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Posts tagged with: "MCOILWTICO"

View this series on FRED

The Canadian dollar and the price of oil

Canada’s oil sector amounts to about 10% of its GDP and 25% of its exports, almost all of which go to the U.S. It’s not too surprising, then, that the U.S./Canada exchange rate mirrors the price of oil. Of course, trade between the countries is much more than oil, but many of Canada’s other commodity exports have a price that is well correlated with the price of oil. And the financial linkages between the countries are also disproportionately tied to the mining and extractive industries.

That said, this relationship hasn’t always existed. See the graph: If you expand the time sample to more than the 10 years shown above, the correlation becomes gradually less clear. But the reason is clear: Canada has continuously expanded its oil production, and oil simply did not matter that much a few decades ago when it was not nearly the dominant revenue source it is today.

How this graph was created: Look for the Canadian/U.S. dollar foreign exchange rate and select the monthly series. Then use the Add a Series option to search for and select “WTI” (again, the monthly series). Modify this second series as follows: Switch the y-axis to the right side and create you own data transformation with formula 1/a. Finally, restrict the graph’s sample period to the past 10 years.

Suggested by Christian Zimmermann and inspired by a tweet from Paul Storer, who recently passed away

View on FRED, series used in this post: EXCAUS, MCOILWTICO

Oil prices and business fixed investment in structures

Most economists believe lower oil prices are positive for the economy: They lead to lower gasoline and diesel prices, which tend to reduce headline inflation, which increases consumer purchasing power. Lower oil prices also tend to reduce operating expenses for transportation firms, such as airlines, trucking, and delivery services. The sharp drop in crude oil prices since mid-June 2014 is generally expected to produce positive (if temporary) economic effects. Lower oil prices generally don’t benefit energy producers, but the vast majority of households, firms, and organizations are net consumers, not net producers; so, lower prices still tend to bring net benefits.

One way the effects of lower oil prices reveal themselves is through mining activity. (More precisely, “real private nonresidential fixed investment in mining exploration, shafts, and wells.”) In 2013, fixed private investment in mining activity was about 5 percent of total fixed private investment and only 0.8 percent of real GDP. Still, since the third quarter of 2009, mining activity has increased at a 17.1 percent annual rate—much faster than the 5.5 percent rate of gain in total fixed private investment.

As the graph shows, mining activity (which includes drilling) is positively correlated with crude oil prices. When oil prices rise, this activity increases and so does investment in it. When oil prices fall, this activity slows and investment in it falls.

How this graph was created: Search for mining investment to find the first series, then add “Crude oil prices WTI” for the second. Limit the sample to start in 1999.

Suggested by Kevin Kliesen

View on FRED, series used in this post: E318RX1Q020SBEA, MCOILWTICO


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