Double, double, oil and trouble. Impact of falling oil prices on Canada and its charities.

Monday, April 13, 2015
Chief Economist Commentary

Canadians have a complicated relationship with oil and oil prices. On the one hand, we are an energy and petroleum intensive economy — using oil for transportation, heating, running factories, generating electricity and so on. We are also producers of oil — Canadian production of petroleum roughly balances Canadian consumption but the nature of this production is changing as conventional relative low cost reserves are depleted and replaced by higher cost production from oil sands and heavy oil.

Energy production, of course, has a distinct regional character with production concentrated mainly in the west (and to a lesser extent Newfoundland). Much of this is exported to the United States and to Ontario. Consumption is highest in central Canada with supplies coming from western Canada but with a significant amount of demand met by imports from the world market. This means there are few absolutely clear answers to the question: what is the impact of falling oil prices on Canada and on Canadian charities?  The answer will depend in part on one’s perspective as a producer or consumer of energy, whether one is well off or lower income, and or whether one is most affected by the national or regional economy.

At the most general level, falling oil prices are estimated to depress economic activity in Canada. Recent forecasts from the Organization of Economic Cooperation and Development in Paris estimate that falling oil prices will reduce Canada’s Gross National Product growth by 0.4% in 2015 and an additional 0.3% in 2016. 

Almost everything charities do is significantly influenced by the overall level of activity in the economy – donations track Gross Domestic Product; government ability to fund charities depends in large part on GDP; earned income is a function in large part of how well off the charitable marketplace finds itself. Donations from individuals, for example, track GDP closely. Donations were approximately $10 billion in 2014 – a 0.4% decrease in GDP growth translates into $40 million less for charities in 2015 and $70 million less in 2016.

The impact of reduced GDP growth on donations will be magnified by charities’ reduced ability to access government funding in a time of slower growth. And, by a reduced ability to generate earned income when the marketplace as a whole is growing more slowly.

In addition, investment and production in some sectors of the economy will slow perhaps dramatically with investments in oil production the clearest example. This will mean unemployment for some workers in affected industries and slower job growth throughout the economy. Thus, the population of Canadians in need may well increase at a point in time where revenues for charities are under threat from an overall deterioration in economic conditions.

These impacts will not be evenly distributed. Income and employment and charities in producing parts of the country like Alberta will be more dramatically and negatively affected. Consuming parts of the country may well benefit as energy intensive industries experience lower energy costs; a lower dollar stimulates demand for exports; and as rapidly growing United States and world economies also increase export demand.

…it is difficult to characterize falling oil prices as unambiguously good or bad but rather as disruptive.”
~ Brian Emmett, Chief Economist for Canada’s Charitable and Nonprofit Sector

For some charities and for some Canadians, falling oil prices are far from unequivocal bad news. Charities, like other economic entities, will experience lower energy and operating costs. Energy consumers will benefit from lower costs to drive their cars and heat their homes. Many of the clients of charities are relatively low-income earners. Low-income earners tend to devote more of their income to basic necessities like transportation and keeping warm. Lower energy prices are likely to benefit lower income earners relatively more than the relatively well off.

But there is one group of charities that will clearly be negatively affected – those concerned with the natural environment. Petroleum consumption is perhaps the economy’s biggest source of stress on the natural environment. Lower oil prices mean more oil consumption and more impact on air quality and carbon emissions. Lower oil prices also reduce the economic attractiveness of investments in energy conservation and alternative energy sources. This may be offset to a certain extent by reduced investment in relatively high cost and relatively environmentally disruptive new oil production.

In the final analysis, it is difficult to characterize falling oil prices as unambiguously good or bad but rather as disruptive. A sharp change in such an important element of the economy creates both winners and losers but at a broader economic level imposes substantial costs of adjustment that reduce overall economic activity with consequent impacts on jobs and growth. Canadians and their governments will also need to pay close attention to potential impacts on the natural environment and on the development of cleaner energy sources.

 

About the Author

Chief Economist for Canada’s Charitable and Nonprofit Sector, Brian Emmett is tasked with measuring the impact of the sector and bringing economic issues facing charities and nonprofits to the forefront of public policy decision makers. Mr. Emmett is an economics graduate of the University of Western Ontario and the University of Essex in England, and has enjoyed a long and distinguished public service career. He was Canada’s first Commissioner of the Environment and Sustainable Development in the late 1990s and worked extensively on Canada’s Green Plan. He also served as Vice-President of the Canadian International Development Agency (CIDA) in the early 2000s and has been an Assistant Deputy Minister in a number of federal government departments.

The office of the Chief Economist for Canada’s Charitable and Nonprofit Sector is made possible through funding received by The Muttart Foundation, Ontario Trillium Foundation, Vancouver Foundation, an anonymous donor, and the PricewaterhouseCoopers Canada Foundation.

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