March 2, 2016 11:00 am eastern

Statistics Canada reports this morning that capital spending in the oil and gas extraction industries in Canada was down $10.3 billion to $11.9 billion in Q4 or down 46.4% from the prior year.

That is clearly a HUGE decline. To put this in perspective, Canada’s total GDP as reported yesterday is about $1997 billion, so about $500 billion per quarter. And capital spending is a component of GDP although the addition to GDP is likely somewhat lower after deducting related purchases from other companies, to avoid double counting. Without making that deduction this $10.3 billion reduction amounts to 2.1% of Canada GDP in the quarter! I am not sure what deduction should be made for the double counting issue but in any case, the impact on GDP is not tiny and in particular the impact on GDP growth which runs at say 4% in nominal dollars (prior to this reduction) is HUGE.

This reduction in capital spending by the oil and gas extraction industries was absolutely what needed to happen. Companies needed to cut spending to survive. Current prices make much of the potential investments in oil and gas extraction uneconomic. And there is really nothing that can be done about it until prices rise. Lower capital spending by these industries world-wide is the surest means of getting prices to rise as supply would start to drop off. Another means would be the OPEC production-curtailment-and-price-fixing cartel but that appears to not to be functioning at this time. Pipelines could help increase local prices in Alberta, at least marginally, but those are years away.

For Canada and Alberta the unfortunate reality is that capital spending (and operating spending) in the oil and gas extraction industries is absolutely required to be reduced at this time. And the 46% reduction of Q4 may not be enough.