Uber And The False Hopes Of A Sharing Economy

Regulating Ride-Sharing: New York May Be The Model For The Future

Writing On The Wall: London and Vancouver Moving In A Similar Direction

At its inception, Uber touted itself as a shining example of the “sharing economy” described by Jeremy Rifkin, in this now famous book, The Third Industrial Revolution. As time has passed the reality has been radically at odds with a sharing economy.  Among the many issues that have emerged has been the legacy of Uber’s ugly corporate culture, secret apps used to confound regulators, and to intimidate journalists, a Justice Department investigation of illegal practices, including 200 Uber employees conspiring together to attack Lyft’s operations. The proverbial chickens have come home to roost, as municipalities around the world have begun to regain control of transportation policy within their jurisdictions, and the inflated valuations of these unicorns begin to deflate.

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READ MORE: Wharton Newsletter: Regulating Ride-Sharing: New York May Be The Model For The Future

From the Wharton Newsletter/Podcast, August 14, 2018

The largest market for Uber, Lyft and other ride-hailing app companies — New York City — last week had its first successful attempt at regulating the growth of the nascent industry. On Wednesday, the New York City Council passed a series of bills, notably one that places a one-year moratorium on the issue of new for-hire vehicle (FHV) licenses. Other bills establish minimum wage levels for ride-hailing service drivers; require FHVs to submit data on ridership with penalties for failure to do so; and create driver-assistance centers to provide counseling services.

New York City had little option to act, especially after a similar move by Mayor Bill de Blasio fell apart following intense lobbying by Uber. Increasing road congestion by cars was the biggest contributing factor to the passage of the bill capping new licenses, corroborated by a decline in subway ridership. The number of FHVs in the city had grown from 65,000 in 2015 to about 130,000 currently. Uber is the biggest gainer, as shown by its almost hockey-stick growth in ridership.

New York City took the right steps to regulate the FHV industry, according to Wharton professor of operations, information and decisions Senthil Veeraraghavan. “This is the right way to go,” he said. “This is a great experiment that we’re [witnessing].”

“They had to do something,” noted Wharton management professor John R. Kimberly. “This is part of an obviously much deeper story … and the timing seems to be right.”

The move to ensure that drivers receive a minimum pay of $15 an hour after they cover expenses is also significant, said James Parrott, director of economic and fiscal policies at the New School’s Center for New York City Affairs. He had worked on an extensive study for the city’s Taxi and Limousine Commission that looked at the ride-hailing sector and its growth, and in particular its impact on driver earnings.

Kimberly, Veeraraghavan and Parrott discussed the implications of the legislative actions governing New York City’s for-hire vehicle industry on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

“This is the right way to go. This is a great experiment that we’re [witnessing].”–Senthil Veeraraghavan

Incentive to Improve

The establishment of a minimum pay for drivers is an important incentive for ride-hailing app companies to increase the utilization of drivers’ time, said Parrott. Drivers currently have a passenger in the car for only about 36 minutes of every hour, which means they don’t have a paying passenger for 42% of their time, he added.

Up to now, Uber’s business model has been “to flood the streets with cars,” since the firm gets a commission based on every fare, Parrott said. “There’s been no incentive for them to better utilize the drivers’ capital,” he added. “Keep in mind; this is an industry where the capital investment in the rolling stock – the cars – is entirely put up by the drivers. The pay standard gives them an incentive by allowing them to pay a little bit less if they make better utilization of the drivers’ time.”

The city will use the year ahead to study congestion levels in the city and find ways to redress that, including through congestion pricing mechanisms. Last week’s actions took a step in that direction with a surcharge on cabs below 96^th Street ($2 per ride for medallion trips and $2.75 for ride-hailing app cabs). It will also allow the city to monitor how the pay standard works out, and how the ride-hailing app companies make better utilization of drivers’ time, Parrott said.

“Even if you increase utilization by 10 percentage points – from 58% to 68% – you would only increase average wait times across the city about 20 to 30 seconds,” said Parrott, citing his study’s findings. “We sense that most people can live with that.”

According to Parrott, the number of Uber trips in the city increased 100% in 2016 and 70% in 2017. Going forward, he said that figure could probably grow another 40% over the next year, “even without any additional cars on the street – just from increased efficiency.” Those increased efficiencies could come from a variety of quarters, including urging part-time drivers to go full-time and recruiting some of the drivers from the non-app services, such as the traditional livery car segment that has no minimum pay standards.

“Uber and the drivers are on both sides of the story,” noted Veeraraghavan. Riders want low waiting times, which can be achieved with more vehicles. But drivers want fewer drivers, because that would allow them to get better pricing, he said.

“Granted it might have been done a lot sooner, but it seems to me that at least in the city of New York there’s a real, serious effort to get their arms around the problem.”–John Kimberly

Worsening Congestion

Parrott said New York City had first started talking about capping Uber and Lyft cars in 2015, drawing “heavy pushback” from the ride-hailing industry at that point. Between then and now, the number of trips using ride-hailing apps has skyrocketed to 600,000 a day, which is more than five times the level in 2015, he noted. A 2016 study by the mayor’s office proposed several remedial measures including those to reduce congestion, improve air quality, protect drivers’ interests and enhance passenger experiences.

Parrott said that while the city bears some responsibility for not acting sooner on the unbridled growth of the FHV industry, it faced a different climate when it attempted that in mid-2015. Uber at the time controlled 90% of the market in the city as opposed to 66% now, he pointed out. Suicides by six cab driversalso highlighted the “economic crisis” and changed public opinion in favor of the changes, he said.

“Theoretically speaking, there’s always a gap between what firms will want to optimize and what society wants to optimize,” said Veeraraghavan. “And it’s hard for individuals to see what’s optimal for this society.” However, as city residents have begun seeing the impact of the FHV industry’s growth — including on public transportation ridership numbers — they now have had a better understanding. “So we have a redo from 2015 to 2017 … and we’re seeing better support for this.”

“Granted, it might have been done a lot sooner, but it seems to me that at least in the city of New York there’s a real, serious effort to get their arms around the problem and to figure out how to solve it,” said Kimberly.

Congestion in New York City has worsened in recent years with not just the influx of cabs, but also other vehicles “providing instant service for a variety of needs that people believe they have,” including delivery vehicles, said Kimberly. “The density of tourists on the sidewalks is so great it spills over into the street – that slows down traffic and makes it hard for cars,” he added. The option of levying congestion pricing is being seriously considered also at the state headquarters in Albany, he noted.

At the same time, “the growth of FHVs has meant that there’s much better transportation access in the outer boroughs, so the city doesn’t want to diminish that newly available service,” said Kimberly. “And yet the city also has a great interest in making sure that the drivers are able to remain economically viable to meet their expenses and to earn a decent living.” Higher wages would also enable drivers to work fewer than the 10-12 hours a day they now put in, he added, and that would have safety benefits as well.

“If they can show that they have stability and regulatory certainty in their largest market in the U.S., that will give investors a lot more certainty….”–James Parrott

Congestion pricing will also help fund investments in maintaining and upgrading the city’s aging subway and public bus system, Parrott said. The decline in mass transit ridership is not just because of the growth of the FHV industry, he noted; commuters are turning away because of “under-investment and under attention to adequately maintaining the mass transit system.”

Uber’s Leadership Challenge

The changes also highlight a “leadership challenge” for Uber, said Kimberly. “They have hundreds of markets around the globe, and each market has its own political configuration, and its own way of doing business,” he noted. “When you think about the challenges of operating an enterprise like Uber on a global basis with all the local idiosyncrasies that need to be taken into account both economically and politically, it’s a really interesting [problem].”

Uber, which is currently valued at about $62 billion, is said to be preparing for an initial public offering of its stock next year. “If they can show that they have stability and regulatory certainty in their largest market in the U.S., that will give investors a lot more certainty about the potential prospects for the company,” said Parrott.

Uber’s impact on employment is also large, Parrott noted. Uber drivers are not legally considered employees, but if they were to be treated as full-time equivalent (FTE) employees, Uber would be the largest private-sector employer in New York City, with about 35,000 FTEs, he said. “[Ride sharing] has become a huge enterprise in New York City, and it and it’s not what people usually think of as gig work where you are doing this to supplement other income. We found that 80% of the drivers bought their cars mainly for the purpose of providing transportation services, and two thirds of the drivers are full-time drivers.”

Parrott noted that both Uber and Lyft embraced the pay standard proposal. But Kimberly thought they had little option in the matter. “I don’t think it’s by accident that they’re embracing the pay standard,” he said. “Left to their own devices, they probably would not have done that. But there’s been so much social criticism – and valid criticism – of their models that they’ve really had no choice.”

The Panama Papers and Thomas Piketty

UPDATE May 5, 2016:  National Public Radio’s Takeaway news analysis program, today interviewed James Henry, senior adviser at the Tax Justice Network and a senior fellow at the Columbia Center for Sustainable Investment. He’s examined World Bank and IMF data over the last 45 years, and has found that kleptocrats have taken $12.1 trillion from developing countries. James’ interview specifically discusses the foreign dark money driving the housing markets in Miami, New York and Vancouver, providing further confirmation of my points.  Audio of the interview begins at 19:45 in the podcast below.

I am sharing this because of its particular relevance to the ongoing revelations about connections between global tax evasion shell companies and real estate markets: London, Miami, New York City, San Francisco and Vancouver.

Reblogged from Foreign Affairs

How the Leak May Transform Politics

By Henry Farrell

The Panama Papers—the massive collection of leaked documents from Mossack Fonseca, a Panamanian law firm that helps set up offshore shell corporations—have already had political consequences. Iceland’s prime minister, Sigmundur David Gunnlaugsson, resigned after the leak revealed that he had partly owned an offshore firm. David Cameron, the British prime minister, is facing criticism over an offshore company that his father set up. In Brazil, many of the people connected to the country’s unfolding corruption scandal appear to have held offshore shell companies set up by Mossack Fonseca. And in Russia, Sergei Roldugin, a cellist who is a close friend of Vladimir Putin, appears to control assets of over $100 million. Roldugin hasclaimed that this fortune is the result of donations from Russian businessmen to help buy expensive musical instruments for poor students. Clearly, classical music has some very generous friends among the Russian business elite.

At first glance, the Panama Papers leak looks a lot like other big leaks, such as the classified documents that U.S. Army soldier Chelsea Manningprovided to WikiLeaks or the former NSA contractor Edward Snowden’s trove of information on international surveillance. Like those leaks, the Panama Papers highlight the hypocrisy of prominent politicians and officials. The leak also recalls a series of less glamorous data leaks on the customers of secretive Swiss and Liechtenstein-based banks, which put pressure on governments to crack down on tax havens and allowed some authorities to pursue cases against tax evaders. Although few may remember, WikiLeaks began with a similar leak from the Swiss bank Julius Baer.

Yet the best comparison—and the best guide to what may happen next—is not to Snowden or Julian Assange but to Thomas Piketty, the famous French economist. Piketty’s book, Capital in the 21^st Century, has been interpreted as an economic history, as a grand economic theory and a gloomy political prognosis. Yet few have paid attention to its closing pages, where Piketty lays out the political bet that underlies his research program: that people simply do not know the full extent of economic inequality, and that politics would be transformed if they ever found out.

Piketty’s research and his political program are motivated by a belief that the true extent of economic inequality is invisible. Everyday statistics simply cannot capture the extent to which the rich are different from ordinary people. They are not designed to. Common techniques of measuring inequality, by comparing the income or wealth of the top ten percent of the population to the rest, do not capture how much richer the top one percent is than the top 10 percent, or how much richer the top 0.1 percent is than the mere one-percenters. As the American political commentator Chris Hayes observed in Twilight of the Elites: America After Meritocracy, inequality is like a fractal in that it gets deeper and stranger the further one investigates it. One reason why Piketty’s research has influenced other economists is that it figures out clever ways, such as using university endowment funds as a proxy for hidden fortunes, to measure the consequences of inequality despite imperfect data.

Piketty’s aspirations may yet be fulfilled, but only if the Panama Papers create a new, self-sustaining politics that demands ever more information on the ways in which wealth is being hidden.

But the problem goes beyond deficient datasets. The truly rich have the means and the incentives to hide their staggering wealth. Piketty’s collaborator, the Berkeley economist Gabriel Zucman, estimates that $7.6 trillion is hidden in offshore arrangements. The London real estate market has been reshaped by oligarchs from Russia and elsewhere who use shell corporations to park their capital in a safe and predictable economic system. Activists run Hollywood-style bus tours of the houses of the new kleptocracy.

YVES HERMAN

An activist shows fake banknotes during a demonstration outside the European Commission headquarters after the Panama Paper revelations, in Brussels, April 2016.

As the economist Branko Milanovic argues in his new book, Global Inequality, these trends are reshaping economic and political development. It used to be that economic elites had an interest in building up the rule of law in their own country, if only to protect their own property. Now they can just transfer the loot to London or New York, where “nobody will ask where the money came from,” Milanovic writes. Financial globalization is building a world similar to the one depicted in William Gibson’s grimly satirical science fiction novel, The Peripheral, in which the truly rich are unaccountable to anyone but themselves.

Piketty wants to map this hidden world and destabilize it. He believes that ordinary people simply don’t understand the extent of wealth because they aren’t able to comprehend it. There is thus an urgent need to generate new information that will help people understand how important wealth is, and who has it. This explains, for example, why Piketty wants a utopian global tax on economic capital. It’s not because such a tax would be a complete solution to inequality but because the tax would generate reporting requirements, and hence information on who holds which assets, allowing democracies to hold a “rational debate about the great challenges facing the world today” and who should pay for them.

Piketty’s perspective provides a different—and more fundamental—way of thinking about the long-term consequences of the Panama Papers. The Panama leaks, measured in gigabytes of information, are far larger than the Snowden and Manning ones. Yet compared with the true size of the offshore sector, they are less a leak than a trickle. Mossack Fonseca is not the only law firm setting up shell corporations to help people avoid taxes and scrutiny. And shell corporations are just one small part of a much larger system designed to hide people’s wealth.  The document release—although significant—is no substitute for the kind of detailed and comprehensive information that a global tax arrangement might provide.

The truly rich have the means and the incentives to hide their staggering wealth.

Still, the leak brings the world one step closer toward better information on global wealth. The United Kingdom, for example, has come under pressure to stop protecting its tax haven dependencies. France and Germany are calling for a blacklist of tax havens, which might be cut off from the SWIFT financial messaging network, a global network that financial institutions use to transmit information securely, if they do not make their ownership structures completely transparent.

STIGTRYGGUR JOHANNSSON / REUTERS

People demonstrate against Iceland’s Prime Minister Sigmundur David Gunnlaugsson in Reykjavik, April 2016.

Perhaps more important, in some countries the revelations are creating a new popular politics around tax avoidance and fraud. The Panama Papers have spurred massive public protests in Iceland and political furor in the United Kingdom. They are connecting technical questions of tax evasion and tax avoidance to everyday politics by identifying well-known politicians, officials, and celebrities who benefit from complex arrangements. Some of Piketty’s hopes for popular debate are being realized.

Even so, the effects have been sporadic. The revelations have had little popular impact in the United States, where no public figures have been identified as taking advantage of Mossack Fonseca. They have also yet to lead to substantial public outcry in countries such as Russia or China, where there are limited channels for public dissent. If this is indeed a first step toward identifying the true extent of global wealth inequality, it is only that.

Piketty’s aspirations may yet be fulfilled, but only if this release of information creates a new, self-sustaining politics that demands ever more information on the ways in which wealth is being hidden. This is a tall order given the complexities of international politics and the incentives for individual states to cheat, but the world is significantly closer to it now than anyone would have predicted three weeks ago.

Barclays, Others Expand FX Probe to Salespeople (The Wall Street Journal Europe, Nov 20 2013, Page1)

Barclays, Others Expand FX Probe to Salespeople
By Chiara Albanese, Katie Martin and David Enrich
The Wall Street Journal Europe
Nov 20 2013

LONDON—Banks including Barclays PLC that are enmeshed in the global investigation into potential manipulation of foreign- exchange markets are looking into the possible roles played by their salespeople, according to people familiar with the…read more…

Tech Tags: The Wall Street Journal Europe newspaper Front Page

See my earlier posts on this story:

Read more: Biggest Global Banks face new foreign exchange fraud probe

Read more: Manipulation of global currency trading suspected by Swiss investigators

Read more: Crony capitalism, UBS, LIBOR, Phil Gramm and the Junk Bond King

Cisco System’s Vision For Online Education Is Emerging Now

Google is driving the deployment of Gigabit Fiber to the Home (FTTH), which holds the promise of orders of magnitude higher bandwidth and dramatically lower cost.  But people have asked the question, “what will people do with all of this massive bandwidth?” Having lived with Moore’s Law for most of my career, I smile in bemusement. I can remember a fear that the 256Kb flash memory chip was “too big.” The truth is that if you were asked 20 years ago to predict how we would be using the Internet today, I doubt many would have accurately predicted our current global village.  The few exceptions would be visionaries like Dave Evans, Chief Futurist at Cisco Systems, who authored a Huffington Post article, providing an excellent prediction of how FTTH may impact just one aspect of the future: education.  Read below:

Read more: How Gigabit fiber to the home will transform education way beyond MOOC’s

Now we are seeing actual glimpses into that future,  and how Cisco Systems vision for the future of education is already emerging.

VIDEO: Could your child could benefit from a 24/7 tutor?

The Invasion of the Online Tutors

They teach via chat windows and digital whiteboards

By

SUE SHELLENBARGER

Nov. 12, 2013 7:21 p.m. ET

In the world of on-demand tutoring, kids can log on 24/7 to sites with problems or questions. But how well do these really work? Sue Shellenbarger reports and mother Peggy Bennett shares her own experience. Photo: Justin Clemons for The Wall Street Journal.

It’s a nightly dilemma in many households: A student hits a wall doing homework, and parents are too tired, too busy—or too mystified—to help.

Ordering up a tutor is becoming as easy for kids as grabbing a late-night snack. Amid rapid growth in companies offering online, on-demand tutoring, students can use a credit card to connect, sometimes in less than a minute, with a live tutor. Such 24/7, no-appointment-needed services can be especially helpful to students with tight budgets or tight time frames or those in remote areas.

“All of a sudden, the world opens up to them,” says Michael Horn, executive director of education for the Clayton Christensen Institute, a San Mateo, Calif., education and health-care think tank.

That said, the quality of on-demand scholastic support can be uneven, and the catch-as-catch-can approach to enlisting a tutor may not be best for struggling students who need sustained help. Sessions can bog down on technical glitches, and language barriers can cause problems on sites that rely on tutors from abroad.

Chloe Friedman of Dallas uses Tutor.com for homework help between dance classes. Justin Clemons for The Wall Street Journal

Prices, ranging from about $24 to $45 an hour (and often prorated to the minute), are cheaper than what many skilled tutors charge in a student’s home. And parents and students say the quick homework fix can ease stress and make evenings at home more peaceful.

Whenever Peggy Bennett of Dallas tried to help her 13-year-old daughter, Chloe Friedman, with her eighth-grade physics and algebra homework, “we’d always end up bickering,” Ms. Bennett says, with Chloe often objecting that the teacher did it differently. “It was a lose-lose situation.”

Chloe says she was skeptical when her mom helped her sign up last month on Tutor.com, a New York City-based provider of on-demand tutoring. But after she logged on one evening for algebra help, a tutor, identified only by a first name and last initial, responded within a minute. Chloe says she was guided to figure out the answers, using text chat and an interactive “whiteboard” that displayed their writing and calculations on a shared screen. After hearing nothing but typing for about 10 minutes, Ms. Bennett says she heard Chloe yell from the other room, “They told me I did a good job!” Ms. Bennett adds, “That was all that she needed.”

Chloe, who takes classes in dance, acting and singing, also uses Tutor.com on hersmartphone at the dance studio between classes. She says she recently got help solving a math problem in less than 10 minutes.

Enlarge Image

Math Mentoring on the Fly: A text chat between Chloe Friedman of Dallas and her Tutor.com tutor. ‘He didn’t give me the answer,’ she says. ‘He went through it with me like my teacher would at school.’ Justin Clemons for The Wall Street Journal

Ms. Bennett now lets Chloe use her credit card to extend her Tutor.com subscription whenever she needs help. So far, Chloe has spent $79.99 for up to two hours of tutoring. Tutor.com subscribers pay once a month for time used; unused minutes can be carried to the next month.

Most sites enlist moonlighting or retired teachers, college professors or professionals with tutoring experience; most offer scheduled tutoring in addition to on-demand sessions. The most common users are middle- and high-schoolers, and college students taking basic courses.

About 95% of the 1,200 tutors available on Bangalore, India-based TutorVista are recruited from India, says C.S. Swaminathan, president of TutorVista, which was recently acquired by the London-based publishing and education companyPearson PSON.LN -0.76% PLC. Tutoring sessions with its mostly U.S.-based customers are usually held via whiteboard and text chat, to reduce potential language difficulties, Mr. Swaminathan says. Still, students say, language barriers can sometimes slow communication, and grammar glitches can occasionally creep in.

Saira Sultan, an Irvine, Calif., college student, says the TutorVista tutors she taps several times a week for help with her English and math courses are pleasant and knowledgeable. She recently uploaded a business letter she had been assigned to write for her English class, and the tutor marked errors in the text and texted instructions on correcting verb tenses, rearranging paragraphs and rephrasing sentences to read more smoothly, Ms. Sultan says. The one-on-one edits have helped her learn to write more clearly, she says.

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The drawback, she says, is that communicating via text chat “takes a lot of time.” Mr. Swaminathan says TutorVista can provide audio-chat sessions if scheduled in advance.

As with in-person tutors, knowledge levels and teaching skills can be uneven. Stephanie Dobbs of Los Angeles says one InstaEDU tutor who responded to her daughter Sarah’s request for calculus help “didn’t know the material at all.” But Sarah, who uses the site two to three times a week, says it has so many tutors that switching is easy, and the convenience outweighs any drawbacks.

An InstaEDU spokeswoman says on occasion, tutors can halt billing while they figure out the material, or students can be given refunds or a different tutor.

James Nickerson agrees that on-demand tutors need winnowing. When he turned to InstaEDU recently to help his 16-year-old daughter Emma with an advanced-Latin class (they couldn’t find a skilled Latin tutor in their hometown of Stevens Point, Wis.), he didn’t turn Emma loose online. Instead, he sat beside her while she chose a tutor, urging her to bypass a math major who claimed a sideline expertise in Latin in favor of a New York University grad student majoring in classics. He also helped her schedule sessions, to provide continuity with the same tutor.

Related

• Work & Family Mailbox: Readers’ Questions

On-demand tutoring is just one of a growing array of online homework-help options. Khan Academy, one prominent example, offers interactive tutorials in addition to educational videos. Chegg.com provides answers to homework questions, while crowdsourcing sites such as StudyBlue enable students to share study guides, notes and flashcards.

Some school districts pay New York City-based TutaPoint and other online-tutoring sites to provide free access to students; about 2,000 libraries let students use Tutor.com without cost. Free access to tutoring sites can help level the playing field for students from all income groups—if they provide trained, qualified tutors, conduct background checks and safeguard users’ security, says Nora Carr, president of the National School Public Relations Association, a professional group.

But the sites can also tilt the playing field in favor of kids with plenty of money for tutoring help, creating pressure for other students to have a tutor too. Parents should monitor kids’ use of the sites and track fees, which “can get very expensive very quickly,” says Ms. Carr, who is chief of staff of the Guilford County Schools in Greensboro, N.C.

Yamini Naidu says online tutoring last year through InstaEDU helped her earn As in advanced-placement classes at her Beaverton, Ore., high school. Now a freshman at Yale University, Ms. Naidu works eight hours a week as an InstaEDU tutor.

She says that students who come to sessions with a list of questions or assignments to work on—and who block out time to concentrate—benefit most. Text chats occasionally stall, though, if students are distracted or start multitasking; Ms. Naidu tries to re-engage students by asking questions to spark their interest, she says.

Bharathy Chummar of Plantation, Fla., turned to the online tutoring site Eduboard last summer to help her 15-year-old son Prajwal research possible science-fair topics. Prajwal had a 45-minute audio and text chat with a tutor, who is also a physician, about an idea involving bacteria. The doctor later sent him a research summary with links to more studies.

Online tutors “fill a huge gap that can never be filled by parents,” Ms. Chummar says.

Write to Sue Shellenbarger at sue.shellenbarger@wsj.com

Alberta Bitumen Bubble And The Canadian Economy: Industry Analysis Case Study

Alberta Tar Sands In Their Indigenous State 

The Canadian media (CBC, Globe & Mail, Canadian Business) have been buzzing with analyses of Alberta Premier Alison Redford’s  pronouncement last month that the “Bitumen Bubble,” is now crashing down on the Alberta economy, and potentially the entire Canadian economy. The Alberta budget released last Thursday, March 7, acknowledged a multi-Billion dollar deficit from this year, and “even larger declines in the next several years,” due to forecasts for significant price decreases for “Western Canada Select“ (WCS), the market term for the Alberta oil sands. This is contrasted with “West Texas Intermediate“ (WTI) which is also known as the standard for “light sweet crude,” which is much cheaper to refine.   Canadian Finance Minister Jim Flaherty echoed the impact of reduced oil sands revenue on the federal budget, by warning of significant cutbacks in federal spending as well.  The impact of this sudden change in the prospects for the Canadian petroleum industry and for government oil tax revenues, will likely also have serious implications for the BC economy, jobs growth, business investment, consumer spending: essentially the Canadian economy as a whole will suffer.

As an Industry Analysis case study for Management students, how did this happen, why was it not foreseen?  Why weren’t foresighted  policies put in place, and what are Alberta and Canada‘s strategic options now?

The June 25th, 2006, CBS News 60 Minutes report by senior CBS News Correspondent Bob Simon, can be taken as a convenient departure point for this analysis.

Video (1min 52 sec.) CBS 60 Minutes: 6/25/2006: The Oil Sands

The so-called “proven reserves” of oil in the Alberta oil sands are estimated to be 175 Billion barrels, second only to Saudi Arabia’s estimated 260 Billion barrel reserve. In the CBS video, Shell Canada CEO, Clive Mather estimates that the total may be as large as 2 Trillion barrels, or eight times that of Saudi Arabia. The CBS 60 Minutes report at the time in 2006, was considered so positive, that it was eventually shown in an endless loop in the foyer of Canada’s Embassy in Washington D.C., at Canada House in London, and elsewhere around the World.   The Alberta oil sands were seen as the harbinger of a great new era of Canadian economic progress and wealth.

Since that time a variety of external market factors, and long-standing failures of Canadian government policy have converged like Shakespeare’s stars, to turn this Pollyanna scenario into the national disaster it has become for Canadians.

Perhaps the single most important point in this discussion is that Canada has historically been a natural resource based economy, which has led to complacency and neglect of investment in innovation.  Innovation is the most important determinant of business competitiveness and economic prosperity in a world of global markets and rapid technological change.  Canada’s overall investment in R&D in science and technology has been below the OECD average for decades, and continues to decline year to year.  As a consequence, Canada has also fallen sharply behind the United States in productivity.  Essentially, there has been a “robbing Peter to pay Paul” mentality in Canada with regard to investment in the future of the Canadian economy. So long as we can simply dig a hole and ship the rocks or oil overseas we are doing just fine, thank you very much!

In a serendipitous coincidence, the current events in Venezuela have provided a parallel to the petroleum industry issues in Canada. Yesterday, the HBR Blog Network published a post by Sarah Green. Ms. Green interviewed Francisco Monaldi, Visiting Professor of Latin American Studies at the Harvard Kennedy School. Professor Monaldi is a leading authority on the politics and economics of the oil industry in Latin America.

During the HBR Blog interview, Professor Monaldi referred to the “resource curse” of Venezuela, also citing Canada and Saudi Arabia as suffering from the same malaise. Venezuela has done all the wrong things under Chavez, and consequently the Venezuelan economy is in shambles. Monaldi cited Chile, who also had a natural resource boom, but are creating a national stabilization fund by not putting all of the money back in the economy at once, a counter cyclical policy almost unheard of in Latin America. A similar scenario of reinvestment in innovation has occurred in New Zealand, whose government has sought to reduce its vulnerability to over-reliance on natural resource exploitation.

A Canadian Broadcasting Corporation interview March 7th on The Current with oil industry expert Robert Johnston, and CBC business columnist Deborah Yedlin, revealed that the Venezuelan Orinoco crude is actually very similar to Alberta WCS, but it does not require massive destruction of the land. Transportation routes to U.S. refineries designed to deal with extra heavy crude have been up and running for years.  The U.S., despite the political tensions with Venezuela, is currently the single largest customer for Venezuelan extra heavy crude.  In The Current interview yesterday, both Johnston and Yedlin admitted that the Alberta oil industry was ” very uneasy”  about their competitive situation vis-a-vis Venezuela.  Yedlin also underscored Canada’s “resource curse” and the failure to diversify Canada’s investment in innovation and technology.

Listen to the CBC interviews: http://www.cbc.ca/thecurrent/episode/2013/03/07/the-future-of-venezuelas-oil-industry-and-what-it-means-for-albertas-oil-patch/

Alberta oil sands, by contrast, are completely land locked, and the Alberta producers are in the midst of an unsavory political wrangle over two pipelines, which has brought undesired attention to the other problems with Canadian bitumen.  Without at least one pipeline, the Alberta oil sands industry is in a questionable state. Should the United States elect not to approve the Keystone XL pipeline to the Gulf of Mexico, Canada’s only viable remaining option would be to sell the oil to China.  Some Canadians are taking the position that Canada “should” sell the oil to China.  The Harper government is now hypersensitive to China’s interest in the oil sands. Others have suggested that we should refine the oil ourselves, but it is cheaper to send it to Texas than to build refineries in Canada. According to Yedlin, Canada is now locked into the urgent need for the pipelines, with no other options or strategy.

The argument can be made that Canada should have been implementing policies like those in Chile or New Zealand years ago, anticipating the boom and bust of the global petroleum market, and socking away money to deal with it.

The most recent 2012 OECD Economic Survey of Canada also serves to underscore the urgent need to change our national policies with regard to natural resource exploitation and investment in innovation to improve our performance in global productivity.

As the oil boom and high value of the loonie have pushed wealth westward, Canada’s productivity growth has been relatively flat in recent decades, and has actually dropped since 2002. Meanwhile, as the OECD observes, productivity growth south of the border has risen by about 30 per cent in the last 20 years — a gap that is causing Canada to lose competitive ground.

“Canada is blessed with abundant natural resources. But it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and an equitable distribution of the fruits of growth,” study author Peter Jarrett, head of the Canada division at the OECD Economics Department, said in a press release.

Meanwhile, yesterday, Friday, March 8th, the Globe & Mail published a scathing criticism of federal Natural Resources Minister Joe Oliver for characterizing the Alberta oil sands industry as the “environmentally responsible choice for the U.S. to meet its energy needs in oil for years to come.”  G&M Journalist Tzeporah Berman wrote, “At a time when climate change scientists are urgently telling us to significantly scale back the burning of fossil fuels, having a minister promote exactly the opposite really does feel like being told that two plus two equals five.”

Our most respected national journal simply reached the end of its patience with Canadian government “doublespeak.”  Every independent study, including one from the U.S. Department of Energy, has found that the oil sands are one of the World’s dirtiest forms of oil, producing three times more emissions per barrel produced and 22 per cent more greenhouse gas emissions than conventional oil (when their full life cycle of emissions, including burning them in a vehicle are included).  The problem is simple: the massive “energy in versus energy out” equation simply does not work for oil sands.  Large amounts of natural gas and water are required simply to prepare the bitumen for transport to refineries. Yet our government continues to wave its arms in a desperate attempt to divert attention from the facts, rather than to deal with the facts. One would think that our national government by now would have a reality-based strategy to deal with major economic and political issues of this scale.

This discussion has barely touched on the opposition to the two pipelines, Keystone XL and Enbridge Gateway, attempting to move the landlocked tar sands out of Alberta. This is a strategic market issue that should have been addressed years ago, but was not.  The thorny issues of both pipelines are now a rod for Alberta’s own back. Considering the market competitor Venezuela, with comparably unattractive “extra heavy crude,” but having existing transport, the prospects for Alberta are not favorable, and it has finally sunk in for Alberta oil executives.

The long awaited U.S. State Department Draft Environmental Impact Assessment (DEIA) on the Keystone XL pipeline, released early this month, was written by oil industry consultants which have raised significant concerns of a serious conflict of interest in their findings. The Executive Summary of the State Department DEIA took a decidedly neutral position, saying that the pipeline would have “no effect” on the development of the Alberta oil sands. But buried in the report were findings that argue against the need for the pipeline.  The recent developments in Venezuela and the increasing energy independence of the United States were not factored into their findings.

The DEIA specifically evaluated what would happen if President Obama said “no” and denied Keystone XL a permit. It concluded that not building the pipeline would have almost no impact on jobs; on US oil supply; on heavy oil supply for Gulf Coast refineries; or even on the amount of oil sands extracted in Alberta. If these findings are accurate, then one must ask why it is necessary to build the Keystone XL pipeline.

So in conclusion, how could the Canadian federal government not have foreseen this calamity, and prevented it?  Could it have been the giddy euphoria of the 2006 CBS 60 Minutes report?   The only best solution, investing government oil revenue into innovation and technology R&D, may no longer be a viable option.

In such a situation, what would you do to address this crisis for the Canadian economy?

Michael Lewis And Liar’s Poker

Liar’s Poker is one of those books one of your friends strongly urges you to read..  A short little book, the recommendation I got from Bill Howe, my Canadian Intel colleague in Europe, was that it was a hilarious read.  And so it was. It reads like Animal House.  It is all, well mostly, a true autobiographical story of Lewis’ time at Solomon Brothers in London in the mid 1980’s, at the very beginning of the mortgage securities trading business… As you may also know, Solomon Brothers went out of business long before 2008. I was running my own computer systems integration business in London at the time, exploiting Maggie Thatcher‘s deregulation of the financial markets (where have we heard that before?), selling into the City of London, and to the BBC, British Telecom, ICI and a host of other corporate customers.  So I had a bit of an insider’s grasp of what was going on in The City. It made reading the book all the more interesting.

Looking back, Liar’s Poker is now seen as something of a harbinger of things to come, a foreshadowing of darker clouds, a “canary in the coal mine.”

Lewis also recently wrote The Big Short, his analysis of the 2008 financial meltdown. Liar’s Poker has been described as a comedy, and The Big Short as a tragedy, which seems very apt to me, if you heard Michael discuss both books.  Many may know Michael best for his recent success with Moneyball.

With all that has happened, Liar’s Poker finally appears to be near getting the nod from Hollywood to be made into a film.  It is long overdue.