New insights reveal the Canadian dollar no longer rises with oil prices, impacting economic policies and inflation
The traditional relationship between the Canadian dollar, often referred to as the loonie, and oil prices has significantly weakened, according to a recent analysis by Charles St-Arnaud, chief economist at Alberta Central.
This change marks a departure from historical patterns where rising oil prices typically bolstered the value of the Canadian dollar, according to The Financial Post.
St-Arnaud highlights that since 2016, and particularly over the past year, higher oil prices have not led to an appreciating Canadian dollar. This observation underscores a shift from the loonie's long-standing reputation as a “petro-currency.”
He points out that in 2007, prior to the Great Recession, the US benchmark West Texas Intermediate (WTI) oil price reached approximately US$140 per barrel, which corresponded with the Canadian dollar rising above parity with the US dollar.
However, a similar rise in WTI above US$100 in 2022 did not yield the same effect on the loonie, which instead moved in the opposite direction.
The analysis by the Calgary-based economist identifies two primary reasons for this shift.
Firstly, a significant portion of oil revenue is now being directed towards shareholders in the form of buybacks and dividends, with a notably higher percentage of these benefits going to non-Canadian investors compared to previous years.
St-Arnaud notes that approximately 10 percent of revenue from major Alberta oil producers—equivalent to $20bn—went to investors last year, a sharp increase from three percent ($3.7bn) in 2014.
With 78 percent of these shareholders being non-Canadian, up from 62 percent in 2014, the outflow of capital to foreign investors has quadrupled, representing about 1.5 percent of Canada's GDP.
Secondly, there has been a notable decrease in reinvestment by Canadian energy companies. St-Arnaud estimates that these companies reinvested about nine percent of their revenue ($17bn) into operations over the past year, down from 25 percent ($28bn) in 2014.
Since the Canadian oil industry largely operates with US dollar-denominated assets due to oil being priced in USD, the reduced reinvestment results in fewer conversions from US dollars to Canadian dollars, thereby diminishing support for the loonie.
This weakening link between oil prices and the Canadian dollar could have broader economic implications, including contributing to higher inflation, as the loonie receives less support from rising oil prices.
It may also influence the Bank of Canada's approach to interest rate policy, making it more sensitive to energy prices due to their heightened impact on inflation.
