Alberta Bitumen Bubble and The Canadian Economy: Revisiting My Industry Analysis Case Study

Bitumen prices are low because the province has ignored at least a decade of warnings.

Over five years ago now, March 11, 2013, I published this mayo615 blog post on the Alberta bitumen bubble, and the budgetary problems facing Alberta Premier Alison Redford, and the federal Finance Minister Jim Flaherty at that time, both of whom were surprisingly candid about the prospect for ongoing long-term budgetary problems for both the Alberta and Canadian national economies. Fast forward five years to today and the situation has essentially worsened dramatically.  The current Alberta Premier Rachel Notley is facing another massive budget deficit, just as Alison Redford predicted years ago, and was forced to call a new election. My most glaring observation is that despite years of rhetoric and arm-waving, almost nothing has changed. Meanwhile, the Canadian economy is on the precipice of a predicted global economic downturn which could easily become a global financial contagion.

READ MORE: Alberta Bitumen Bubble And The Canadian Economy 

Today, the Tyee has published an excellent article detailing how and why this trainwreck of Alberta fossil fuel-based economic policy developed, and has persisted for so long without changing course.

Source: Alberta’s Problem Isn’t Pipelines; It’s Bad Policy Decisions | The Tyee

In 2007, an Alberta government warned that bitumen prices could eventually fall so low that the government’s royalty revenues — critical for its budget — would be at risk. Photo via the Government of Alberta. 

 

The Alberta government has known for more than a decade that its oilsands policies were setting the stage for today’s price crisis.

Which makes it hard to take the current government seriously when it tries to blame everyone from environmentalists to other provinces for what is a self-inflicted economic problem.

In 2007, a government report warned that prices for oilsands bitumen could eventually fall so low that the government’s royalty revenues — critical for its budget — would be at risk.

The province should encourage companies to add value to the bitumen by upgrading and refining it into gasoline or diesel to avoid the coming price plunge, the report said.

Instead, the government has kept royalties — the amount the public gets for the resource — low and encouraged rapid oilsands development, producing a market glut.

With North American pipelines largely full, U.S. oil production surging and U.S. refineries working at full capacity, Alberta has wounded itself with bad policy choices, say experts.

The Alberta government and oil industry is in crisis mode because the gap between the price paid for Western Canadian Select — a blend of heavy oil and diluent — and benchmark West Texas Intermediate oils has widened to $40 US a barrel.

Some energy companies have called on the government to impose production cuts to increase prices.

The business case for slowing bitumen production was made by the great Fort McMurray fire of 2015.

The fire resulted in a loss of 1.5 million barrels of heavy oil production over several months. As a result, the price of Western Canadian Select rose from $26.93 to $42.52 per barrel.

Premier Rachel Notley has appointed a three-member commission to consider possible production cuts, something Texas regulators imposed on their oil industry in the 1930s to help it recover from falling prices due to overproduction.

Oilsands crude typically sells at a $15 to $25 discount to light oil such as West Texas Intermediate. It costs more to move through pipelines, as it has to be diluted with a high-cost, gasoline-like product known as condensate. According to a recent government report, it can cost oilsands producers $14 to dilute and move one barrel of bitumen and condensate through a pipeline.

And transforming the sulfur-rich heavy oil into other products is more expensive because its poor quality requires a complex refinery, such as those clustered in the U.S. Midwest and Gulf Coast.

But the growing discount has cost Alberta’s provincial treasury dearly because royalties are based on oil prices.

Earlier this year, an RBC report pegged the loss at $500 million a year, while a more recent study estimates the losses could be as high as $4 billion annually.

While a few oilsands companies such as heavily indebted Cenovus say they are losing money due to the heavy oil discount, others are making record profits and say no market intervention or change is necessary.

The difference is those companies heeded the decade-old warnings and invested in upgrades and refineries to allow them to sell higher-value products.

Canada exports about 3.3 million barrels of oil a day. About half of that is diluted bitumen or heavy oil.

And the current dramatic price discount has divided oilsands producers into winners and losers.

The winners invested in upgrades and refineries, while the losers are producing more bitumen than their refinery capacity can handle or the market needs.

During Alberta’s so-called bitumen crisis, the three top oilsands producers — Suncor, Husky, and Imperial Oil — are posting record profits.

All three firms have succeeded this year because they own upgraders and refineries in Canada or the U.S. Midwest that can process the cheap bitumen or heavy oil into higher value petroleum products.

Imperial Oil, for example, boosted production at its Kearl Mine to 244,000 barrels in the most recent quarter but refined and added value to that product.

As a result, its net income for the quarter doubled to $749 million.

CEO Rich Kruger said that the collapse in bitumen prices was not a concern.

“Looking ahead, in the current challenging upstream price environment, we are uniquely positioned to benefit from widening light crude differentials,” he stated in a press release.

Suncor also reported that most of its 600,000-barrel-a-day production is not subject to the price differential because it upgrades the junk resource into synthetic crude or refines heavy oil into gasoline.

In its most recent business report, Husky reported a 48-per-cent increase in profits as cheap bitumen has fed its refineries and asphalt-making facilities.

The Alberta government knew this was coming.

A technical paper on bitumen pricing for Alberta Energy’s 2007 royalty review warned the province about the perils of increasing production without increasing value-added production.

“Bitumen prices, when compared to light crude oil prices, are typified by large dramatic price drops and recoveries,” it noted. Between 1998 and 2005, “bitumen prices were 63 percent more volatile than West Texas Intermediate prices,” it said.

Two things are apparent from the bitumen (BIT) and West Texas Intermediate (WTI) price series shown above. First, bitumen prices, when compared to light crude oil prices, are typified by large dramatic price drops and recoveries. In fact, over the period shown, bitumen prices were 63 percent more volatile than WTI prices. Image from 2007 Alberta government report.

The analysis added that “for bitumen to attract a good price, it needs refineries with sufficient heavy-oil conversion capacity.”

The province’s push to develop the oilsands quickly increased the risk, the report said. “Price volatility for bitumen, especially the extremely low prices that have been witnessed several times over the past several years, is the most obvious risk.”

And the report noted that increasing bitumen production posed “a revenue risk for the resource owner” — the people of Alberta. When the differential widens, Alberta makes less money on its already low royalty bitumen rates.

Companies can compensate for the price risk by buying or investing in U.S. refineries; securing long-term pipeline contracts; investing in storage or using contracts to protect them from price swings.

Many oilsands producers, including Suncor, Imperial, and Husky, have lessened their vulnerability to bitumen’s volatility by doing all of these things.

But the provincial government is more exposed to price swings, the report said.

“For the province, the variety of risk mitigation strategies that can be pursued by industry is generally not available. Therefore Alberta is absorbing a higher share of price risk, particularly where royalty is based on bitumen values.”

In 2007 Pedro Van Meurs, a royalty expert now based in Panama warned the government that its royalty for bitumen was way too low in a paper titled “Preliminary Fiscal Evaluation of Alberta Oil Sand Terms.”

Van Meurs noted that upgrading considerably enhances the value of bitumen and would generate more revenue for the province.

But that did not appear to be the policy the government was pursuing, warned Van Meurs in his report to the government.

Low royalties “raise the issue whether it is in the interest of Alberta to continue to stimulate through the fiscal system such very high-cost production ventures,” wrote Van Meurs, a chief of petroleum developments for the Canadian government in the 1970s.

Charging higher royalties would not only slow down production and avoid cost overruns in the oilsands but also encourage “upgrading projects with higher value-added opportunities,” he wrote.

But Alberta succumbed to sustained oil patch lobbying in 2007 and ignored Van Meurs’ advice.

As a result oilsands royalties remained low and there was little incentive for companies to add value or build more upgraders and refineries.

In 2009 the province’s energy regulator said in an annual report on supply and demand outlooks that low bitumen prices were a direct consequence of overproduction.

Planned additions for upgrading and refining would resolve the problem in the future.

But after the 2008 financial crisis, planned upgrades in Alberta did not materialize.

With no provincial policy encouraging value-added processing, the industry took a strip-it-and-ship-it approach on bitumen and depended solely on pipelines to deal with overproduction.

Robyn Allan, an independent B.C. economist and former CEO of the Insurance Corporation of British Columbia, says the 2009 report by the energy regulator clearly shows the Alberta government knew the risks of overproduction.

“It won’t matter how many pipelines are built if oil producers continue to increase the amount of low-quality product they pump from the oil sands. Pipelines do nothing to improve quality and with new regulations on sulfur content, the world is telling us the downward pressure on heavy oil prices will only get worse,” said Allan.

In 2017, only 43 percent of the bitumen produced was actually upgraded in Canada while 57 percent was shipped raw to U.S. refineries.*

Sorry Alberta, BC Will Not Pay for Your Bungling

READ MORE 

As bitumen prices plunged this year, U.S. refinery margins jumped to record levels.

According to a Nov. 6 article in the Wall Street Journal, Phillips 66, a major buyer of cheap Canadian bitumen, ran its refineries at 108 percent of capacity and was “earning an average $23.61 a barrel processed there.” Profits jumped to $1.5 billion, an increase of 81 percent over last year.

“U.S. refining has really gone from being a dog to being a fairly attractive business model,” one consultant told the Wall Street Journal. “I don’t think that’s going to change any time soon.”

Another beneficiary of Alberta’s no-value-added policy has been the billionaire Koch brothers.

They own the Pine Bend refinery in Minnesota, which turns more than 340,000 barrels of Canada’s crude into value-added products every day.

A widening of the price discount of heavy oil by just $15 adds an additional $2 billion in windfall profits a year for Koch Industries, one of the most powerful companies in North America.

The risks of Alberta’s policy of shipping raw bitumen to U.S. refineries was outlined again during the province’s 2015 royalty review, which like the 2007 report, resulted in little change due to successful industry lobbying.

In 2015, Barry Rogers of Edmonton-based Rogers Oil and Gas Consulting warned the government that low royalties for bitumen simply encouraged the industry to export the heavy oil to U.S. refineries with no value added in Canada.

“By not charging a competitive fiscal share Alberta is, in fact, subsidizing the industry. This gets government directly into the business of business and removes the benefits of market-priced signals — leading to reduced innovation, higher costs, reduced competitiveness, a transfer of economic rent from resource owners to industry and reduced economic diversification.”

Rogers added that the current policy might benefit a few powerful companies but was “a disaster for the overall industry, and, therefore, a disaster for Alberta — both for current and future generations.”

Risk of Global Financial Contagion Is Growing

Wall Street is currently basking in a vigorous “Trump rally,” with the Dow rising more than 1000 points since the election.  The rally is driven by analysts who are salivating over the future prospect of sweeping deregulation of many markets. But there is also a chorus of concern from dozens of financial experts, that the global financial markets are “whistling in the graveyard,” acting in a classicly irrational manner. I am reminded of the often cited 19th Century classic, “The Madness of Crowds and Extraordinary Popular Delusions.” Experts  cite a host of issues both financial and geopolitical, among them Trump’s intention to exit TPP, NAFTA, and the COP21 Climate Agreement. Combined with rising geopolitical tensions with China, North Korea, and Iran, a perfect storm of global uncertainty and instability is forming.

REBLOGGED FROM MAYO615, February 18, 2016

What is “Global Financial Contagion”?

 

Global Financial Contagion, is a well-understood phenomenon among economists, but less so among the general public.  Financial contagion refers to “the spread of market disturbances — mostly on the downside — from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows.” Financial contagion can be a potential risk for countries who are trying to integrate their financial system with international financial markets and institutions. It helps explain an economic crisis extending across neighboring countries, regions, or in the worst case, the entire global economy.

An examination of economic history suggests that the effects of financial problems in one country rippling through other countries may have begun in the 18th Century with colonialism, with the mother country’s economy having large direct impacts on the colonies.  Today, in Marshall McLuhan’s global village, and with the World Wide Web, a financial hiccup in Asian markets late on our Sunday night, can turn into a major global financial crisis in Europe and North America in less than 24 hours.

At the moment, the number of risk factors that contribute to a major financial contagion is at an all-time high. The following article from the Associated Press details some of these global economic issues, but ironically also omits additional other issues contributing to the anxiety in markets.

The attached article does place China at the top of its list but fails to mention a number of additional issues contributing to global worries about China. The first is the Chinese leadership itself, led by Xi Jinping.  Concerns have increased regarding the overall management of the Chinese economy. These issues include the lack of faith in economic numbers released by China, the poor management of the unrest in the Shanghai financial market, and the $1 Trillion flow of money out of China by wealthy Chinese, which has had a dramatic impact on the Vancouver housing market. Add to this, the neo-Maoist tendencies of the current PRC leadership and its saber-rattling in the South China Sea. There are other disturbing domestic Chinese economic issues, but I will not list them here. The ultimate risk, understood only too well by the Chinese leadership is the risk of social unrest. Harvard professor Niall Ferguson has said that in his view nothing has really changed in 2000 years of Chinese history. The Mandarin class still rule at the expense of the peasants.

Glaring out at me, the AP analysis omits any specific mention of military and social unrest. This week it would seem that North Korea and Kim Jong Un have risen to the top of concerns, but not far behind were the satellite photographs of ground-to-air missiles installed by the Chinese on the Spratley Islands in the South China Sea. Syria has been described as an order of magnitude more complex than the crisis in the Balkans in the 1990’s. With the U.S., Russia, Turkey, NATO, and a host of other smaller players, it would take only a small spark, like another pilot burned alive, to ignite the entire region.

The AP article mentions the oil economy only in the context of emerging markets. In many economists view, the global oil market chaos is a crucial major issue in its own right, and likely to persist for many years.  Just last week, as Russia, the UAE and Venezuela agreed to cuts in production, Iran defiantly declared that it would not be bound by OPEC or any other group’s attempts to curtail oil production. Petroleum industry debt increasingly is a concern affecting the financial stability of the banks who lent the capital.  Taken together, it is known as The Natural Resource Curse, the fact that economies focused on natural resource exploitation underperform more diversified economies.  It is a vicious circle spinning out of control

Finally, we have the lack of confidence in financial institutions generally and the lack of regulation. Despite efforts to restore reasonable regulations like Glass-Steagall, put in place during the Great Depression, nothing has happened to restore confidence in financial institutions in the United States or globally. The problems in the housing markets, particularly the bizarre behavior of the Vancouver housing market are directly a result of the global financial instability and yet the local and regional British Columbia governments have failed to take any action. The LIBOR scandal has shown how vulnerable we all are to ongoing financial mismanagement across the globe, which could contribute to a collapse of the World as we know it.

–David Mayes

 

 

Christine Lagarde, Managing Director

International Monetary Fund

REBLOGGED FROM THE ASSOCIATED PRESS

Wednesday, February 17, 2016

WASHINGTON (AP) — Eight years after the financial crisis, the world is coming to grips with an unpleasant realization: serious weaknesses still plague the global economy, and emergency help may not be on the way.

Sinking stock prices, flat inflation, and the bizarre phenomenon of negative interest rates have coupled with a downturn in emerging markets to raise worries that the economy is being stalked by threats that central banks — the saviors during the crisis — may struggle to cope with.

Meanwhile, commercial banks are again a source of concern, especially in Europe. Banks were the epicenter of the 2007-9 crisis, which started over excessive loans to homeowners with shaky credit in the United States and then swept the globe into recession.

“You have pretty sluggish growth globally. You don’t really have any inflation. And you have a lot of uncertainty,” says David Lebovitz, who advises on market strategies for JP Morgan Funds.

Some of the recent tumult may be an overreaction by investors. And the rock-bottom interest rates are partly a result of easy money policies by central banks doing their best to stimulate growth.

Unemployment is low in several major economies, 4.9 percent in the United States and 4.5 percent in Germany. The IMF forecasts growth picking up from 3.1 percent last year to 3.4 percent this year.

But that’s still far short of the 5.1 percent growth in 2007, before the crisis. The realization is dawning that growth may continue to disappoint, and that recent turmoil may be more than just normal market volatility.

In Japan, the yield on 10-year bonds briefly turned negative, meaning bondholders were willing to pay the government for the privilege of being its creditor — for years. In the United States, long-term market rates are sliding again, even though the Federal Reserve has begun pushing them higher.

That’s alarming because such low or negative rates are way out the ordinary. For one thing, they suggest investors don’t expect much economic growth.

Here are some of the risks that markets have been waking up to.

___

CHINA

A sharp slowdown in China threatens to remove a pillar of global growth. Slackening demand for raw materials there is hitting producers of oil and metals in other countries. Energy exporter Russia, for instance, slid into recession and its currency has plunged.

German automaker Daimler made a record operating profit last year, helped by a 41 percent surged in sales in China for its Mercedes-Benz luxury cars. But its shares fell when it announced a cautious outlook for only a slight profit increase for 2016 and “more moderate” growth in China. CEO Dieter Zetsche cautioned that he saw “more risks than opportunities” amid “restrained” global growth.

___

EMERGING MARKETS, SUBMERGING

Money is flowing out of so-called emerging markets like Brazil, Russia, South Africa and Turkey. Investors pulled $735 billion out of such countries in 2015 — the first year of net outflows since 1988, according to the Institute of International Finance.

And emerging markets aren’t so emerging any more: they provide 70 percent of expected global growth.

Central banks led by the U.S. Fed responded to the global recession by slashing interest rates and printing money. That encouraged investors in search of higher returns to place their money in emerging markets.

Now the Fed is trying to push up its interest rates, and those flows have gone into reverse, causing financial markets and currencies in emerging markets to sag. Debt becomes harder to repay.

IMF chief Christine Lagarde has warned of “spillback” effects from emerging markets on more advanced economies.

Stephen Lewis, chief economist at ADM Investor Services, argues the Fed should simply go ahead with raising rates to a more normal level.

“Unless we’re going to paralyze monetary policy in the advanced economies forevermore, it is inevitable that the funds that have gone into emerging markets are going to come back out of them,” he said.

___

UNCLE SAM

The other pillar of the global economy besides China, the U.S., is also now showing signs of weakness. Maybe not a recession, yet. But growth was a weak 0.7 annually during the fourth quarter. Factory output has declined.

Though unemployment has dropped, wages have not recovered quickly and companies appear to be unsettled by the global jitters.

A rising dollar — a side effect of expected Fed interest rate increases — could hurt exporters. That’s one reason the Fed may in fact hold off raising rates again soon.

___

BANKS

Banks stocks have been plunging in the U.S. and Europe.

In the U.S., low oil prices may mean companies involved in expensive drilling and extraction will be unable to repay loans made to dig wells that are no longer profitable.

In Europe, bank shares have been shaken by the bailout of four Italian lenders and fears about 1.2 trillion euros ($1.35 trillion) in bad loans across the 19 country currency union.

John Cryan, co-CEO of Deutsche Bank, had to take the unusual step of publicly reassuring that the bank’s finances were “rock-solid” after investors pounded the bank’s stock.

The spread of negative interest rates could reduce banks’ profitability, since it squeezes the different between the rates at which banks borrow and at which they lend.

Sick banks can choke off credit to companies and dump huge costs on governments, shareholders and creditors.

___

RETURN-FREE RISK

Low rates help people pay mortgages and buy cars. But there’s some concern that they suppress spending by savers, and may steer investment to less productive uses. The typical 10 million-yen ($87,900) in savings held by a household with a member over 65 would have earned $3,500 in 1995, but only returns $175 now, estimates Richard Katz, editor at the Oriental Economist.

“We’re retired, so it would be nice to see them go up,” said 75-year-old Lynne Metcalfe, who was having coffee and reading the morning paper with her husband in a Sydney shopping center Tuesday.

Metcalfe, a retired teacher, says she is part of a generation that lived frugally and thanks to that she and her husband haven’t had to change their savings or investment strategies. And though they’d like to see the rates go up for their own sake, “for our son’s sake, no,” she says. “Because he has a mortgage.”

___

OUT OF BULLETS?

With interest rates below zero in some cases, it’s much harder for central banks to apply more stimulus if needed.

Low rates and stimulus in the form of bond purchases — using some $3.6 trillion in newly printed money in the case of the Fed — have driven up stocks worldwide.

Yet inflation has remained quiescent. U.S. consumer prices fell 0.1 percent in December. European inflation is only 0.4 percent annually, despite massive ECB stimulus.

So markets may be realizing this is one downturn where the central banks can’t ride to the rescue as before.

China warns Trump against abandoning climate change deal

  “Climate change is not, as rumored, a hoax created by the Chinese.” — Liu Zhenmin, China’s deputy minister of foreign affairs

China likely to fill climate change global leadership void on U.S. departure

We are now seeing the first indications of the consequences of  a Trump withdrawal from the international community. China has seen an opportunity to displace the United States and to advance China’s own aspirations to take a more aggressive and visible leadership role in the COP21 agreement. The simultaneous announcement of the de facto death of the TransPacific Partnership (TPP) has also opened a new opportunity for Chinese hegemony in the Asian economic and geopolitical world. Regardless of the Trumpist views on climate change and foreign trade, we are proverbially cutting off our noses to spite our faces.

Source: China warns Trump against abandoning climate change deal

Beijing pushes for progress to prevent global warming, saying that the world wants to co-operate

 

Delegates at the international climate conference in Marrakesh

NOVEMBER 11, 2016, FINANCIAL TIMES

by: Pilita Clark in Marrakesh

China has warned Donald Trump that he will be defying the wishes of the entire planet if he acts on his vow to back away from the Paris climate agreement after he becomes US president next January.  In a sign of how far the world has shifted in recognizing the need to tackle global warming, Beijing — once seen as an obstructive force in UN climate talks — is now leading the push for progress by responding to fears that Mr. Trump would pull the US out of the landmark accord.

“It is global society’s will that all want to co-operate to combat climate change,” a senior Beijing negotiator said in Marrakesh on Friday, at the first round of UN talks since the Paris deal was sealed last December. The Chinese negotiators added that “any movement by the new US government” would not affect their transition towards becoming a greener economy.

India also joined in the warnings, saying Mr. Trump’s appointment would force countries to reassess an accord hailed as an end to the fossil fuel era.

“Everyone will rethink how this whole process is going to unfold,” India’s chief negotiator, Ravi Prasad, told the Financial Times.

As delegates descend on the Moroccan city of Marrakesh for the latest UN talks on tackling global warming, further progress has been thrown into doubt by the election of Donald Trump, a climate change skeptic, as the next US president.

Recalling the way support for the earlier Kyoto protocol climate treaty crumbled after it was abandoned by another Republican president, George W Bush, Mr. Prasad said he feared the Paris accord could suffer “a contagious disease that spreads” if the US withdrew.

Mr. Trump’s sweeping victory on Tuesday has shaken what had appeared to be an unstoppable bout of global action to tackle climate change in the run-up to the two-week Marrakesh talks, which began on Monday.

Governments struck the first climate deal for aviation in October, just days before agreeing to phase out planet-warming hydrofluorocarbon chemicals used in air-conditioners.

The Moroccan hosts of this week’s talks had been planning a celebratory meeting to cap this unprecedented bout of activity. Instead, organizers awoke on Wednesday morning to find the world’s wealthiest country had a president-elect who has called global warming a hoax, pledged to “cancel” the Paris agreement and vowed to stop US funding of UN climate programs entirely.

“They were in absolute shock,” said one person who saw Moroccan officials on Wednesday morning.

Adnan Amin, the director-general of the International Renewable Energy Agency, said “a sense of helplessness” had pervaded the Marrakesh talks, and “a certain amount of fear”.

The EU and Japan also reaffirmed their commitment to the agreement, which requires all countries to come up with a plan to curb climate change in order to stop global temperatures from rising more than 2C from pre-industrial times.

But neither they nor China were willing to offer extra cuts in greenhouse gas emissions to fill the vacuum a US withdrawal would create, nor additional money for an agreement requiring billions of dollars in public and private funds to be channeled from rich to poor countries to tackle climate change.

At 3am in the morning I started to hear the [US election] results and I said, ‘No, you’re having a nightmare, go back to sleep’. When I got up and realised it was true, I walked around in a daze

“If the US changes its position that would be very serious for us, especially the aspect of the finance,” said Shigeru Ushio, a Japanese foreign ministry official.

As delegates absorbed the ramifications of Mr. Trump’s sweeping victory, many swapped stories of how the result had hit them.

“At 3am in the morning I started to hear the results and I said, ‘No, you’re having a nightmare, go back to sleep’,” said one developing country participant. “When I got up and realized it was true, this was really, really happening, I walked around in a daze. I think a lot of us were.”

The negotiations have continued nonetheless and some countries have been adamant that the US election result should not interfere with a meeting that is due to start negotiating a raft of important rules for how the Paris agreement will operate.

“We’re talking about the big challenge of climate change,” said Russia’s lead negotiator, Oleg Shamanov. “This issue is bigger than life. This is a long-term issue, longer than any mandate of any president of country X or Z, even if that country is a big one.”

The prospect of the US withdrawing from the Paris agreement has been a topic of endless discussion beneath the sun-shaded walkways in the temporary convention center built for the Marrakesh meeting.

A pullout would take four years unless Mr. Trump chose to take the US out of the accord’s parent treaty, the 1992 UN Framework Convention on Climate Change, in which case it could only take a year.

That would be a highly provocative move, said international climate law expert, Farhana Yamin. “It would escalate non-cooperation to the highest level possible.”

But as the first week of the talks drew to a close, a mood of defiance was emerging among some delegates who said past US retreats from UN climate action had only spurred other countries’ determination to unify and proceed.

“The talk in the corridors is, ‘OK, this is not going to stop us from moving forward, we will just redouble our efforts’,” said Hugh Sealy, a lead negotiator for an alliance of small island countries.

“This is still an existential threat,” he said. “I still want to pass on that little house I have on the coast in Grenada to my children and the rest of us are going to have to step up.”

Leonardo DiCaprio’s “Before The Flood” Documentary Free Everywhere

The Urgency of Climate Change Action Made Vividly Real

Leonardo DiCaprio‘s extraordinary two-hour National Geographic documentary is now available for viewing free everywhere, including on this page, YouTube, The National Geographic website, and the National Geographic Channel. Everyone should watch it.  Equally worthwhile is the series The Year of Living Dangerously on National Geographic.  The 2-minute trailer and the full documentary film are below here.

The Years of Living Dangerously on National Geographic:

New Accelerate Okanagan Report On Tech Industry: Devil Is Again In the Details

Problems Persist With New 2016 Accelerate Okanagan “Tech Industry Analysis”

 Accelerate Okanagan should be commended for publishing a document, the stated goal of which is to “assist in attracting new talent, companies, and potential investors to the Okanagan, as well to inform policy makers and the media.”  Such reports are commonly used to promote a community or region’s economy. However, as with the earlier 2015 report, there are persistent issues, particularly with the industry definition and methodology of the study.  The result is questionable data and numbers that simply do not pass a basic “sniff test.” Accepting the results of this study as published may only serve to mislead community leaders on planning, and mislead prospective entrepreneurs considering relocating here.

I taught Industry Analysis at the University of British Columbia, and my entire career has been in high-tech in Silicon Valley and globally, beginning with many years at Intel Corporation, so my assessment is exclusively from a professional perspective. A PowerPoint presentation of my work in this area is posted on this website, under the heading Professional Stuff.

The report begins by explaining that the study was completed by an unnamed third party, apparently affiliated with Small Business BC.  A review of the Small Business BC website, staff, and services indicates the organization is almost exclusively organized and resourced to provide services only to individual small businesses. For example, scanning SBBC’s “Market Research” heading, it indicates that its services are focused entirely on smaller scale research for an individual small business, not a large scale analysis of an entire industry in a region.  Industry analyses of such scale are better suited to a local educational institution like UBC, with all the requisite skills and resources.  Though I have no inside knowledge, it seems reasonable to surmise that some degree of budgetary constraint and political influence were involved in the selection of SBBC, and a desire to emphasize local promotion over objective accuracy.

With regard to methodology and industry definition, the Report states that it follows the methodology of British Columbia’s High Tech Sector Report, the most recent of which is from 2014. A closer look at this methodology can be found on the provincial government website. A separate document is listed, “Defining the British Columbia High Technology Sector Using NAICS,” published fifteen years ago in 2001. My review of this document indicates that while it offers some useful discussion, it is seriously out of date and in need of revision.  A more professional approach would have required the development of a more current methodology relevant to the Okanagan situation. The BC methodology document does provide some very cogent cautionary remarks on high-tech industry definition and methodology:

The “high technology” sector is a popular subject of discussion and analyses, partly because it is viewed as an engine of growth both in the past and for the future. However, the high-technology sector has no specific and universally accepted definition. Defining and measuring the high technology sector can be done as part of basic research at the level of individual firms. A second, more “modest” approach uses pre-existing data collected on “industries” which are defined for general statistical purposes. The challenge is to determine which of these industries warrants inclusion in the measurement of the high technology sector.

The AO Report author seems to have accepted both approaches. Page 4 of the Report explains that the author decided to also include “the previous survey undertaken by Accelerate Okanagan.”  The previous AO survey was simply a Survey Monkey survey submitted by individual local businesses. The results were apparently compiled without additional professional judgment applied, or follow-up contact with companies by phone or other means and cross-referencing with the more “modest” macro data methodology mentioned in the 2001 BC document. IMHO, if my assumptions are correct, the Survey Monkey data should have been thrown out as unreliable, or regenerated with much greater scrutiny and judgment applied.

Then there is the issue of Kelowna as an employment market, as noted in the recently reported Bank of Montreal (BMO) and BC Business low national and provincial rankings of Kelowna’s employment market. These issues have also been reported in KelownaNow.  Hootsuite, whose founder is from Vernon, consciously chose Vancouver to start his company.  CEO Ryan Holmes openly admitted that he did not base Hootsuite in the Okanagan because he knew he would not be able to attract the necessary talent here. It is also important to note that a significant number of local business and community leaders met with the BC Labour Minister and reported that their primary concern was a lack of Temporary Foreign Workers, not economic development or the growth of the local high-tech industry.

The AO Report touches on these issues only very tangentially and indirectly in the closing pages. A more credible approach would have been to confront these local problems directly, citing the BMO report for example, and what AO and the community plan to do about it.  Clearly, there are unresolved and ignored contradictions with the AO report that damage its credibility and usefulness.

Finally, this week’s media coverage of the report has died down, having duly reported all the desired sound bytes, but a Google search shows that the media coverage has so far been nearly exclusively from the local Okanagan media which does not meet the stated goal of the AO effort to broadcast the promotion beyond the Okanagan.

Read the complete AO September 2016 report here:

Click to access Economic_Impact_Study_2015_Edition.pdf

MAYO615 REPOST from January, 2015:

AO Tech Industry Report Lacks The Rigor Necessary To Give It Much Credibility

Read the AO January 2015 press release and access the full report here

The AO report’s “economic impact” conclusions are based on 2014 Survey Monkey voluntary responses, which are problematic due to an apparent lack of critical assessment. The report does not follow the kind of rigorous industry analysis performed by leading technology consultancy firms like International Data Corporation (IDC) or Gartner. The definition of an “industry,” for example the “automobile industry in Canada,” involves broad activity around all aspects of “automobiles,” but at some point, firms like Kal Tire or “Joe’s Brake Shop” might be excluded from a definition of the automobile industry.  The report does not mention the rigor applied to this industry analysis, so the question is left open, “What exactly is the “tech industry” in the Okanagan?”  A well-defined $1 Billion industry is the mobile advertising industry in Canada.  Is that what we have in the Okanagan? By way of comparison, I reported on New Zealand’s Ice House tech incubator economic impact report, which has much greater credibility.  The AO report is essentially claiming that the Okanagan technology economy is more than twice the size of New Zealand’s…That’s too big of a leap of faith for me. Read New Zealand’s Ice House Startups Achieve Impressive Results and contrast it with the AO report.

Then there is the issue of Kelowna as an employment market, as noted in the recently reported Bank of Montreal (BMO) and BC Business low national and provincial rankings of Kelowna’s employment market. These issues have also been reported in KelownaNow. Clearly, there are unresolved contradictions with the AO reports.

Read More: Kelowna’s Low Jobs Ranking

Read More: Okanagan economy likely to worsen next year

I offer a summary view of “industry analysis” here: Industry Analysis: the bigger picture

Risk of Global Financial Contagion Is Growing

 

Global Financial Contagion, is a well-understood phenomenon among economists, but less so among the general public.  Financial contagion refers to “the spread of market disturbances — mostly on the downside — from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows.” Financial contagion can be a potential risk for countries who are trying to integrate their financial system with international financial markets and institutions. It helps explain an economic crisis extending across neighboring countries, regions, or in the worst case, the entire global economy.

An examination of economic history suggests that the effects of financial problems in one country rippling through other countries may have begun in the 18th Century with colonialism, with the mother country’s economy having large direct impacts on the colonies.  Today, in Marshall McLuhan’s global village, and with the World Wide Web, a financial hiccup in Asian markets late on our Sunday night, can turn into a major global financial crisis in Europe and North America in less than 24 hours.

At the moment, the number of risk factors that contribute to a major financial contagion is at an all-time high. The following article from the Associated Press details some of these global economic issues, but ironically also omits additional other issues contributing to the anxiety in markets.

The attached article does place China at the top of its list but fails to mention a number of additional issues contributing to global worries about China. The first is the Chinese leadership itself, led by Xi Jinping.  Concerns have increased regarding the overall management of the Chinese economy. These issues include the lack of faith in economic numbers released by China, the poor management of the unrest in the Shanghai financial market, and the $1 Trillion flow of money out of China by wealthy Chinese, which has had a dramatic impact on the Vancouver housing market. Add to this, the neo-Maoist tendencies of the current PRC leadership and its saber-rattling in the South China Sea. There are other disturbing domestic Chinese economic issues, but I will not list them here. The ultimate risk, understood only too well by the Chinese leadership is the risk of social unrest. Harvard professor Niall Ferguson has said that in his view nothing has really changed in 2000 years of Chinese history. The Mandarin class still rule at the expense of the peasants.

Glaring out at me, the AP analysis omits any specific mention of military and social unrest. This week it would seem that North Korea and Kim Jong Un have risen to the top of concerns, but not far behind were the satellite photographs of ground-to-air missiles installed by the Chinese on the Spratley Islands in the South China Sea. Syria has been described as an order of magnitude more complex than the crisis in the Balkans in the 1990’s. With the U.S., Russia, Turkey, NATO, and a host of other smaller players, it would take only a small spark, like another pilot burned alive, to ignite the entire region.

The AP article mentions the oil economy only in the context of emerging markets. In many economists view, the global oil market chaos is a crucial major issue in its own right, and likely to persist for many years.  Just last week, as Russia, the UAE and Venezuela agreed to cuts in production, Iran defiantly declared that it would not be bound by OPEC or any other group’s attempts to curtail oil production. Petroleum industry debt increasingly is a concern affecting the financial stability of the banks who lent the capital.  Taken together, it is known as The Natural Resource Curse, the fact that economies focused on natural resource exploitation underperform more diversified economies.  It is a vicious circle spinning out of control

Finally, we have the lack of confidence in financial institutions generally and the lack of regulation. Despite efforts to restore reasonable regulations like Glass-Steagall, put in place during the Great Depression, nothing has happened to restore confidence in financial institutions in the United States or globally. The problems in the housing markets, particularly the bizarre behavior of the Vancouver housing market are directly a result of the global financial instability and yet the local and regional British Columbia governments have failed to take any action. The LIBOR scandal has shown how vulnerable we all are to ongoing financial mismanagement across the globe, which could contribute to a collapse of the World as we know it.

 

 

Christine Lagarde, Managing Director

International Monetary Fund

REBLOGGED FROM THE ASSOCIATED PRESS

Wednesday, February 17, 2016

WASHINGTON (AP) — Eight years after the financial crisis, the world is coming to grips with an unpleasant realization: serious weaknesses still plague the global economy, and emergency help may not be on the way.

Sinking stock prices, flat inflation, and the bizarre phenomenon of negative interest rates have coupled with a downturn in emerging markets to raise worries that the economy is being stalked by threats that central banks — the saviors during the crisis — may struggle to cope with.

Meanwhile, commercial banks are again a source of concern, especially in Europe. Banks were the epicenter of the 2007-9 crisis, which started over excessive loans to homeowners with shaky credit in the United States and then swept the globe into recession.

“You have pretty sluggish growth globally. You don’t really have any inflation. And you have a lot of uncertainty,” says David Lebovitz, who advises on market strategies for JP Morgan Funds.

Some of the recent tumult may be an overreaction by investors. And the rock-bottom interest rates are partly a result of easy money policies by central banks doing their best to stimulate growth.

Unemployment is low in several major economies, 4.9 percent in the United States and 4.5 percent in Germany. The IMF forecasts growth picking up from 3.1 percent last year to 3.4 percent this year.

But that’s still far short of the 5.1 percent growth in 2007, before the crisis. The realization is dawning that growth may continue to disappoint, and that recent turmoil may be more than just normal market volatility.

In Japan, the yield on 10-year bonds briefly turned negative, meaning bondholders were willing to pay the government for the privilege of being its creditor — for years. In the United States, long-term market rates are sliding again, even though the Federal Reserve has begun pushing them higher.

That’s alarming because such low or negative rates are way out the ordinary. For one thing, they suggest investors don’t expect much economic growth.

Here are some of the risks that markets have been waking up to.

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CHINA

A sharp slowdown in China threatens to remove a pillar of global growth. Slackening demand for raw materials there is hitting producers of oil and metals in other countries. Energy exporter Russia, for instance, slid into recession and its currency has plunged.

German automaker Daimler made a record operating profit last year, helped by a 41 percent surged in sales in China for its Mercedes-Benz luxury cars. But its shares fell when it announced a cautious outlook for only a slight profit increase for 2016 and “more moderate” growth in China. CEO Dieter Zetsche cautioned that he saw “more risks than opportunities” amid “restrained” global growth.

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EMERGING MARKETS, SUBMERGING

Money is flowing out of so-called emerging markets like Brazil, Russia, South Africa and Turkey. Investors pulled $735 billion out of such countries in 2015 — the first year of net outflows since 1988, according to the Institute of International Finance.

And emerging markets aren’t so emerging any more: they provide 70 percent of expected global growth.

Central banks led by the U.S. Fed responded to the global recession by slashing interest rates and printing money. That encouraged investors in search of higher returns to place their money in emerging markets.

Now the Fed is trying to push up its interest rates, and those flows have gone into reverse, causing financial markets and currencies in emerging markets to sag. Debt becomes harder to repay.

IMF chief Christine Lagarde has warned of “spillback” effects from emerging markets on more advanced economies.

Stephen Lewis, chief economist at ADM Investor Services, argues the Fed should simply go ahead with raising rates to a more normal level.

“Unless we’re going to paralyze monetary policy in the advanced economies forevermore, it is inevitable that the funds that have gone into emerging markets are going to come back out of them,” he said.

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UNCLE SAM

The other pillar of the global economy besides China, the U.S., is also now showing signs of weakness. Maybe not a recession, yet. But growth was a weak 0.7 annually during the fourth quarter. Factory output has declined.

Though unemployment has dropped, wages have not recovered quickly and companies appear to be unsettled by the global jitters.

A rising dollar — a side effect of expected Fed interest rate increases — could hurt exporters. That’s one reason the Fed may in fact hold off raising rates again soon.

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BANKS

Banks stocks have been plunging in the U.S. and Europe.

In the U.S., low oil prices may mean companies involved in expensive drilling and extraction will be unable to repay loans made to dig wells that are no longer profitable.

In Europe, bank shares have been shaken by the bailout of four Italian lenders and fears about 1.2 trillion euros ($1.35 trillion) in bad loans across the 19 country currency union.

John Cryan, co-CEO of Deutsche Bank, had to take the unusual step of publicly reassuring that the bank’s finances were “rock-solid” after investors pounded the bank’s stock.

The spread of negative interest rates could reduce banks’ profitability, since it squeezes the different between the rates at which banks borrow and at which they lend.

Sick banks can choke off credit to companies and dump huge costs on governments, shareholders and creditors.

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RETURN-FREE RISK

Low rates help people pay mortgages and buy cars. But there’s some concern that they suppress spending by savers, and may steer investment to less productive uses. The typical 10 million-yen ($87,900) in savings held by a household with a member over 65 would have earned $3,500 in 1995, but only returns $175 now, estimates Richard Katz, editor at the Oriental Economist.

“We’re retired, so it would be nice to see them go up,” said 75-year-old Lynne Metcalfe, who was having coffee and reading the morning paper with her husband in a Sydney shopping center Tuesday.

Metcalfe, a retired teacher, says she is part of a generation that lived frugally and thanks to that she and her husband haven’t had to change their savings or investment strategies. And though they’d like to see the rates go up for their own sake, “for our son’s sake, no,” she says. “Because he has a mortgage.”

___

OUT OF BULLETS?

With interest rates below zero in some cases, it’s much harder for central banks to apply more stimulus if needed.

Low rates and stimulus in the form of bond purchases — using some $3.6 trillion in newly printed money in the case of the Fed — have driven up stocks worldwide.

Yet inflation has remained quiescent. U.S. consumer prices fell 0.1 percent in December. European inflation is only 0.4 percent annually, despite massive ECB stimulus.

So markets may be realizing this is one downturn where the central banks can’t ride to the rescue as before.

IMF report cuts growth outlook for Canada to 1.0 per cent for this year

OTTAWA – The International Monetary Fund has cut its growth outlook for the Canadian economy to just 1.0 per cent for the year, due to the drop in oil prices and reduced investment in the energy sector.

Source: IMF report cuts growth outlook for Canada to 1.0 per cent for this year

OTTAWA – The International Monetary Fund has cut its growth outlook for the Canadian economy to just 1.0 per cent for the year, due to the drop in oil prices and reduced investment in the energy sector.

The forecast, issued Tuesday, is down from the IMF’s expectation in July for Canadian growth of 1.5 per cent. The organization also lowered its Canadian outlook for 2016 to 1.7 per cent from 2.1 per cent.

Meanwhile, the IMF said the world economy would grow only 3.1 per cent this year, the lowest since 2009, although it increased its estimate for the United States to 2.6 per cent for this year from a July forecast of 2.5 per cent.

A major contributor to Canada’s slowdown, it said, was lower capital spending in the oil sector.

“In commodity exporters, lower commodity prices weigh on the outlook through reduced disposable income and a decline in resource-related investment,” the IMF said.

“The latter mechanism has been particularly sharply felt in Canada, where growth is now projected to be about one per cent in 2015, 1.2 percentage points lower than forecast in April.”

The downgrade by the IMF came as Statistics Canada reported the country’s trade deficit with the world increased to $2.5 billion in August as exports posted their biggest drop since 2012 due to a sharp fall in oil prices. Economists had expected a trade deficit of $1.2 billion for the month, according to estimates compiled by Thomson Reuters.

Statistics Canada also updated its reading for July to show a deficit of $817 million compared with its initial reading of a $593-million deficit.

CIBC economist Nick Exarhos noted soft energy prices and temporary disturbances to more regular trade patterns played a role in August.

“It’s clear that the cheaper loonie still needs time to have its full effect in lifting Canadian export volumes,” Exarhos said.

Canada’s exports in August fell 3.6 per cent from the previous month to $44 billion, while imports edged up 0.2 per cent to $46.5 billion.

Exports in the energy sector fell 14.7 per cent to $6.3 billion, due to a 20.9 per cent drop in the value of crude oil and crude bitumen exports. For the group as a whole, prices fell 16.4 per cent while volumes increased 2.0 per cent.

However, exports of motor vehicles and parts rose 3.1 per cent to $7.8 billion due to a 4.5 per cent increase in exports of passenger cars and light trucks.

On the other side of the trade equation, imports of consumer goods increased 2.6 per cent to $10.0 billion, while metal and non-metallic mineral products rose 6.0 per cent to $3.9 billion.

Economist David Madani of Capital Economics said given the earlier strength in exports, the economy is still on track for growth of around 2.5 per cent, ahead of the Bank of Canada’s forecast.

“After suffering a mild recession in the first half of the year, it appears that the economy returned to growth in the third quarter,” he said.

However, Madani also noted that imports were largely unchanged.

“This persistent weakness in import volumes is a sign of soft domestic demand,” he said.

The Canadian economy began 2015 by sliding into recession with back-to-back quarters of contraction. However economists predict the third quarter will show growth.

The IMF forecast for the economy is slightly more pessimistic than the Bank of Canada’s prediction that the economy will grow by 1.1 per cent this year. However, the Canadian central bank predicts the economy will pick up to 2.3 per cent next year, ahead of the IMF’s 1.7 per cent prediction.

The central bank has cut its key interest rate twice this year taking it to 0.5 per cent in a bid to help a struggling economy hurt by a drop in the price of oil.

OECD Slashes Canadian Economic Forecast Yet Again

One day after federal Finance Minister Joe Oliver deflected concerns over Canada’s poor economic showing to start 2015, the OECD announced that it now projects Canadian growth this year at about 1.5 percent, down sharply from 2.2 percent during its previous temperature reading in March and a full percentage point below its forecast last November. Oliver on Tuesday told a Parliamentary Committee that he does not anticipate a recession.

Carolyn Hyde of Bloomberg News discusses the revised OECD global economic forecast, and further negative impacts to the Canadian and U.S. economies

Today, June 3rd, the Paris-based body has also adjusted its timetable for the start of monetary tightening by the Bank of Canada to early-2016 from mid-2015.

Commenting on the main risk to even its reduced Canadian forecast, the OECD cites “a disorderly housing-market correction, particularly given high household debt, which would depress private consumption and residential investment and could, in the extreme, threaten financial stability.”

Other potential negatives for the Canadian economy range from a further fall in oil prices and slower than expected growth in the United States, to a sudden Chinese slowdown, which could translate into “a greater and more protracted than expected deceleration in activity, including weaker investment, exports and private consumption.”

Potential Canadian pluses include a recovery in oil demand and prices and higher than anticipated growth in the United States and other important export markets.

Royal Bank of Canada is more upbeat in a forecast also released today. The bank predicts a much better second half for the Canadian economy, with growth reaching 1.8 percent this year and 2.6 percent in 2016.

RBC acknowledges that investment will be weak for the rest of the year, as energy companies slash capital spending by about 30 percent. But the bank expects other sectors to pick up part of the slack, thanks to low financing costs and stronger demand.

But the OECD worries that investment everywhere will remain below the level of previous recoveries, partly because of weak consumer demand, continuing uncertainty about fiscal policies and a lack of structural reforms in several key economies.

“Despite tailwinds and policy actions, real investment has been tepid and productivity growth disappointing,” the OECD report says.

“By and large, firms have been unwilling to spend on plant, equipment, technology and services as vigorously as they have done in previous cyclical recoveries.

“Moreover, many governments postponed infrastructure investments as part of a fiscal consolidation.”

Iraq About To Flood Oil Market: More Grief Ahead For Canada

Underscoring Goldman Sachs forecast last week of oil prices at or below $50 per bbl until at least 2020, Bloomberg News is today reporting that Iraq is preparing to unleash a flood of new oil within the next few months.  This is very bad news for the price of Western Canadian Select bitumen, and Alberta oil sands producers.  Saudi Arabia’s strategy, together with OPEC, to squeeze high-cost oil producers of oil sands and shale seems to be working.  More pessimistic forecasts of WCS at $25 for an extended period now appear more plausible.  The complex interplay of oil and global economies could also have a reverberating effect on regions on the sharp edge of full-scale recession, including Canada, Europe, Russia and China.

Iraq About to Flood Oil Market in New Front of OPEC Price War
If shipping schedules are correct, a tidal wave of oil is coming.

BLOOMBERG NEWS by Grant SmithJulian Lee
7:37 AM PDT
May 26, 2015

(Bloomberg) — Iraq is taking OPEC’s strategy to defend its share of the global oil market to a new level.
The nation plans to boost crude exports by about 26 percent to a record 3.75 million barrels a day next month, according to shipping programs, signaling an escalation of OPEC strategy to undercut U.S. shale drillers in the current market rout. The additional Iraqi oil is equal to about 800,000 barrels a day, or more than comes from OPEC member Qatar. The rest of the Organization of Petroleum Exporting Countries is expected to rubber stamp its policy to maintain output levels at a meeting on June 5. While shipping schedules aren’t a promise of future production, they are indicative of what may come. The following chart graphs planned tanker loadings (in red) against exports.

As in previous months, Iraq might not hit its June target – export capacity is currently capped at 3.1 million barrels a day, Deputy Oil Minister Fayyad al-Nimaa said on May 18. Still, any extra Iraqi supplies inevitably mean OPEC strays even further above its collective output target of 30 million barrels a day, Morgan Stanley says. The following chart shows OPEC increasing output in recent months against its current target.

Defying the threat from Islamic State militants, Iraq has been ramping up exports from both the Shiite south – where companies like BP Plc and Royal Dutch Shell Plc operate – and the Kurdish region in the north, which last year reached a temporary compromise with the federal government on its right to sell crude independently.

Canada’s Entrepreneurship Dilemma: Decades Of Anemic Research Investment

UPDATE: May 21, 2015.  As if to drive home the Canadian economic crisis, Goldman Sachs has just released an oil price forecast suggesting that North Sea Brent crude will still be $55 in 2020, five years from now.  As Alberta Western Canadian Select (WCS) bitumen is valued lower on commodity markets this is extremely bad news for Canada. Further, the well-known Canadian economic forecasting firm, Enform is predicting that job losses across all of western Canada, not only Alberta, could reach 180,000. 

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This issue has driven me absolutely nuts since I first arrived in Canada from Silicon Valley.  It did not take me long to figure out that things did not work they way they did in California, and that there wasn’t much of a true entrepreneurial economy here.  Since then, I have also been appointed to the Canada Foundation for Innovation grant process, providing me with insight into how R&D funding works in Canada. I have seen many issues in Canada that have impaired the nation’s ability to develop an entrepreneurial culture,  among them is the inherent Canadian conservatism and short term horizon of investors unfamiliar with technology venture investment.  But none has been worse than Canada’s decades-long neglect of adequate funding for research and development nationwide.  A review of the OECD data on Canada’s investment in R&D compared to other industrialized nations paints a sorry picture.  This has led directly to a poor showing in industrial innovation and productivity. This is further compounded by the current government’s myopic focus on natural resource extraction, Canada’s so-called “natural resource curse.” The result now is an economic train wreck for Canada.  The fossil fuel based economy has collapsed and is not forecast to recover anytime in the near future.  During the boom time for fossil fuel extraction, there has been essentially no rational strategy to increase spending on R&D and innovation, and hence no increase in economic diversification.  Now the problem is nearly intractable, and may take decades to reverse.

 ASLEEP AT THE WHEEL, by Bruce Smardon, McGill-Queens University Press

ASLEEP AT THE WHEEL explains that since 1960, Canadian industry has lagged behind other advanced capitalist economies in its level of commitment to research and development. Asleep at the Switch explains the reasons for this underperformance, despite a series of federal measures to spur technological innovation in Canada. It is worth noting that Arvind Gupta, President of The University of British Columbia, and former head of MITACS, the organization at UBC tasked to promote R&D, has also been an outspoken proponent for increased R&D, at one point editorializing in the Vancouver Sun, that Canada needed an innovation czar, to promote innovation in the same manner as the 2010 Seize the Podium program to enhance gold medal performance for Canada.

Also, as a member of the 2012 Canada Foundation for Innovation Multidisciplinary Assessment process, and the University of British Columbia 2015 CFI grant preparation process, I can say without reservation that the Canada suffers from inadequate R&D funding and its consequences.

ANALYSIS From CBC News

Canada’s research dilemma is that companies don’t do it here

Ten-year study says repairs needed for rebound will be costly and difficult

REBLOGGED: By Don Pittis, CBC News Posted: May 15, 2015 5:00 AM ET Last Updated: May 15, 2015 6:31 AM ET

Northern Electric was a domestic Canadian technology success story that became the telecom equipment giant Nortel Networks. But when Nortel failed, the lack of an R&D hub meant there were no startups to replace it. (The Canadian Press)

As Stephen Harper handed out more tax breaks for Canadian manufacturers in Windsor, Ont., yesterday, you might ask, “With that kind of support, why is Canada’s industrial economy in such bad shape?” Political economist Bruce Smardon thinks he has the answer.

Smardon says companies operating in Canada just aren’t spending enough on domestic research and development, and the Harper government is only the latest in a long line of governments, stretching back to that of John A. Macdonald, that have contributed to the problem.

As China’s resource-hungry economy goes off the boil, taking Canada’s resource producers with it, everyone including Bank of Canada governor Stephen Poloz, has been waiting for a rebound in Canada’s industrial economy.

But there are growing fears such a Canadian rebound is not on the cards. As the Globe and Mail’s Scott Barlow reported last week (paywall), despite having the top university for generating new tech startups, Canada has repeatedly failed to become a hub for industrial innovation.

Best in North America

Interviewed by the New York Times, the president of the startup generator Y Combinator, Sam Altman, called the University of Waterloo the school that stood out in North America for creating new ideas that turned into companies.

But as Barlow reported, there is statistical evidence that Waterloo’s success has not translated into R&D success, as Canadian industrial innovation continues to decline.

After 10 years of research, Smardon thinks his recent book, Asleep at the Switch — short-listed this year for one of Canada’s most prestigious academic book awards — provides the answer.

Political science professor Bruce Smardon’s book, Asleep at the Switch, examining Canada’s R&D failure, has been short-listed for one of Canada’s most prestigious academic prizes. (McGill-Queen’s University Press)

And, believe it or not, Smardon traces the chain of events back to Canada’s first prime minister and his tariff policy of 1879. Paradoxically, those rules were put in place to protect Canadian manufacturers from cheap U.S. goods, that were in turn protected by U.S. tariff walls.

Central Canadian boom

For the industries of central Canada, the tariff barriers worked. In the years before the First World War, says Smardon, Canada was second only to the United States in creating an economy of mass production and mass consumption, where workers could afford to buy the products they produced.

However, prevented by tariffs from exporting U.S. goods to Canada, American companies did the next best thing. They started, or bought, branch plants north of the border, wholly- or partly-owned subsidiaries that used U.S. technology in Canadian factories.

Smardon says that started a trend that continues today. The majority of R&D was being done in the home country of the industrial parent, not in the Canadian subsidiaries. And in the Mulroney and Chrétien era of free trade, he says, relatively high-tech branch plants, such as Inglis and Westinghouse, started to close as products were supplied more efficiently by the U.S. parent factories.

There were Canadian R&D stars such as Nortel and Blackberry, says Smardon. But they were exceptions. And when those stars began to set, the lack of a traditional R&D hub in Canada meant there were few young research-based companies ready to come up and replace them.

Tax credit paradox

The paradox, he says, is that Canadian taxpayers have spent a fortune on R&D tax credits. The 2011 Jenkins report showed that as a percentage of GDP, Canadian R&D tax incentives were higher than anyplace else. But as Barlow showed, Canadian R&D still lags behind.

The reason, Smardon concludes, is that while taxpayers fork out for R&D, industrial R&D doesn’t happen here but in traditional R&D hubs abroad. He says that free trade agreements and a longstanding view by Canadian governments that business knows best mean it’s very difficult to put conditions on how that money is spent.

“If we are concerned with developing a manufacturing base in the more advanced research intensive sectors, we’re going to have to have incentive programs at the very minimum, that are clear in insuring that any incentives are used to develop products and processes in Canada,” says Smardon. “They’ve got to think through how that can be done.”

But Smardon is not optimistic. He says that free trade and the free market philosophy has become so entrenched in Canadian thinking that it’s impossible to change.

Market rules

He says that is why the Harper government became so enamoured with the business of pumping and exporting unprocessed oil and gas while the Canadian industrial economy crumbled. It was exactly what the global free market wanted.

It may indeed be that global market forces decide Canada is an icy wasteland that is best at producing raw materials. It may decide that the best way to use our brilliant young people is to send them to California to develop their business ideas there.

But if we want more than that, perhaps handing out ineffective tax incentives is not going to be enough.