Canada is shying away from its image as a petro-state, but its economy is moving in the other direction. BMO Capital Markets’ latest research note looks at Canada’s merchandise trade balance for 2021. Canada produced its first surplus since 2014, way back when oil was above $100 barrel. That’s not a coincidence, with energy prices being one of the largest contributors to the surplus. Energy’s trade surplus is now so large the past quarter was over five percent of gross domestic product (GDP).
Canada’s Merchandise Trade Sees First Surplus Since 2014
Canada posted its first international merchandise trade deficit in months. In December, the trade deficit reached $138 million, meaning more was imported than exported. It was the first deficit since May, breaking a six-month streak. Though the minor deficit is “considered to be essentially balanced,” says Statistics Canada (Stat Can).
Balance of Canadian Merchandise Trade
Canada’s monthly net balance of international trade. Positive numbers indicate a surplus and negative numbers mean a deficit.
Source: Statistics Canada; Better Dwelling.
A minor monthly dip barely put a dent in the annual surplus, which hasn’t been seen in over half a decade. The year ended with a surplus of $6.6 billion in 2021, the first surplus since 2014 and the biggest since 2008. Those were both significant years for energy prices, and that isn’t a fluke.
Energy Is Now Over 5% of Canada’s GDP
“Unsurprisingly, much of this big turnaround in trade was due to energy products…as was the case in 2014, when oil was last at $100,” wrote Kavcic. His calculations show energy’s surplus reached $104 billion in 2021, more than double the $51 billion in 2020. This is equivalent to 4.2% of Canada’s GDP, compared to just 2.3% in 2020.
Energy became a much larger share of the economy in the fourth quarter, as oil prices increased. “In Q4 alone, the energy surplus hit $33 billion, a record both in dollar terms, but also even as a share of GDP (we estimate it at just over 5%),” he said.
Canada’s Economy Is Set To Become More Dependent On Oil
Canada’s economy is set to become even more dependent on oil as prices climb. BMO calculations show WTI averaged $77 in Q4 2021, compared to $90 today. This is set to send energy’s share of the economy soaring. “Crude oil accounted for 78% of the energy surplus, with the remainder due (in descending order of importance) to natgas, coal, electricity and nuclear fuel.”
The rising dependence can be a little problematic, hints the bank. Increasingly, investors use environment, social, and governance (ESG) criteria to evaluate investments. As this demand for ESG-friendly products rises, the oil industry faces negative pressures. “Of course the other key point here is that the Canadian economy is now more dependent than ever on energy trade, in an ESG world,” notes the economist.