Potash vs. Oil Sands, a policy dichotomy

With news of PetroChina International Investment Co. readying itself to be the sole owner of the undeveloped Mackay River in-situ project ~40 km Ouest of Fort McMurray, the question of Canada’s foreign takeover review scheme merits further attention than it’s been getting of late. The deal triggered by Athabasca Oil Sands Corp. owner of the remaining 40% stake not owned by PetoChina will lead to the latter buying the stake for an estimated $680 M Canadian dollars.

Now for those not aware, the Mackay river flows into the Athabasca river which itself flows into Athabasca Lake which outflows through Slave river and through a few national parks until the water system reaches its final destination in the North Arctic Sea. All that to say that the in-situ development finds itself in quite the environmentally sensitive region. Now, a foreign state owned company will be an environmental guarantor of the region. Why am I kicking up a fuss about this exemple of foreign Oil Sands ownership and not say, Statoil’s not far off operations. Is it maybe because Norwegians are something of green nuts while China is competing with Russia for most pollutated country in the World, maybe. Is it because Statoil is known for trying to maximize the return on Norwegian taxpayer dollar while PetroChina and other chinese primary ressource companies are known for attempting to distort markets for the gain of the motherland, probably.

The reason I raise this issue is because I personally disagreed with the Canadian federal government’s decision to oppose the BHP Billiton bid for Potash Corp of Saskatchewan, while I opposed the federal governments regulatory decision to allow PetroChina’s majority ownership and operating of Canadian natural ressource exploitations. So who between the Conservative government of Canada and myself is wrong while both hold seemingly inconsistent and paradoxical opinions? I’ll let you answer that once I’ve finished exposing my case.

Let’s start by raising a point that would seem to show inconsistency on behalf of the Government. The regulatory approval of PetroChina’s deal with Athabasca raised the feds no problem because it could only increase competition for the supply of Canadian Oil and increase the competition for demand in Canadian labour, win-win right? The decision to oppose the purchasing of Potash Corp. was one of opposing increased supply of Canadian potash (one of the worlds most popular agricultural fertilizers). Sudden policy shift or backtrack? Not really, here is a situation of two weights, two measures. Both ressources are considered ‘Strategic Ressources’ in Canada. However one is treated as a free market good while the other one is considered as legitimate producer collusion product, a.k.a. a cartel worthy product. In light of the Governments recent abolition of the Canadian Wheat Board monopoly, their previous decision to protect the Saskatchewan potash cartel seems strange. Or maybe it doesn’t after all Alberta (where most of the Oil Sands are) is traditionally pro-market whereas Saskatchewan is traditionally left-leaning. Does lobbying by Provincial governments really explain a difference in policies. The real difference lies behind the fact that Oil production is extremely geographically atomized, thus it’s trade is quite competitive, potash on the other hand can only be found in a few regions of the World. One of the regions richest in potash is western Canada. Essentially the difference is that Canadians can get away with cartel-esque behaviour in potash but not in oil.

This demonstrates that if the conservatives in Canada are not consistent in their policies it is not for lack of reflection of pragmatic economic solutions, simply inconsistent and un-ideological ones. So we actually have two very different decisions made for pragmatic reasons. That just means I will have to raise two different objections!

Regarding the BHP Billiton takeover of Potash Corp. blocking. The main reason for blocking the takeover was because of the aforementioned cartel in potash. In Saskatchewan the export of potash outside of NAFTA is undertaken by a corporation called Canpotex (short for Canadian Potash Exporters), which effectively operates as a cartel controlling over 30% of the worlds potash production. BHP would have broken up the cartel in order to produce at capacity and sell freely. The Provincial governments belief was that it would have lost royalty revenue from the drop in per unit profit. Whether the government would have actually registered a drop in revenues following the decision is aside from the point. It represents a stark intervention into markets which should be unacceptable in a modern democracy. A short list of consequences include, higher fertilizer prices for such poor farmers as those found in India or Africa, damaged Aussie-Canadian relations, reduced attractiveness of Canada as an investment destination and countless other immeasurable and unimaginable damages to Canada and the World.

Unfortunately one bad decision tends to follow another in politics, let’s now turn our attention to the regulatory decision that paved the way for a foreign power’s state owned corporation buying up ressources in Canada. As a fervent classical-liberal and staunch internationalist, I am all in favour for increasing developing nations and less than democratic nations participation in Global trade. I think there is no better way to improve their economic and socio-political prospects, than permitting them to join the WTO and partake in international trade. Although these beliefs push me to reflexively accept international takeovers, I believe there are a few caveats needed to smooth things out. First problem is the lack of reciprocity. Chinese companies benefit from industrialized nations legal systems when investing in the West. Western multinationals do not benefit from such property protection when doing business in China. Let’s help China, let’s show them some tough love by telling them they can buy our ressources when our companies will get some respect in China. An important issue is that state owned corporations do not necessarily seek to maximize profits as much as maximize socio-economic and political priorities of their governments, whereas public companies always seek to maximize profit for their shareholders. From the economic literature I believe it is most evident to all that maximizing profit in a competitive environment is the key to increasing global welfare.

It is hence my view that the Government’s Foreign Takeover Review process should be aimed at differentiating between those companies who will seek to maximize profit through increased productivity, the real key to increased wealth, and those companies who may have alternate motives such as shifting wealth from one geography to another (like state owned corporations). Blocking foreign State’s proxies from buying our ressources and encouraging public companies to invest is good policy. Let’s hope that when the Canadian federal government finishes its review of the takeover process that will be the ensuing conclusion.