OTTAWA — The ill wind sending gas prices to $1.20 a litre and beyond across Canada is blowing a few a lot of good, including some governments.
Both Ottawa and resource-rich provinces are likely to realize benefits from the escalating price of crude and other commodities — if they remain perched high above norms.
For oil-producing provinces that collect royalties from resources within their borders, the payoff is considerable.
For non-producers, particularly Ontario, there is only pain.
For Ottawa, which is deep in red ink, there’s a bit of both, perhaps weighted toward the good side of the ledger.
The situation is somewhat analogous to the years leading up to the 2008 economic crash, when Ottawa seemed to have trouble estimating the size of the revenue haul it would receive, leading to annual surpluses of $10 billion and more on some years.
Today, Ottawa remains convinced it doesn’t benefit all that much from the oil price bonanza.
The Finance Department said the revenue boost will be minimal.
The federal gas tax is based on volume of sales, not price, and for other benefits, there are countervailing offsets.
“Corporate income tax revenues from the oil sector increase with oil prices,” the department notes.
“However, the energy sector makes up only a little more than 10 per cent of corporate profits and higher oil prices can mean higher costs for much of the rest of the corporate sector.”
Additionally, GST revenue would be boosted at the gas pump, but that may mean consumers paying more to fill up the family wagon will have less money left in their pockets to buy other goods.
Still, analysts believe there are reasons to believe Ottawa will make off like at least a modest bandit from oil prices in the stratosphere.
That’s what happened when commodities hit records levels in the years leading up to the recession, said Michael Gregory, an economist with BMO Capital Markets.
“In Canada we do get the income boost. Corporate profits go up, Canadians own stock so their wealth goes up, and the Canadian dollar tends to drift up, so you can buy more,” he explains. All that generates government revenues.
Down the road, profitable companies tend to hire more employees and pay them better, he adds, again generating tax revenues. Firms may up production of the tar sands, generating more jobs in the oilpatch, but also creating support manufacturing jobs in Ontario.
On the other side of the ledger, high oil prices slows down the U.S. economy, which tends to hurt exporters in Ontario. They also add to business costs.
“Overall, there’s no question it’s a positive, but it’s not going to be a windfall. A more significant picture is the regional divergence — Western Canada will do much better and Central Canada noticeably worse,” explained Gregory.
By one estimate, every $10 hike in the price of oil trims Ontario’s annual economic output by between 0.1 and 0.3 percentage points.
Scotiabank economist Mary Webb says the other major negative for Canada is that sustained high oil prices will likely slow global growth, hurting Canada’s overall economy. In fact, she said Ottawa likely preferred the situation before the crisis in the Middle East sent oil above $100 a barrel, because the picture was brightening and the unknowns were fewer.
“Before this latest surge in oil prices, fiscal year 2012, which starts April 1, was a window of opportunity for budgetary repair,” she said. “We have real growth and nominal growth that is higher than anticipated and interest rates that are going to stay very close to historically low levels.
“And now down the road, (if prices remain high) there are a number of national issues that Ottawa would have to face.”
In particular, Ottawa will be dealing with an economy that is hot in the less populous regions and cool where the majority of the people are.
After a record $55.6-billion deficit last year, Ottawa is projecting the shortfall to drop to $45.4 billion this fiscal year, which ends March 31.
Finance Department accounting for the first eight months of the year shows the deficit could come in at under $40 billion, however, economic and job growth was stronger in 2010 than Ottawa had expected.