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Relief at pumps, but havoc on economy

These are hard times in Canada’s oilpatch. With crude hovering around $40 a barrel after averaging $100 through 2008, profits are slumping and belts are tightening.

These are hard times in Canada’s oilpatch. With crude hovering around $40 a barrel after averaging $100 through 2008, profits are slumping and belts are tightening. Earlier this week, Suncor Energy Inc., the leading oilsands producer and a bellwether for the energy sector, reported a fourth quarter loss of $215 million. It promptly whacked planned 2009 capital spending to $3 billion, less than a third of last year’s total.

Canadians who were squeezed by historically high gasoline prices last year may have little sympathy, but they should. Today’s lower pump prices are a relief, but the industry’s slowdown has a far greater negative impact on all of us.

Lower energy prices, the result of weakening demand as the recession gathers, mean weaker corporate revenues from domestic and export sales and, consequently, lower profitability. This leads to job cuts, reduced purchases from suppliers across the country, less capital-fuelled expansion and trimmed discretionary spending on everything from paper clips to philanthropy.

The energy sector’s weakness simply diminishes an already struggling economy, rather like bleeding a medieval invalid.

In Alberta, the key producing province, the number of oil rigs operating this year is the lowest in a decade. The province suffered a net loss of 15,800 jobs in December, nearly half the national total. Not all of those jobs were in the energy sector, but many were, and they generated income for thousands of Canadians who once hailed from locales as diverse as Newfoundland outports and hamlets on Vancouver Island. Worse still, the energy sector’s workforce is expected to shrink a lot more in 2009.

Add it all up and energy’s contribution to gross domestic product, somewhere around 5.5 per cent normally, is taking a big hit.

Indirectly, the effects are no less severe. Alberta has collected $11 billion or more in energy royalties in each of the past three years, but it won’t in 2009. Nor will other producing provinces match their previous totals. Provincial gasoline tax revenues, 16.5 per cent of the price of every litre sold, will fall, as will the 15.5 per cent share comprised of federal excise tax and GST. Lower tax revenues in the current climate mean bigger deficits and even harder choices for governments figuring out how to revive the economy.

For good measure, lower energy prices are further eroding our life savings. By weighting, the energy sector accounts for about 28 per cent of the S&P/TSX Composite Index. When energy shares fall, all investors feel the pain.

 
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