Thank you, Mr. Chair.
I have prepared and distributed a document analyzing the impact of lower oil prices on the manufacturing sector from our perspective. I'm not going to go into detail on that subject; you can take a look at that yourself. The only thing I could probably accurately forecast is that if you have a group of economists, you'll at least get as many, if not more, opinions about the impact of lower oil prices on the economy.
Let me focus on a couple of key issues. One is the relationship between the American dollar and the price of oil. It's important to realize that oil prices are denominated in U.S. dollars, and if the currency exchange rate of the U.S. dollar is rising against other currencies, the price of oil will naturally fall, and you don't need any change in supply and demand to effect that decline in the price of oil. There's a very strong correlation. In fact, if you take the U.S. dollar against a basket of currencies and weight it in terms of overall transactions for oil, what you find is that the U.S. dollar has fallen by 25%. That accounts for just over half of the decline in the price of oil that we've seen since last September.
This is a story about the strength of the U.S. dollar right now, which is an indication that other economies appear weak or are weakening, which also feeds into the other 50% of the equation about supply and demand in oil. Lower global demand for oil and continued overcapacity are on the supply and demand side and that's also bringing oil prices down.
That's important because the impact on Canadian manufacturing of the lower price of oil, I agree with Rhys, is net negative. However, that is being offset and will be offset over a period of time by a stronger U.S. economy, and also by the fact that the Canadian dollar is relatively low against the U.S. dollar. Rhys mentioned the impact that lower oil prices are having on economic activity in western Canada. That of course affects manufacturing across the country. We estimate that the hit on the manufacturing sector will be about $12 billion a year. It's not only because of lower demand for manufactured products and equipment particularly in the new projects in the oil sector in western Canada, but it's also because right now there's tremendous downward pricing pressure being exerted by the procurement companies, by the major oil operators, throughout the supply chain. It's not only a matter of lost production, but also of very dramatically lower pricing leverage.
The part that is offsetting the impact of oil prices, of course, is the fact that to some extent, some sectors will benefit primarily from lower feedstock costs. In the petroleum products sector, for instance, the price of petrochemicals and plastics is coming down along with the price of oil, not as rapidly, but it is having some positive cost implications for manufacturers who use those feedstocks.
On the whole though, let's not exaggerate the impact of lower oil prices on energy costs. Energy costs from oil are 0.3% of total operating costs for manufacturing. The impact is marginal. The biggest benefit will be on the purchasing power, not of Canadian consumers—because if you go down south you're going to be spending a lot of that money there, or on imported products—but the biggest benefit is to strengthen consumer recovery in the United States. The combination of a lower dollar and a stronger U.S. recovery is where the major benefit is.
One final point is that we can't take the lower oil price, the stronger U.S. economy, or the lower dollar for granted. Nobody is going to be competitive unless they continue to invest in new technology, new products, better skills. Competition is intense, and the currency rates around the world are also falling, so this is no silver bullet for Canadian manufacturers.