Since the beginning of this century, the Canadian dollar has twice outstripped the American greenback in value: In November 2007, when it was worth US$1.07 and again in April 2011, when it was at US$1.06. And it was generally on par with the U.S. dollar through 2012.
It’s no coincidence that oil prices were high when the Canadian dollar was strong, reaching US$90 per barrel for West Texas Intermediate (WTI) in November 2007 and about US$110 per barrel in April 2011. Billions were invested in Alberta’s oilsands throughout this period.
“The next big thing was Canadian heavy oil, so every company poured investment into Canada and Alberta,” said Vijay Muralidharan, an oil and fuel analyst and owner of R Cube Economic Consulting. “That created a demand for the Canadian dollar, and that created a strong Canadian currency.”
So why, when oil prices have been so high in 2022, has the loonie continued to languish against the American dollar?
Between March and July this year, global oil prices shot well above US$100 per barrel, hitting highs of US$120 per barrel. But the Canadian dollar never rose above US$0.80, and as of last week had fallen to US$0.74.
“One of the really interesting phenomena that we have seen in the last year or so is the decoupling of our Canadian dollar from the movement in the oil price,” said Werner Antweiler, an economist at the University of British Columbia’s Sauder School of Business. “The usual effect was that, when commodity prices were going up, so was the Canadian dollar. That isn’t happening to the same extent.”
Lack of pipeline capacity and the inability to build new ones has decreased investment in Alberta’s oil sector in recent years and increased divestment by several large oil majors, which has contributed to the Canadian dollar decoupling from oil prices, Muralidharan said.
“People have no confidence investing in Canada in oil and gas because you have opposition to pipelines,” he said. “You can’t build a pipeline, so what’s the point in producing and investing in oil?”
But Antweiler said that’s not the only reason the Canadian dollar has weakened in comparison with the U.S. dollar. Other major currencies, including the British pound, Euro and Australian dollar, are also down against a strong U.S. dollar.
“The U.S. dollar is an international phenomenon,” Antweiler said. “The strength of the U.S. dollar is reflecting uncertainty in the world and the fact that the U.S. dollar is a safe-haven currency.”
There are pros and cons to a low Canadian dollar. Because so much of what importers buy is priced in American dollars, a weaker currency is generally good for resource exporters, and Canada is a major exporter of oil and gas, lumber, minerals and agricultural products.
“For commodities and energy and for those kinds of natural resource-based stuff, absolutely the lower dollar will help, whereas for manufacturers it doesn’t,” said Andrew Wynn-Williams, B.C. divisional vice-president for the Canadian Manufacturers and Exporters.
“Broadly-speaking, a lower Canadian dollar and exchange rate against lumber priced in American dollars can yield a higher price for B.C. lumber being sold into the U.S.,” said Linda Coady, the new CEO for the Council for Forest Industries (COFI).
“This is helpful, given that the industry is facing lower demand for lumber with declining housing starts in the U.S. and continued challenges predictably accessing fibre at a reasonable cost here at home.”
For B.C. miners, a low dollar is basically a wash, according to the Mining Association of BC (MABC). While metals like copper are priced in U.S. dollars, so are inputs, and mining is very capital intensive.
“As exporters, you would think that a low Canadian dollar would benefit B.C. mines and smelters, but it’s important to note that approximately 60 per cent of the average B.C. copper mine’s costs are based on U.S. dollars,” said MABC CEO Michael Goehring. “So, a low Canadian dollar scenario for B.C. copper mines involves higher input costs and reduced margins.”
Canadian oil producers benefit from the lower dollar, but Canadian motorists suffer because American gasoline prices affect prices in Canada, even when the gasoline is refined in Canada.
At current exchange rates, Canadian producers get more than $100 per barrel when oil is at US$80 per barrel, according to the Canadian Association for Petroleum Producers (CAPP). But when it comes to refined products – gasoline and diesel – the low dollar means less buying power for Canadians.
“We export a lot of crude,” Muralidharan said. “We also import a lot of products, like gasoline and diesel in different parts of Canada from the U.S. So the flip side is you actually pay U.S. dollars. You spend more to get the products.”
Dan McTeague, president of Canadians for Affordable Energy, estimates the impact of a weak loonie on gasoline prices in B.C. to be about $0.46 per litre. That’s how much more he estimates British Columbians are paying than they would if the Canadian dollar were on par with the U.S. dollar.
“What it means is the lack of having a petro-dollar that responds to higher oil prices, the consumers are being hit with a profound loss of purchase power on a scale that most don’t really comprehend,” McTeague said. “The weakness of the Canadian dollar is, in my view, materially one of the main drivers of inflation in Canada.”
The price Canadian refiners charge for refined gasoline is influenced by American refined fuel prices.
“Whether you like it or not, our domestic prices in Canada [for gasoline] are set by what happens in the U.S.,” Muralidharan said. “There is a currency impact on pricing.”
Pacific Northwest gasoline spot prices were US$4.54 a gallon on September 30, McTeague said. If the Canadian dollar were on par with the American dollar, that would translate to $1.14 per litre. But because of the current exchange rate, it comes out to $1.58 per litre, he said.
With GST, that’s $0.46 per litre more that British Columbians are paying than they would if American and Canadian dollars were at par.
“My point is, we’re paying dearly for the limping loonie,” McTeague said.
