Could Carney Be Wrong

Mark Carney the Bank of Canada’s Governor has been one of the most vocal central bankers Canada has yet seen. He intervenes in the media often and repeatedly about some of his worries concerning the health of the Canadian economy. His chief worries revolve around three subjects broadly vassal to the theme of international competitiveness. The first of his worries is that Canadian manufacturers aren’t using the combination of low interest rates and high Canadian dollar to invest in cheap foreign capital goods. His second ”keep me up at night” issue is that of Canadian businesses’ low exposure to rapidly developing countries and over exposure to stagnant markets. His third problem and dilemma is that of rapidly escalating household debt load. While not explicitly saying so, Carney’s fear is that Canada will increasingly ressemble the pre-crisis US; a debt saddled and internationally uncompetitive economy. Commentators have been doing a fair bit of wall painting by noting that Canadian Households are second in indebtedness in the G7+BRIC category. Economic nationalists regularly plaster business newspapers with doomsday scenarios foreshadowed by Canada’s perennially lagging productivity. Alright, let’s breath… wait a minute and think about this.

It is a little funny that Carney’s most recent musings about Canadian manufacturers and business came less than a week after the latest numbers of the Canadian Survey of Business Investments . The survey’s data reveals that new capital expenditure (read fixed capital formation) is expected to run at the fourth highest clip in over two decades, only failing to surpass the dotcom bubble fueled investment mania at the turn of the millennium. One would have thought that the BoC Governor would have taken note of such a survey. It seems that manufacturers were just waiting for the Goldilocks’s moment of low interest rates, easy lending conditions and better international sales prospects to start investing. A traditional Canadian conservative way of doing business, one that served Canada’s financial sector well during the crisis. In any case with Chairmen Bernanke of the Fed’s pledge to keep interest rates near zero through 2014, Canadian manufacturers probably expect their low rates + high currency combo to persist a while longer, so what’s the big rush to invest? As noted above business investment isn’t our central bankers only preoccupation. Our aversion to developing nations export markets tick’s him off as well.

When it comes to Canadian exporters’ choice of export markets, I propose that bureaucrats who have never managed anything other than a hyped up economic think tank (say a central bank) or sovereign debt investment bank department (say at Goldman Sach’s), stay out of real businessmen’s head. When Mark Carney proposes exporters start doing business with emerging markets, which ones is he talking about? Is he talking about Russia? a country where ex-KGB mafia is indistinguishable from the oligarchical business class and where the contracts you sign are only as good as the prevailing mood of the Kremlin? Is he talking about Brazil? Brazil a country where if your company spills a drop of oil in the ocean your executives risk loosing their passports and being prosecuted by only thinly-veiled xenophobia infected local prosecutors. Maybe, he meant China? That very same country that will toss Rio Tinto executives in jail just to squeeze a better deal out of those executives’ native country and supposed business ally Australia. International business is a tough business in itself, why don’t we let those entrepreneurs that have first hand experience decide when they want to abandon the largest markets of the World (Japan, US and Europe) for some of the riskiest markets on Earth.

We’re left to examine the remaining entry on the Carney sin list. Our profligacy and lack of thriftiness. So Canadian household debt levels have jumped to never before seen heights. With interest rates at a historic low this is to be expected. The number however only gives an incomplete picture of Canadian households’ health. Household average debt says nothing about the distribution of that debt. In the US, the subprime crisis became a crisis because debtors were at or not far away from the bottom of the income distribution. In Canada most of the ongoing issuance of debt is for mortgages, and less than 9% of Canadians have less than 10% equity in their homes. If we add the two together it says that on average wealthy Canadians are the one’s increasing their average debt load, since homeowners that own a decent amount of home equity are generally well off. Something which makes sense as most wealthy Canadians do not need to indebt themselves to live, whether they choose to invest when their financing costs go through the floor is a whole other ball game. Maybe commentators want to come out with more data on the distribution of indebtedness in Canada before alarming national rate strategist.

The accusation that Canada is uncompetitive however is rooted in other numbers than simply those on indebtedness or exposure to this or that foreign market; it is rooted in the fact that on an aggregate level more Canadian workers working longer hours have not been producing as much. The US has seen its per worker productivity increase faster than Canada’s for much of the last few decades. Something that we should all be worried about in normal circumstances. Canada is not living in normal circumstances. Canada is in the midst of reallocating some of its labour and capital resources to a sector where it actually holds a comparative advantage. For the last few years Canada’s workers, corporations, entrepreneurs and capital markets have been investing time and effort in developing its valuable natural resources. There are very long lags between payoff and investment for some of Canada largest most capital intensive projects. The Business Investment Survey forecasts fixed capital formation in the resource extraction industries will beat the record set last year by $13 Billion dollars. For now this money creates little revenue, profits or exports but 3, 5, 10 years down the line expect to see GDP jump. Building Oil Sands steam assisted gravity drainage mines takes years, likewise BHP Billiton’s Jansen potash mine wont be operational for years. The Canadian mining landscape is only now starting to bubble, when it starts to boil those productivity numbers we spend so much time worrying about will become jokes. All in all Canada is shifting. The economic landscape we now see will not be the same. Mr Carney rest easy, Canada’s households and entrepreneurs have got this one under control.

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

Sunshine Oilsands Chinese IPO Plans

Hong Kong Chinese trade gateway

Sunshine Oilsands Ltd. a canadian based oil sands venture with chinese backing is preparing an IPO launch in Hong-Kong. The Financial Times reports that the Calgary based early development stage company is readying its IPO with backing from chinese institutional investor backing.

The float is estimated to reach as much as $600 Million representing 25% stake in the company. Last March Sunshine raised $230-million from investors including China Life Insurance and Bank of China Group Investment.

Traditionally primary ressource Canadian based companies float their stocks on the Toronto Stock Exchange TSX and Toronto Venture Exchange where a deep pool of ressource analysts and investors exists. Most of the Worlds Material stocks are concentrated in the TSX, London Stock Exchange and Australian Stock Exchange. The Hong-Kong stock exchange is not recognized as a particularly ressource oriented stock market. The reasons for a chinese based issuance have not been divulged by the company. The Financial Times in its article suggests the decision was influenced by Chinese government backed companies.

For those having read my previous posts know I take issue with Canada’s regulatory stance onforeign takeovers and investments. I had previously raised the issue of foreign entities not seeking profit should not be permitted to acquire companies in Canada. I would like to expand that statement to include purchases or investments at large in undeveloped ressources. The logical business decision here would have been to issue stock where it can be most precisely valued by experienced professionals to obtain the best price. Here in what can only be described as a nationalistic move to develop its internal financial markets, China has pressured its semi-private subsidiaries into picking Hong-Kong over Toronto.

Is the company going to be free from future interference? Will the destination and price of the oil produced by Sunshine going to be determined by profit seeking incentives and the Market place or by chinese polit-bureaucrats?

zài jiàn

Pipeline a-bust?

Reports from Reuters and the Wall Street Journal claim that the White House is about to refuse permitting of the Keystone XL pipeline from Alberta to Texas. The reports also state the White House will permit TransCanada to reapply for the permit to a redrawn pipeline avoiding the Nebraska aquifers. Okay unsurprising decision by the Obama administration on this one. Realizing that some of Obama’s donors and staunchest supporters are tree-hugging, scorched-earth theorists hippies, the administration seems to be speeding up the regulatory process in preparation for the up-coming presidential election later this year. Mind you these are un-confirmed reports so far, yet reports we are sure at the very least represent Obama’s views regarding hydrocarbons in general.

Now the public reason for such a potential refusal would be to save the Nebraska aquifers which serve as the tap and drinking water of millions of inhabitants of the region. The political reason for such a refusal is the belief that Canadian Oil Sands, or Tar-Sands as the green mouvement calls them, are the dirtiest oil sources one can find and developing them imperils the global environment. Let’s adress these two issues shall we.

Regarding the fear of contaminated water and soils in Nebraska. I’ll admit that I understand it. I wouldn’t particularly like a big oil pipeline crossing my backyard either, especially given Enbridges pipeline leak in Michigan last year and the Gulf of Mexico Macondo well spill calamity of 2010. Now that would be my gut feeling reflexive reactionary thoughts right there. However my brain would eventually kick in and my train of thought would go somewhere along the lines of: Hey! no pipelines were involved in the GoM oil spill, serious case of apple and oranges comparisons going here. What of the Enbridge pipeline spill in a Michigan river? Well it was one of the first large scale spills in a long time to actually get reported on, why so? Apparently a little research reveals that pipelines have better safety records than airplanes do, who in turn have better safety records than cars. As I eye my own vehicle suspiciously after these thoughts, my mind turns back to the issue at hand. The over 3000 km Keystone XL project was only slated to increase the total US pipeline gride by ~1%. Much of the US pipeline grid is old and in need of replacing. Furthermore it is overstretched capacity is running at maximum on much of the grids routes. I am only speculating here but wouldn’t it be better if we  switched some of the oil flow from old decaying infrastructure to the most up to date technology in pipeline safety design? I’ll let the engineers answer that one but the answer seems quite self-evident.

Now assuming for a moment that the project never goes forward, what would be some of the easily identifiable consequences. One of the gravest consequences from an American perspective that I can think of would be increased dangers of oil spills. What was that? you say. Well, the most rapidly expanding production of oil in North America isn’t actually the Oil-Sands right now, it’s actually the Bakken oil fields in North Dakota. How does the oil from ND make its way to US refineries in the Mid-West or Texas you may ask yourself, the answer is by train. Oil from that region which could have been transported by Keystone XL or an attachment to the latter, is transported by freight-train hauling. If you’d ever looked up the safety record of freight-trains on Google you’d be a hell of a lot more worried than by pipeline trust me. Spilling petrochemicals from freight-train accidents are virtually a yearly norm in Canada where our two main freight-train companies have some of the best safety records in all of the Americas. But hey! suit yourself Obama. (In his defence it’s probably the EPA’s fault for being unable to study collateral benefits and consequences of their decisions)

Now let us look at the issue from a more global perspective, something the greenies claim to do. If Keystone XL doesn’t go through the most likely outcome will be the permitting of Enbridge’s Northern Gateway pipeline to the Pacific port of Kitimat. The result of that wold be simply increased CO2 emissions on a global level. How do we get to that conclusion? Firstly the oil will have to be transported to China or other regional industrial countries by super-tankers. No matter how efficient they’ve become over the years they don’t beat pipeline in terms of efficiency. Especially given that the distance travelled will be twice as long. Now we talk about the US being the biggest polluter in the world and China running a close second. A little detail forgotten quite often is that of efficiency per emissions. For virtually the same consumption of energy and pollutant emissions the US generates roughly three times more output (wealth), let’s not even broach the per capita quagmire. So Canada will have to send  the crude oil to be refined in some of the least environmentally efficient refineries in the world.

All this to say how can the best intentions in the world (save the planet from apparent environmental Armageddon) always lead to a worse outcome (more spills, more emissions and more deadweight loss: less global wealth). Mister Obama please think wisely before caving in to your green lobby please.

P.S. Since I now have to go to class I’ll leave aside talk of Canada’s Oil sands being all that dirty a point I’ll refute next time!

P.P.S. Leave comments, argue, get mad, it’s the internet there are thankfully no fist-fights to be had here 🙂