Wealth Denial by Environmental Regulation

I just finished watching a report on the future of nuclear power plants’ safety design on the Wall Street Journal’s website. The short report got me thinking about the regulatory processes for large energy infrastructure projects building in the western world. Here are a quick few facts I looked up while thinking about this issue. No new building of nuclear power plants since 1974 in the US (although two new permits emitted recently), no major oil refineries built since 1976 in the US and recently the permit refusal of the Keystone XL pipeline from Alberta to Texas. In Canada the public backlash against Enbridge’s Northern Gateway pipeline from Alberta to the Pacific Coast, the permit refusal of the Prosperity copper and gold mine in British Columbia’s North  and talk of shutting down Quebec’s only nuclear power plant are symptomatic of the pernicious decease that is “Not in my Backyard Syndrome”. In Germany and Japan plans to scrap nuclear energy altogether are further signs of NIMB syndrome’s widespread contagion. Such thinking isn’t exactly illegitimate, I mean  who wants an oil spill in their backyard, a stinky refinery next door or a Fukushima disaster anywhere? Are these knee jerk reflex reactions to energy projects really the way we should be approaching the issue of energy production and distribution?

In the case of Alberta the current discount between a barrel of Edmonton Ligh oil to a barrel of NYMEX traded West Texas Intermediate is approximately 9 dollars which itself trades at a 19 dollar discount to ICE traded Brent Crude. So because of a lack of cheap oil distribution infrastructure Alberta oil is on average being sold at a 15% discount to world oil prices. At a production clip of 1.6 million barrels of oil a day, off the top of my head, that comes out to a loss of exports of 11 billion dollars a year at current prices. That means that those opposed to building Northern Gateway aren’t shy about about reducing Canadian GDP by almost one percent every year. In other words Canadians are on average close to 1% poorer because of environmental concerns over one single project! This is just one example of the cost of overzealous environmentalism.

What is worrying isn’t the current state of affairs of environmental regulation. It is its unambiguous radicalization. While many believe regulation serves the goal of expertly minimizing environmental risk while minimizing lost economic gain, this is no longer so. The political and regulatory processes of environmental protection have definitely taken a drastic left turn. Increasingly, the politics of environmentalism and the regulation of the environment are no longer the purview of experts and professional civil servants. The main actors are now politicians, green lobbyists and special interest groups. Prudent regulation has given way to public and populist regulation. While studies tend to prove that environmental damages due to the energy sector are on a secular downtrend (here is just one somewhat dated study http://bit.ly/xGE2Yw), opposition seems to be growing daily. While recent NASA images (http://natpo.st/xjCIbN, http://1.usa.gov/azQJcY) have shown that the Alberta Oil Sands aren’t an environmental “game-over” by a long shot, the environmental polemic has been ferocious over Keystone XL.

Public concern over nuclear safety has pushed two of the worlds greatest energy consumers (Japan & Germany) to shy away from nuclear. No research, no inquiries, no commissions just decisions. Everyone understands the casual observers reticence with pursuing nuclear energy in Japan following the Fukushima crises, however one still expects rational voices to emerge to remind the Japanese that nuclear is environmentally clean (not around Fukushima of course), statistically safe and that the real culprit is not the energy source itself but its criminally lackadaisical handlers. Germany which produced 22% of its power in 2010 from nuclear now wants to shut down all facilities by the next decade and replace them with wind and solar power. Simply laughable. As nuclear production went down in Germany, energy imports from France’s nuclear energy sector jumped. So much for reducing nuclear dependence eh! Japan itself is now importing record amounts of fossil fuels to power its economy, registering its first structural trade deficit in a long time. When Osaka’s air looks like Beijing’s and people start dying from smog related diseases, I wonder if nuclear will seem so bad?

Turning back to Canada it is worth noting where environmentalism gets its grassroots. Sure all big cities have their Occupy Wall Street semi anarchic enviro-fanatics, but it is a particular faction of opportunistic greenos that are of interest to me. First Nations are the cream of the crop in terms of pesky regulatory sabotage of energy projects. In Quebec their grievances (real and fictitious) serve only  the purpose of extracting further economic gain from the feeble hearted politician. Countless hydroelectric projects have been stalled, reassessed given up or simply passed over because of the threat that is the local band council. In British Columbia, First Nations people along the cost pay some convincing lip service to environmentalism. However the slew of LNG plans, aluminum smelting plants and pre-existing pipelines indicate that their real concern is getting the right price. Such overt and unapologetic environmental regulation blackmail should be unacceptable in a social democracy. Delaying and depriving an entire country of significant wealth just to get a fatter piece of the cake is simply put selfishly immoral. It is a pity the expression social parasite was already invented, as Canadian first nations and opportunistic environmentalist the World over epitomize the term.

Here’s hoping someday energy production and distribution can return to a place of civil and rational thinking and debating, so that we may actually do some real environmental good and not kiss so much wealth àdieu

Debunking McGuintonomics

So last week Alison Redford the Premier of Alberta asked Ontario’s Premier Dalton McGuinty to show some public support for the Oil Sands, currently facing a heap of criticism from environmentalists. No one knows what Mrs. Redford was expecting as a response, in any case the answer sounded a little bit like “If Alberta didn’t exists Ontario would be better off”. His conclusion was based on the popular belief that the Canadian dollar had become a ‘PetroDollar’ and that it’s meteoric rise had crushed Ontario’s manufacturing base. Now because McGuinty and his family seem to be career politicians we will pardon his ignorance of economics and try to fill some of his knowledge gap.

So McGuinty thinks a high dollar is bad. First mistake. Very broadly speaking a relatively high currency is a mark of wealth. Basically the World wants to buy our stuff more than we want to buy the worlds stuff. Okay so foreigners recognize that we are a nice country worth investing in and who’s products look alright, but if you still believe a high currency is killing jobs in manufacturing well that would seem like a mightily expensive accolade. However Ontario is not innocent in this. Unfortunately the worlds appreciation of fiscal virtuousness is quite lagged to reality by a couple crises. So when Canada starts supplying the World with all our AAA rated (and less well rated but ‘made in Canada’ stamped debt) in an environment where some of the deepest debt markets are not nearly as risk free as they used to be, obviously foreign investors gobble it up our debt greedily. What is the effect of that? well essentially the world values our debt more than our goods and services, so when that appetite for financial assets inflates the Canadian dollar, our exports will suffer (see the US current account deficit/reserve currency status/trade deficit quagmire). Now since Alberta doesn’t have any debt and hasn’t issued some for a while they can’t be guilty on that front. So who is exactly contributing to our soaring Looney from a financial assets trade perspective? The feds are! Alright since much of the stimulus package was spent in Ontario (G8/G20 summit spending, carmakers bailouts etc, etc…) maybe McGuinty should move to accuse the second biggest  new Canadian debt emitter… oh wait a minute, that’s Ontario, oops. So McGuinty’s spending problem is partly to blame for a high Canadian dollar not Alberta. Okay in all fairness international financial assets trade is not the only contributing factor to currency mouvements so let’s move on.

The gist of McGuinty’s argument was that Albertan energy sales are increasing the value of the CAD to the detriment of manufacturing. So he is implying that their is a a negative correlation between manufacturing exports and energy exports. That data does not support this claim one bit! When looking at seasonally adjusted and 2002 chained dollars (inflation adjusted) Canadian total energy product sales have risen by 24% since 2000 and total manufacturing (sum of statscan’s industrial goods, manufacturing and equipment, automotive parts categories) have gone down by 14% over the same periode would imply the Premier is right, However when looking at proportions the increase in energy sales is only of 40 billion yearly versus a 125 billion drop for total manufacturing. So basically if there actually was a one-for-one tradeoff between energy and manufacturing exports energy would only be responsible for ~32% of the decline. However when one looks at balance of trade in those subcategories and asks what percentage of net energy exports accounts for the decline of net manufacturing exports the answer is a measly ~4.5%. So to reiterate if there even was causality (which is not proven) it would be weak at best. Now that we’ve lain waste to McGuinty’s foolish idea that Alberta is guilty for his province’s hard times, let’s bring up one more point.

Ontario is now a have-not province. Ontario received upwards of 3 Billion dollars last year from equalization transfers. Alberta paid in over 8 Billion into equalization. Bottom line Ontario got some money from Alberta to pay for its social services. Methinks McGuinty owes Redford and Albertans an apology, don’t you?