World association

From energy to food prices and even inflation, here’s how the war in Ukraine could impact the Canadian economy

It may be a world apart and pale in comparison to the human toll, Russia’s decision to invade Ukrainian territory this week will have many direct and indirect impacts on the Canadian economy.

The most obvious concerns the price of oil. Russia is an energy superpower and the prospect of limiting Russian exports of energy products like crude oil and natural gas is weighing heavily on the markets.

Europe’s oil benchmark, Brent crude, rose above $105 a barrel on Thursday, its highest level since 2014. The predominant North American oil mix, West Texas Intermediate, was not far behind, changing hands just before 98 dollars per barrel at any given time. Thusday.

Barring military intervention, threatening to limit Russian energy exports would be NATO’s most potent weapon to convince Putin to end his incursion into Ukraine, but because Europe is just as dependent on Russia for oil and gas than Russia is for revenue from sales, experts believe that is unlikely to happen.

“The White House has gone to great lengths to make it clear that it will not target Russia’s energy sector and worsen an already tight supply situation,” commodity analyst Helima Croft said Thursday. RBC Capital Markets in a note to clients.

“While there have been no physical supply disruptions yet, there are serious concerns that Russia may decide to restrict commodity exports in response to US sanctions.”

Russia currently pumps around 10% of the world’s crude oil supply every day.

Normally, one energy giant turning off the taps would open the door for another turning them on, but that’s unlikely to happen with Canada, as pipeline capacity and oil and natural gas exports are already pushed to the limit, said Eric Nuttall, a partner and portfolio manager at Toronto-based investment firm Ninepoint.

“It’s an impossibility,” Nuttall said in an interview about the prospect of Canada increasing its oil exports to take some leverage away from Putin.

Despite significant energy resources in Canada’s oil sands and U.S. shale, Nuttall says the decision years ago to limit pipeline expansion has limited North America’s ability to export as much oil as possible, to the point where Canada and the United States are still importing oil from abroad.

According to Canadian Association of Petroleum ProducersCanada imports approximately $550 million worth of crude oil annually from Russia, most of which is consumed in Eastern Canada.

And Nuttall says the United States matters even more than that.

“They’re basically contributing $66 million a day to Russian coffers to enable them to launch cruise missiles into Ukraine when they had a safe and reliable supplier in the north,” he said of the statement. Biden administration’s decision to kill the Keystone XL pipeline once. and for all.

Oil prices are rising in the short term due to uncertainty, but a long-term military conflict in the region would be negative for long-term oil prices because it would slow down the global economy, said Barry Schwartz, director of investments. at Baskin Financial.

“Nobody should be dazed by oil,” he said in an interview. “Oil prices may continue to rise as global events remain uncertain, but ultimately, if [the] the invasion continues, if it gets worse, economies around the world will slow down dramatically and that’s a terrible scenario for oil.”

WATCH | Why a prolonged conflict in Ukraine would lower energy prices in the long term:

Ukrainian uncertainty is bad for oil in the long term, fund manager says

Barry Schwartz, chief investment officer at Baskin Wealth Management, said an escalation of the Russian invasion of Ukraine would slow economies around the world and could drive down the price of oil. (Photo credit: John Woods/THE CANADIAN PRESS) 0:31

Higher food prices

Energy is perhaps the most direct impact, but global food markets will also be affected. Often called the “breadbasket of Europe”, Ukraine is a major global supplier of crops like corn and wheat, and Russia is not far behind.

Together, the two countries produce about 25% of the world’s wheat supply, and RBC’s Croft says those supplies are now in doubt due to Russian aggression.

“Given recent Russian naval deployments in the Black Sea, we believe there is a considerable risk that Ukrainian ports will be inoperative if active fighting begins,” Croft said.

As a major wheat exporter, Canada will feel this part of the conflict directly.

“If Europe is not able to get Ukrainian wheat, it will look elsewhere,” said David Quist, executive director of the Western Canadian Wheat Growers Association, in an interview.

“If Ukraine, which is a major exporter, does not produce this year, there will be a global shortage. And this will lead to higher prices.

WATCH | How the conflict in Ukraine will affect wheat prices in Canada:

Conflict in Ukraine could drive up wheat prices, food prof says

With Russia and Ukraine being major wheat exporters, people can expect wheat prices to rise and buyers to shift their purchases to other markets, says agricultural economics professor Richard Gray. at the University of Saskatchewan. (Photo credit: Orlin Wagner/Associated Press) 1:27

They already are. Wheat prices are up 15% in the past month alone, assuming two of the world’s largest wheat crops may be unreliable in the short term at least, and potentially in the long term as well.

“If it’s a protracted war and it’s disrupted, it could disrupt production this spring or years to come,” said Richard Gray, a professor of agricultural economics at the University of Saskatchewan.

Higher wheat prices may be good news for farmers, but it means consumers in Canada and abroad should prepare for even higher food prices to come.

Gray says a loaf of bread can only contain about 40 or 50 cents of wheat, “so the impact won’t be very large directly, but indirectly you’re going to see an increase in grain prices, an increase in other foodstuffs .”

Inflation and rising rates

Rising food prices are one of the main factors pushing inflation to multi-decade highs of late, a trend that central banks were poised to tackle imminently in increase their interest rates.

While rate hikes are still expected, the sudden outbreak of war in Ukraine has changed plans a bit, according to economist Royce Mendes of Desjardins.

The Bank of Canada is expected to announce its latest interest rate decision next Wednesday, and it is widely expected to raise its benchmark rate by at least a quarter of a percent, to 0.5 percent. .

But the way forward is very uncertain.

“Lower interest rates appear inconsistent with high levels of inflation, so we expect the process of interest rate normalization to begin in the coming weeks and continue at least gradually throughout the year,” Mendes said in an interview.

“But there are certainly more question marks over this process than there were a few days ago.”

While expectations for the number of bulls to come and their speed are lower today than they were just 24 hours ago, investors in Canada and the United States continue to expect around half a dozen rate hikes in Canada and the United States by the end of the year, suggest investment swaps known as swaps.

Even the shocking prospect of military conflict in Europe is unlikely to force central bankers to deviate from their inflation-control plans, but the way forward is still far from certain – so Canadian consumers should prepare for the uncertainty of this one world conflict one way.

“A conflict that can sometimes seem so distant to many Canadians could hit home in terms of the prices they pay for everyday goods,” Mendes said.

“We should expect to see higher prices at the pump and potentially higher prices at the grocery store as a result of this dispute.”