The recent crash in oil prices has set the stage for the most-anticipated OPEC meeting in years on Thursday. As oil-producing powerbrokers prepare to gather in Vienna, the Financial Post and Calgary Herald this week present Oil Pressure, a look at the forces buffeting, and buffeted by, the new oil world order. Today, the ties that bind Canada’s economic fate to energy prices.

CALGARY – Calling the Canadian dollar a “petrodollar” certainly makes sense if you mean the fact that the latest batch of bank notes are made out of polymer plastic, derived from petroleum products. But more than ever, economists are split on whether or not the term makes sense any longer in describing the correlation between the value of our loonie and the price of oil.

If it is a petrodollar, “it isn’t a very good petrodollar,” said Jack Mintz, director of the University of Calgary’s School of Public Policy. “There’s some impact that energy prices have on the dollar,” he said. But he added that the correlation between oil prices — and all natural resource commodity prices — has actually decreased in recent years.

FIVE FACTS

1. The term “petrodollar” originates from 1973, when the United States agreed to provide military protection to Saudi Arabia in a deal that would see Saudi oil sold in U.S. dollars.

2. By 1975, every OPEC member had adopted the petrodollar system, agreeing to sell their oil in American currency.

3. In 2000, under Saddam Hussein, Iraq broke away and began selling its crude to France in euros. Today, Iraqi oil is sold in U.S. dollars again.

As Canada has only the U.S. as a consistent oil buyer, all Canada’s oil is sold in American dollars, even though it hasn’t formally signed onto the petrodollar system.

4. Analysts have put the chances that OPEC will cut its crude oil production this week at 50%.

5. Producers around the world have watched oil prices plummet 30% since June.

But that supposed new reality for Canada’s dollar remains a matter of considerable debate. Patricia Mohr, vice-president of economics at Scotiabank, and a commodity markets specialist, said, “I don’t think it’s decoupled from oil prices.” When oil prices were high, politicians from Ontario were complaining that the commodity was inflating our currency and purportedly hurting manufacturing exporters. And correlated or not, since oil began its long slide from over US$100 a barrel in the summer to below US$75 today, the Canadian dollar has likewise trended downward from US$0.95 in July, and is now south of US$0.89.

As OPEC member countries meet Thursday in Vienna to discuss whether to adjust oil production to stabilize prices, the relationship between the price of oil our national currency — and the economy — is naturally a matter of sharp focus.

In Alberta, on Wednesday, the province’s finance minister, Robin Campbell, reduced projections for the annual surplus from $1.1-billion to $933-million, due in large part to the drop in oil prices. The province is now budgeting for 2015 based on oil prices of US$75 per barrel rather than US$95.

Canada has “a very oil-dominated economy now,” Ms. Mohr said. She added that oil and gas make up 39.9% of net exports from Canada. Does that mean there’s a direct correlation with our dollar and that of the U.S. which is still the only consistent buyer of Canadian crude oil? “It has to,” Ms. Mohr said.

A 2008 report presented to the Bank of Canada by economists Philipp Maier and Brian DePratto showed the correlation between the Canadian dollar and energy prices more than tripled between 1980 and 2007, landing at 0.88 to 1.

But things have changed since then, said Moody’s Investor Services senior vice-president Steven Hess. Since the financial crisis of 2008, when the value of the American dollar plummeted, central banks and sovereign wealth funds began looking to the Canadian and Australian dollars as new reserve currencies, Mr. Hess said, and they began investing in Canadian government bonds, which has helped hedge the dollar against commodity swings.

Statistics Canada data show a spike in foreign purchases of Canadian federal government bonds in December 2009, when a net inflow of $7.9-billion was invested in federal government bonds. A few months later, in May 2010, the data shows another new record was set when a net inflow of $13.7-billion was invested in Canadian federal bonds. By comparison, the previous high, reached in March 1993, was a net inflow of $7.6-billion.

“I think the correlation between the Canadian dollar and oil prices for a long time was much stronger than it is now,” Mr. Hess said.

The swoon in oil prices is expected to take $3-billion out of Canada’s annual GDP this year, the federal ministry of finance said in its budget update on Nov. 12. If prices remain low next year, the update showed GDP could drop by a staggering $16-billion next year.

That, the finance ministry maintained, would not affect the projected $2-billion surplus. But it would almost certainly put pressure on the dollar.

Provincial treasuries would not all muddle through as well as Ottawa in an extended oil price trough. Research published last week by Moody’s analyzed the effect of plummeting oil prices on Canada’s three largest oil-producing provinces: Alberta, Saskatchewan and Newfoundland.

According to the credit-rating agency’s research, the province relying most on oil royalties for government revenues is not Alberta; it’s Newfoundland, at 31%.

Alberta’s provincial oil royalties make up 18% of the provincial revenues and Saskatchewan, 11%.

“The boom that we saw from 2003 … that boom in development has had a huge impact on the economy and government revenues and we’ve seen that trickle down to all sorts of sectors,” said Conference Board of Canada deputy chief economist Pedro Antunes. If the petro-focused provinces continue to get pinched on oil prices, the pain won’t stop there, he said. There will be “all sorts of indirect effects” throughout multiple sectors — such as construction — that are connected in one way or another to Canada’s oil industry.