Oil Is Smashing Canada and Norway's Economies

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Oil, oil, everywhere, but not a drop to burn.  If you remember your net holdings taking a rather significant beating during the 2008 financial crisis, you may also remember how the economies of select nations avoided the crisis with a smug grin on their faces thanks to the exploding price of oil.  When a nation relies on a single commodity for the vast majority of their exports, they get a fantastic boost to their economy whenever said commodity (i.e., petroleum) shoots up in value as it did during the commodity boom of 2008-2011.  Such narrow economic might represents a double-edged sword, however, and as the bottom falls out of the oil market and petroleum sells for as little as $35 per barrel, the chickens come home to roost in a rather harsh manner.  Two particular nations, Norway and Canada, have learned that lesson to different degrees in the past six months.

More Money, Less Problems

Norway ranks among the very top of the quality of life indexes available for all nations on planet Earth thanks to the fantastic quantity of oil available off the coast of the Scandanavian country's shores.  The North Sea oil reserves are some of the richest in the entire world, providing the fuel for Russian exploration in tandem with Scottish calls for oil-driven independence and Norway's infamous rainy-day oil funds.  With a small population of just five million people, only slightly larger than the Boston metro area, Norway has ample treasure to divide amongst a very small number of hands.  Norway enjoyed a very literal embarrassment of riches in 2013 when the chief economist of their national DNB bank announced that the country needed to stop spending oil money in order to keep their currency from running away through inflation thanks to swelling coffers.  Norway has the largest sovereign wealth fund in the entire world at nearly three-quarters of a trillion dollars (that's trillion, with a T), over one percent of the market capitalization of all companies on Earth, or enough to give every single citizen a fat $125,000 check.  Oil money during the petroleum bubble made Norway's debt drop from 60% of their GDP in 2005 to just 30% of GDP today, one of the lowest levels of any first-world country.  Conservative spending policies mean that Norway cannot withdraw more than four percent of the rainy-day fund during any one year, effectively ensuring that the money will remain good for years to come.  At least, in theory -- until oil came crashing down.  The Norwegian krone (Norway, unlike neighbors Sweden and Finland, is not part of the Eurozone and does not use the Euro) experienced one of the worst currency devaluations in all the world during 2014, a move that prompted a national election on the issue of hiking interest rates to keep the krone competitive with other EU currencies.  While Norway does not rely on oil as strictly as some economies, such as 90% of Saudi Arabia's total GDP, they nevertheless rely on oil for about one krone in five of the nation's economy and half of their exports are either petroleum or petroleum by-products.  In a nation with one of the most successful welfare states in all the world, it looks impossible for Norway to keep unemployment low while wages remain high, a sharp about-face in contrast to the Golden Age of the past decade.

Great White North In The Red

The Canadian province of Alberta has given the world many things: Wayne Gretzky, the carnivore dinosaur Albertasaurus, and some of the largest oil reserves in North America.  Canada's dollar beat out the US dollar by a rather embarrassing margin through the Great Recession on the strength of Albertan oil, which powered an otherwise-flagging economy to yearly growth at a time when US unemployment shot to eight percent while wages fell by about ten percent overall.  Alberta oil proved so profitable while petroleum traded for $120 a barrel that the province provided enough capital to bail out ailing fellow provinces like Quebec.  The boom also led to the rise of the Alberta Wild Rose party, a political entity based almost solely on eliminating the oil royalties that required Alberta to subsidize fellow provinces.  Since Canada's federal system operates much more loosely than the American system, the Wild Rose represented a major threat to fellow provinces, culminating in Prime Minister Stephen Harper stepping in to ensure that Albertan oil money kept flowing into federal coffers.  A bitter struggle between provincial and federal party leaders has since been exhausted by default as petroleum fell.  Alberta registered a day-to-day budget surplus in 2014 but the downturn of oil meant that their trade surplus turned into an eight-billion dollar trade debt, spelling disaster not just for the province and the Wild Rose party but also Canada writ large.  The Canadian dollar traded above 1-to-1 with the USD during 2011; it has since fallen to just .75-to-1, with Canadian unemployment rising to seven percent.  The change of oil's fate has resulted in the New Democratic Party (NDP) gaining center stage in Canadian politics in the upcoming election, promising to shift infrastructure spending away from Alberta and oil, indicating that the future of the Canadian economy will no longer be tied to oil and that the days of Albertan provincial supremacy are in the rear-view mirror.

Oil's Sticky Future

  • The poor performance of Brent and crude oil have thrust many thriving economies into recession.  That's good news for petroleum itself, however, since Canada and Norway will limit output rather than run operations at a loss.  Indeed, Canada's BP holdings have put in a backup of oil rather than ship current supply.  Given the downward spiral through July and August, oil is now an excellent value buy at $42 per barrel.  Even if it drops by five to ten dollars, investors can grow their money as oil stabilizes and climbs to levels seen less than 9 months ago.
  • Canadian and Norwegian exports will be in a long-term bind as both nations enter recessions.  While both are best known for oil output, they also export large quantities of base metals like nickel and aluminum.  Invest in base metals as a short-term solution in the next three to six months.
  • Companies that rely on Canadian markets, such as GM, will see market shrinkage for the foreseeable future.  Consider divesting your portfolio of stocks that require Canadian trade to be successful.

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