If Energy Prices Remain Near Current Levels, Canada’s Economy Is In Trouble

And so it begins…Collapsing crude prices are starting to make their way through the North American energy sector, as the most unprofitable oil & gas rigs are mothballed. Those flashing red numbers are not just on your screen any more.

Source: Baker Hughes

The closures have been particularly acute in Canada, where some 40 oil & gas rigs have been taken out of operation recently. In fact it's not clear if economists fully appreciate what's about to transpire with the Canadian economy. This decline in rig count is just the beginning.

Consider for example the situation with the Canadian oil sands – one of the more expensive sources of crude production. Even if prices recover somewhat, oil sands production will be winding down – nobody wants to operate -losing businesses for a prolonged period. And those who believe crude will be back above $80/bl any time soon is deluding themselves.

Source: FT

Up until now, production from oil sands has fueled growth in other sectors, including for example transportation and housing in Alberta. This is about come to a screeching halt.

Alberta housing situation (source: Alberta Treasury Board and Finance)

The national situation is not significantly better. Housing markets across the country have continued to rally, even as homes south of the border had undergone an unprecedented price adjustment. While many point out that the reason for avoiding a US-style housing crash has been a stronger mortgage market, that's only part of it. The global commodity boom in which Canada successfully participated is the main reason.

Source: Multiple Listing Service

Now as the commodity super-cycle has ended and energy prices collapsed, Canadian households are caught with near-record levels of leverage.

Source: National Post

Some have been pointing out that Canadian mortgage debt service ratio has continued to improve. However that measure is misleading, as it excludes principal payments. In reality the situation is much worse (see chart, h/t @ac_eco).

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