have started eying the foreign markets for their growth expansion. The US now becomes a feasible region for the economic growth of the majority of investors in the country. Some big banks in Canada have entered the US market as a way of hedging themselves from the upcoming bleak economic times in the country that has made the interest rates to reduce incredibly. The movement of the banks to the foreign markets would result in a situation where the willing investors in the country cannot access credit and investment financing for their businesses. In the long run, the country shall experience a condition of reduced investments that is detrimental to the economy of the country (Plumer, 2015). The reduction in the interest rates reduces the attractiveness of the banking sector in the country based on the reduced returns on the investments. The weakening Canadian dollar would also become another potential factor for the decrease in investments in the country because of the reduced foreign direct investments that would materialize in the country because of the reduced returns on such investments. A country's wealth largely depends on the levels of investments that get initiated by the investors, a deviation in the investment trend of the country would, thus, affect the country's economy on a greater scope. In the rich oil producing regions of Canada such as Alberta and Saskatchewan, there has a reduction in the budgets formulated by the authorities in these areas, for instance, Saskatchewan reported a 262 million dollars deficit in its previous budget (Birn, 2015). The reduction in the budget size becomes an essential factor for impacting the country's overall economy. The cutback on the budgets of the country would reduce the country's ability to spend on developmental aspects that matter greatly for the growth of the economy. The reduction in this area of spending would result in a situation where the economy gets held hostage by the higher recurrent expenditure that leaves little room ...