These are stories Report on Business is following Tuesday, Jan. 6, 2015.

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Potential fallout

Oil prices tumbled again today, bringing $40-a-barrel crude even more into the realm of the possible.

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That crude could sink so low seemed unrealistic just a few weeks ago.

But today, as the U.S. benchmark West Texas Intermediate slides further below the $50 mark, it's not so outlandish.

It's difficult, of course, to try to gauge the fallout.

Economists have already revised their forecasts for global and Canadian economic growth, and for oil-linked currencies like the loonie.

And they've generally found that lower crude prices should buoy the global economy.

In Canada, the collapse is forecast to whack oil provinces like Alberta, Saskatchewan and Newfoundland and Labrador, while others such as Ontario and Quebec enjoy lower energy costs and the weaker currency they bring.

But those forecasts have been based on crude prices well above where they sit today, underscoring the speed of the price drop.

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As luck would have it, I tucked away a mid-December report by Capital Economics, which looked at the likely ramifications of oil at $40.

That was about $20 ago, when the slump to $60 was deemed "a clear net gain" for the global economy. The report was also based on prices for Brent crude, which sells for a few dollars more than WTI.

"Indeed, the potential boost to global demand is one important reason to expect prices to level out soon," chief global economist Julian Jessop wrote at the time.

"Nonetheless, further falls – say, to $40 – could see the negatives start to outweigh the positives."

Mr. Jessop noted that every $10 drop in oil is equivalent to a transfer of annual income to the tune of about $330-billion, or 0.4 per cent of the global economy, to consumers from producers.

"Starting from the summer level of around $110 per barrel (for Brent), the fall to $60 is worth some $1.65-trillion, or 2 per cent of world GDP," he said.

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"A further decline to $40 would lift these figures to $2.3-trillion and 2.8 per cent, respectively. The net boost to global demand will be smaller than these numbers, as oil consumers are spenders too, but it should still be substantially positive."

So, as Mr. Jessop put it at the time, why worry?

Well, even lower prices could drive countries with heavy debt burdens and slim growth forecasts "over the edge," he said.

"The disinflationary impact of a further drop to $40 would not be that much greater than that from the slump which has already taken place," he added.

"However, we already think it likely that euro zone inflation will turn negative in the coming months, and $40 oil would pretty much guarantee that result."

The greater the plunge, the greater the threat of "deflationary spirals."

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Mr. Jessop's other concern is that the losers in a lower-price environment could be "hit so hard" that the impact mutes the benefits to those who win from lower crude.

"This fallout might be economic (as oil producers cut spending and investment), financial (as some are forced to default or sell assets), or even geopolitical (as regimes dependent on high oil prices look for distractions from social unrest at home)."

Of course, he wasn't talking about any Canadian regime, but the impact would hit home given our reliance on crude.

Calculations from Toronto-Dominion Bank suggest economic growth of 1.8 per cent in each of this year and next, down from a base case of 2.3 per cent and 2.2 per cent, assuming WTI were to be driven to $40 by a "supply shock" in the first half of 2015.

"The bigger impact is on income growth in the country, as nominal GDP growth would drop to a mere 0.5 per cent next year before rebounding to 3.4 per cent the following year, but this is 2 percentage points and 0.9 percentage points lower than in the base case," said TD chief economist Craig Alexander.

"Employ­ment growth would be slower, resulting in the national unemploy­ment rate returning to 7 per cent," Mr. Alexander added, with inflation sliding to 0.8 per cent this year and then perking up to 2.1 per cent in 2016.

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This would also see Ontario lead provincial economic growth, at 2.7 per cent in 2015 and 2.4 per cent in 2016, while Alberta "slows to a virtual standstill," he said.

"If oil falls to $40 for a sustained period because of weakening global demand, the negative impact on the economy would be more severe."

Douglas Porter, chief economist at BMO Nesbitt Burns, forecast today that $40 oil would shave a further 0.3 to 0.5 of a percentage point from Canada's growth this year, meaning the economy would expand at a pace below 2 per cent, in line with Mr. Alexander's projections.

Chief economist Avery Shenfeld said it's all about the average price, and why.

"If oil averaged that low, there would likely be a weak global demand story behind it, such as recessions in Europe or disappointments in the U.S.," he said.

"In that kind of environment the Canadian economy might be in the 1.5-per-cent range for real GDP growth. Merely touching $40 wouldn't mean much."

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Separately, senior economist Sal Guatieri, Mr. Porter's colleague at BMO, noted today how the oil rout has already found its way to Calgary's housing market.

According to the latest numbers, home sales in the heart of the oil patch fell 7.5 per cent in December, and new listings "gushed" higher by almost 42 per cent.

"While benchmark prices still rose 8.8 per cent year-over-year, the pace has leveled off and looks to slow sharply, if not turn negative," Mr. Guatieri said.

Camilla Sutton, chief currency strategist at Bank of Nova Scotia, projected a further drop in the Canadian dollar should crude plunge to $40.

The loonie fell by 2 per cent and 2.5 per cent the last two times that crude tumbled by about 20 per cent, Ms. Sutton said.

So a drop to $40 could mean a further 2-per-cent decline in the currency, bringing it to about 83 cents.

"It would actually be a little bit worse than that," she said.

Because the further crude drops, the worse it looks for Canada, given the reduced investment and probable lost production.

White House vows veto

President Barack Obama will veto Republican efforts to force immediate approval of Keystone XL, the White House said today just before Republicans introduced legislation approving the pipeline.

But White House spokesman Josh Earnest made clear the president's plans to veto the effort because it represents an attempt to seize control of the decision-making, not because Mr. Obama has made a final decision to reject the project, The Globe and Mail's Paul Koring reports from Washington.

"There's an important principle at stake here," Mr. Earnest said. "There is a well-established process for evaluation of transportation infrastructure projects like this that cross international borders to determine whether the completion of those projects is in the clear best interests of the United States."

That process can't be completed while TransCanada Corp.'s Keystone XL route application remains in doubt – facing a legal challenge in Nebraska by ranchers and other landowners. A Nebraska Supreme Court decision could come as soon as this Friday but could also be weeks away.

Only then, said Mr. Earnest, can the ongoing State Department assessment of Keystone XL resume. Once it is complete, Mr. Obama will make a decision.

How bad will Greece get?

So far, the flare-up in Greece appears to be contained.

The question now is where it goes from here, and what it could mean for the broader euro zone.

As our European correspondent Eric Reguly reports, the currency union is in far better shape than when the Athens debt crisis first reared its ugly head.

But markets are nervous in the run-up to the Greek election, and the lead of the anti-austerity Syriza party.

Here's what some analysts are saying today:

"Over all, there is at best mixed evidence this morning of contagion across asset classes stemming from Greek/euro concerns but that will probably intensify over the duration of the month … I fear the market aftermath of the Jan. 25 vote. It is looking increasingly likely that Syriza will form the next government and with that the risks of going into default and sparking more material contagion risk are going up." Derek Holt, Bank of Nova Scotia

"The Greek situation hasn't gone away and it will hang over the market for the foreseeable future. The election in Greece could be the beginning of the end of the euro zone and traders are scurrying to the safe havens of gold and government bonds. Banking stocks are being battered for fears that the political uncertainty in Greece could turn into a region-wide financial crisis. If the left-wing Syriza party gain power in Athens it could be the first domino in the euro zone to fall." David Madden, IG

"German and French leaders have hinted that they are prepared to let Greece leave the 19-nation monetary union if the country balks at austerity and reform measures, as the poll-leading Syriza party intends to do if it wins a majority in the Jan. 25 election. So far, contagion to other peripheral euro area bond markets remains contained, suggesting a 'Grexit' might not have a material long-lasting effect on U.S. markets or the economy. However, anti-austerity regimes are also gaining popularity in Spain and Portugal, where elections will be held later this year." Sal Guatieri, BMO Nesbitt Burns

"After years of political fighting and billions of euros in bailout money it could be that we are closer to a Greek exit than we have ever been as the greatest power in the euro zone now see the exit of Greece from the euro as a viable option … German Chancellor Angela Merkel has almost voiced her support for a move by Greece after years of being totally against any move to break up the euro zone, saying that she now believes that the euro zone could cope with an exit. With elections called for later this month and populist parties who are opposed to further euro zone-led austerity measures leading the way in the polls it is almost a case of who will act first. Will it be Greece's people voting for no euro zone or will the [European Central Bank] blink first and call for the change." James Hughes, Alpari

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