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:

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.

___

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.

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

Over two 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 for ongoing long term budgetary problems for both the Alberta and Canadian national economies. Fast forward two years to today, and the situation has essentially worsened dramatically.  The current Alberta Premier Jim Prentice is facing another massive budget deficit, just as Alison Redford predicted two years ago, and has been forced to call a new election. The most glaring difference in my mind is that there is no Jim Flaherty, and there is no candid talk coming from the current Finance Minister, Joe Oliver, or anyone in the Harper government, on this issue or when a new federal budget may be expected. Meanwhile, according to the Bank of Canada’s most recent report, the Canadian economy continues to plummet into a black hole.

READ MORE: Alberta Bitumen Bubble And The Canadian Economy

Originally posted March 11, 2013:

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?

Plummeting Oil Prices Set To Continue As Canada Cringes

 

 

Regrettably, this week’s events in the oil market, provide further evidence of the dire consequences ahead for the Canadian oil economy.  Oil industry bulls who have been betting on a quick rebound in oil prices are likely to get severely burned, and the prospects for the local tourism based economy are only worsening.

In the same week that local gasoline prices mysteriously spiked up nine cents per liter, blamed on the weakening Canadian dollar, and a refinery fire in Los Angeles (of all places), the Wall Street Journal reported that the global oil glut has consumed more than 80% of the available storage capacity. The WSJ report went on to state that with production levels still not likely to decline, oil supply would continue to grow well beyond demand, driving prices into another sharp decline, perhaps as low at CitiBank‘s forecast of $20 per bbl.   Now the International Energy Agency has corroborated the WSJ forecast with its own dire oil market forecast. Both do not see any early end in sight. Crude prices plunged Friday on this news, to below $45 per bbl.

 

Oil Prices Tumble After IEA Warning
Energy watchdog warns that recent rebound in prices may not last

REBLOGGED from the WSJ

By TIMOTHY PUKO And BENOÎT FAUCON
Updated March 13, 2015 5:09 p.m. ET

The benchmark U.S. oil price tumbled to a six-week low Friday, thwarting hopes for a sustained recovery after an influential energy watchdog said U.S. production growth is defying expectations and setting the stage for another bout of price weakness.

Investors and oil producers should brace for further declines in oil prices, the International Energy Agency said in a monthly report. Prices haven’t fallen far enough yet to cut supply, and some signs of rising demand are just temporary—bargain buyers using cheap oil to fill up stockpiles, the agency said.

That outlook weighed on sentiment in the oil-futures market, which has stabilized in recent weeks following a seven-month selloff that saw the benchmark price on the New York Mercantile Exchange plunge 59%. Behind the selloff, which by some measures was the steepest in decades, was a global glut of crude spurred by rising production in the U.S. and Libya.

“This IEA report today confirmed a lot of things bears had been talking about,” said Todd Garner, who manages $100 million in energy commodity investments at hedge fund Protec Energy Partners LLC based in Boca Raton, Fla. “It is a big deal.” His fund is slowly adding to a bet the growing supply will keep bringing down gasoline futures, he said.

The IEA’s report echoed growing concerns in the market that the amount of available oil storage is dwindling, which potentially could weigh further on prices if output continues unabated.

Many barrels are building up in U.S. storage tanks and behind drilled but idled wells. That overhang can flood the market any time prices rise, acting as a cap on prices, Mr. Garner and others said.

Light, sweet crude for April delivery fell $2.21, or 4.7%, to $44.84 a barrel on the New York Mercantile Exchange. The contract closed within 40 cents of the 6-year low closing price of $44.45 a barrel set on Jan. 28.

Brent, the global benchmark, fell $2.41 a barrel, or 4.2%, to $54.67 a barrel on ICE Futures Europe. Both Brent and U.S. oil had their biggest one-day percentage losses in about two weeks.

Oil prices fell sharply Friday. Late last year, workers on a Texas drilling rig grappled with equipment.
Financial markets have been closely watching oil prices, which had recovered to more than $60 a barrel for Brent crude. Oil prices had traded in a fairly narrow range for about a month, raising the question of whether the market had stabilized after a historic collapse.

Rig counts, one closely watched metric, fell for a 14th straight week, Baker Hughes said Friday. The U.S. oil-rig count fell by 56 to 866 in the latest week.

That is down 46% from a peak of 1,609 in October, but hasn’t led to a commensurate cut in production because producers are still completing previously drilled wells and focusing on the highest producing areas to trim costs. Rig counts in the country’s biggest three shale oil fields, the Bakken, Eagle Ford and Permian, haven’t fallen nearly as fast, according to Citigroup Inc.

Today’s oil industry compares to the natural-gas bust of 2011 and 2012 when a dramatic price collapse led to massive cuts in rig activity, but no slowdown production, the bank said in a note this week. Producers got more efficient and left a backlog of wells to connect later. Prices fell by half and took more than a year to fully rebound. Citi expects U.S. oil production this year to grow by 700,000 barrels in 2015 under almost any scenario, it said.

“If you don’t complete wells now, that just means you have more later,” Citi analyst Anthony Yuen said. “When the price is supposed to get high, it will just get dampened” when the uncompleted wells get tapped.

The IEA said U.S. oil production was up 115,000 barrels a day in February, some of it going into bulging storage inventories whose capacity may soon be tested. “That would inevitably lead to renewed price weakness,” the report said. The IEA called the appearance of stability a “facade.”

“Production’s through the roof,” said Tim Rudderow, who oversees $1.6 billion at Mount Lucas Management in suburban Philadelphia. “You’re going to fill up every jar and bottle from here to Europe.”

As oil prices consolidated in recent weeks, Mr. Rudderow bought options that would pay off if June futures fell back to a range between $43 and $50 a barrel, he said. He has about 15% of a $600 million fund on oil bets and might add to it if oil keeps falling, potentially setting off a panic, he added.

Another oil-market contraction could spell good news for motorists, who had begun feeling rising crude prices in higher costs at the pump in the past two months. The average retail cost of a gallon of gasoline in the U.S. was $2.49 this week, compared with $2.04 on Jan. 26, according to the U.S. Energy Information Administration.

Front-month gasoline futures closed down 2.6% to $1.7623 a gallon. Diesel futures closed down 3.7% to $1.7130 a gallon.

Others on Friday echoed the IEA’s view, saying that, in the short term, the oil market is fundamentally weak. “U.S. production growth has not yet slowed enough to balance the oil market,” Goldman Sachs said in a note to investors.

Investors did take heed in the week ended Tuesday, pulling back on a bullish bet on oil prices, according to the U.S. Commodity Futures Trading Commission. Hedge funds, pension funds and others added to their short positions, or bets on lower prices, by 4,763 and added to their long positions, or bets on rising prices, by just 731. It pulled back the net bullish position by 2.5% to 160,278.

UBC Faculty Joins Other Prestigious Universities Calling for Fossil Fuel Divestment

The University of British Columbia is following the lead of faculty and students at Harvard University, the University of California, Stanford University and many other universities across North America.  Also of note, Norway’s sovereign investment fund, the largest in the World @ $1.3 Trillion, has already made the decision to divest. The current fossil fuel market collapse and likely long term instability is prima facie evidence of the need for divestment, and to prevent further increases in carbon emissions.

UBC Faculty Open Letter Here: UBC Faculty Call For Fossil Fuel Divestment

This Big Idea is sweeping public and private institutional investment funds globally in the belief that it is overdue to begin more demonstrative action against human caused climate change.  Canadians have a particularly important role to play in this.  Current government policy has focused the economy on fossil fuels, at the expense of a broader based economy, and is now experiencing the wrath of the “natural resource curse. Canadian innovation and productivity have plummeted on the OECD scale, and Canada is entering a highly volatile and uncertain recessionary period, as forecast by The Conference Board of Canada, the International Monetary Fund, and numerous Canadian banks.

From the Canadian Broadcasting Corporation:

Faculty at the University of British Columbia have voted in favour of the institution divesting its existing fossil fuel holdings and forgoing further investments in companies connected with fossil fuels.

“Students have spoken. Faculty have spoken. It’s time for UBC to act,” George Hoberg, professor in forest resources management, said in a statement. “Climate change presents an urgent crisis for humanity.”

The results of the referendum were released Tuesday, with 62 per cent of voters supporting divestment.

A fossil-free portfolio

Of UBC’s $1.2-billion endowment fund, more than $100 million is invested in oil, natural gas and coal. The faculty vote is calling on the university to divest completely from those holdings within five years.

“Just as UBC has pledged to use its campus as a ‘living laboratory’ for sustainability, we call on our university to apply its expertise with the same vigour to the endowment,” said Kathryn Harrison, professor of political science and a climate policy expert.

“UBC should devise a profitable, fossil-free portfolio that can serve as an inspiration for sustainable investing by other institutions.”

The faculty will now put their proposal to the university’s board of governors.

“UBC is a place of academic dialogue and debate, and we welcome our faculty members’ interest in our investment policies,” the university said in a statement responding to today’s result. “As the trustee of the endowment, UBC has a fiduciary obligation to ensure that it is managed prudently.”

A growing movement

The fossil fuel divestment movement started in the United States and has spread across North America and Canada.

Last year, UBC students held their own referendum on the issue, with an almost four-to-one vote in favour of divestment.

Today’s vote comes just before Global Divestment Day on Friday when, the UBC campaigners say, a divestment campaign will be launched at the University of Calgary.

Norway Sovereign Wealth Fund Drops Coal and Tar Sands Investments

World’s biggest sovereign wealth fund dumps dozens of coal companies

Norway’s giant fund removes investments made risky by climate change and other environmental concerns, including coal, oil sands, cement and gold mining

The world’s richest sovereign wealth fund removed 32 coal mining companies from its portfolio in 2014, citing the risk they face from regulatory action on climate change.

Norway’s Government Pension Fund Global (GPFG), worth $850bn (£556bn) and founded on the nation’s oil and gas wealth, revealed a total of 114 companies had been dumped on environmental and climate grounds in its first report on responsible investing, released on Thursday. The companies divested also include tar sands producers, cement makers and gold miners.

As part of a fast-growing campaign, over $50bn in fossil fuel company stocks have been divested by 180 organisations on the basis that their business models are incompatible with the pledge by the world’s governments to tackle global warming. But the GPFG is the highest profile institution to divest to date.

A series of analyses have shown that only a quarter of known and exploitable fossil fuels can be burned if temperatures are to be kept below 2C, the internationally agreed danger limit. Bank of England governor Mark Carney, World Bank president Jim Yong Kim and others have warned investors that action on climate change would leave many current fossil fuel assets worthless.

“Our risk-based approach means that we exit sectors and areas where we see elevated levels of risk to our investments in the long term,” said Marthe Skaar, spokeswoman for GPFG, which has $40bn invested in fossil fuel companies. “Companies with particularly high greenhouse gas emissions may be exposed to risk from regulatory or other changes leading to a fall in demand.”

She said GPFG had divested from 22 companies because of their high carbon emissions: 14 coal miners, five tar sand producers, two cement companies and one coal-based electricity generator. In addition, 16 coal miners linked to deforestation in Indonesia and India were dumped, as were two US coal companies involved in mountain-top removal. The GPFG did not reveal the names of the companies or the value of the divestments.

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“One of the largest global investment institutions is winding down its coal interests, as it is clear the business model for coal no longer works with western markets already in a death spiral, and signs of Chinese demand peaking,” said James Leaton, research director at the Carbon Tracker Initiative, which analyses the risk of fossil fuel assets being stranded.

A report by Goldman Sachs in January also called time on the use of coal for electricity generation: “Just as a worker celebrating their 65th birthday can settle into a more sedate lifestyle while they look back on past achievements, we argue that thermal coal has reached its retirement age.” Goldman Sachs downgraded its long term price forecast for coal by 18%.

On Wednesday, a group of medical organisations called for the health sector to divest from fossil fuels as it had from tobacco. The £18bn Wellcome Trust, one of the world’s biggest funders of medical research , said “climate change is one of the greatest challenges to global health” but rejected the call to divest or reveal its total fossil fuel holdings.

In January, Axa Investment Managers warned the reputation of fossil fuel companies were at immediate risk from the divestment campaign and Shell unexpectedly backed a shareholder demand to assess whether the company’s business model is compatible with global goals to tackle climate change.

Note: The first line originally said 40 coal mining companies had been dropped, instead of the correct number of 32. A further eight companies were dropped due to their greenhouse gas emissions: five tar sand producers, two cement companies and one coal-based electricity generator.

Preparing For The Long Term Consequences In Texas And Western Canada

UPDATE: January 20, 2015. Target announced this week that it will be closing all 133 stores in Canada, including the Vernon and Kelowna stores. eliminating at least a couple of hundred local $10/hr jobs and a handful of slightly better paid management jobs. The Wall Street Journal is reporting that Target’s 17,000 + Canadian layoffs of low income workers will be the largest in Canadian history.

OPEC Report Downgrades Demand for Its Oil as Prices Fall Again

The growing downturn in the fossil fuels industry has extraordinary implications globally.  While some are proposing theories that this downturn will be short-lived, there simply isn’t much evidence to support an optimistic forecast.  Saudi Arabia is openly executing a long term strategy to squeeze “high cost oil producers,” using its unquestioned leverage and the lowest production costs in the World.  Europe is facing potential deflation, and the current European recession is forcing the European Central Bank to begin “quantitative easing,” beginning this week, essentially printing money.  The Russian economy is in shambles as the ruble weakens, something Putin did not plan on occurring.  The Chinese economy has weakened sharply and will likely remain weak into the near foreseeable future. Meanwhile Canada is at the mercy of these global forces, with little in the way of economic reserves to defend its economy, having bet the entire Canadian economy on oil. Somehow Joe Oliver promised he would balance the Canadian budget in 2015, and then the next day, Oliver ate crow, and walked back his promise.  In a surprise move, The Bank of Canada then reduced the lending rate to 0.75%, causing the loonie to plummet below 81 cents. Things are not what the government wants us to believe.

There are significant hedge bets in the market that oil will soon return to $100 per barrel. A prominent optimistic theory suggests that Saudi Arabia and the United States are collaborating to squeeze Putin and the Russian oil economy, and oil will bounce back within 90 days. However, most economists and oil industry analysts are projecting a much longer and deeper petroleum industry recession than in the 1980’s, for example.  The predominant view is that it will persist for at least five years or longer.

In Texas, Hunkering Down for the Oil Bust

Reblogged from The New York Times

By CLIFFORD KRAUSSJAN. 19, 2015

MIDLAND, Tex. — With oil prices plummetingby more than 50 percent since June, the gleeful mood of recent years has turned glum here in West Texas as the frenzy of shale oil drilling has come to a screeching halt.

Every day, oil companies are decommissioning rigs and announcing layoffs. Small firms that lease equipment have fallen behind in their payments.

In response, businesses and workers are getting ready for the worst. A Mexican restaurant has started a Sunday brunch to expand its revenues beyond dinner. A Mercedes dealer, anticipating reduced demand, is prepared to emphasize repairs and sales of used cars. And people are cutting back at home, rethinking their vacation plans and cutting the hours of their housemaids and gardeners.

Dexter Allred, the general manager of a local oil field service company, began farming alfalfa hay on the side some years ago in the event that oil prices declined and work dried up. He was taking a cue from his grandfather, Homer Alf Swinson, an oil field mechanic, who opened a coin-operated carwash in 1968 — just in case.

Photo

Homer Alf Swinson, left, an oil field mechanic, opened a coin-operated carwash in 1968 — just in case oil prices declined. CreditMichael Stravato for The New York Times

“We all have backup plans,” Mr. Allred said with laugh. “You can be sure oil will go up and down, the only question is when.”

Indeed, to residents here in the heart of the oil patch, booms and busts go with the territory.

“This is Midland and it’s just a way of life,” said David Cristiani, owner of a downtown jewelry store, who keeps a graph charting oil prices since the late 1990s on his desk to remind him that the good times don’t last forever. “We are always prepared for slowdowns. We just hunker down. They wrote off the Permian Basin in 1984, but the oil will always be here.”

It’s at times like these that Midland residents recall the wild swings of the 1980s, a decade that began with parties where people drank Dom Pérignon out of their cowboy boots. Rolls-Royce opened a dealership, and the local airport had trouble finding space to park all the private jets. By the end of the decade, the Rolls-Royce dealership was shut and replaced by a tortilla factory, and three banks had failed.

There has been nothing like that kind of excess over the past five years, despite the frenzy of drilling across the Permian Basin, the granddaddy of American oil fields. Set in a forsaken desert where tumbleweed drifts through long-forgotten towns, the region has undergone a renaissance in the last four years, with horizontal drilling and fracking reaching through multiple layers of shales stacked one over the other like a birthday cake.

But since the Permian Basin rig count peaked at around 570 last September, it has fallen to below 490 and local oil executives say the count will probably go down to as low as 300 by April unless prices rebound. The last time the rig count declined as rapidly was in late 2008 and early 2009, when the price of oil fell from over $140 to under $40 a barrel because of the financial crisis.

Unlike traditional oil wells, which cannot be turned on and off so easily, shale production can be cut back quickly, and so the field’s output should slow considerably by the end of the year.

The Dallas Federal Reserve recently estimated that the falling oil prices and other factors will reduce job growth in Texas overall from 3.6 percent in 2014 to as low as 2 percent this year, or a reduction of about 149,000 in jobs created.

Midland’s recent good fortune is plain to see. The city has grown in population from 108,000 in 2010 to 140,000 today, and there has been an explosion of hotel and apartment construction. Companies like Chevron and Occidental are building new local headquarters. Real estate values have roughly doubled over the past five years, according to Mayor Jerry Morales.

The city has built a new fire station and recruited new police officers with the infusion of new tax receipts, which increased by 19 percent from 2013 to 2014 alone. A new $14 million court building is scheduled to break ground next month. But the city has also put away $39 million in a rainy-day fund for the inevitable oil bust.

“This is just a cooling-off period,” Mayor Morales said. “We will prevail again.”

Expensive restaurants are still full and traffic around the city can be brutal. Still, everyone seems to sense that the pain is coming, and they are preparing for it.

Randy Perry, who makes $115,000 a year, plus bonuses, managing the rig crews at Elevation Resources, said he always has a backup plan.

“We are responding to survive, so that we may once again thrive when we come out the other side,” said Steven H. Pruett, president and chief executive of Elevation Resources, a Midland-based oil exploration and production company. “Six months ago there was a swagger in Midland and now that swagger is gone.”

Mr. Pruett’s company had six rigs running in early December but now has only three. It will go down to one by the end of the month, even though he must continue to pay a service company for two of the rigs because of a long-term contract.

The other day Mr. Pruett drove to a rig outside of Odessa he feels compelled to park to save cash, and he expressed concern that as many as 50 service workers could eventually lose their jobs.

But the workers themselves seemed stoic about their fortunes, if not upbeat.

“It’s always in the back of your mind — being laid off and not having the security of a regular job,” said Randy Perry, a tool-pusher who makes $115,000 a year, plus bonuses, managing the rig crews. But Mr. Perry said he always has a backup plan because layoffs are so common; even inevitable.

Since graduating from high school a decade ago, he has bought several houses in East Texas and fixed them up, doing the plumbing and electrical work himself. At age 29 with a wife and three children, he currently has three houses, and if he is let go, he says he could sell one for a profit he estimates at $50,000 to $100,000.

Just a few weeks ago, he and other employees received a note from Trent Latshaw, the head of his company, Latshaw Drilling, saying that layoffs may be necessary this year.

“The people of the older generation tell the young guys to save and invest the money you make and have cash flow just in case,” Mr. Perry said during a work break. “I feel like everything is going to be O.K. This is not going to last forever.”

The most nervous people in Midland seem to be the oil executives who say busts may be inevitable, but how long they last is anybody’s guess.

Over a lavish buffet lunch recently at the Petroleum Club of Midland, the talk was woeful and full of conspiracy theories about how the Saudis were refusing to cut supplies to vanquish the surging American oil industry.

“At $45 a barrel, it shuts down nearly every project,” Steve J. McCoy, Latshaw Drilling’s director of business development, told Mr. Pruett and his guests. “The Saudis understand and they are killing us.”

Mr. Pruett nodded in agreement, adding, “They are trash-talking the price of oil down.”

“Everyone has been saying `Happy New Year,’” Mr. Pruett continued. “Yeah, some happy new year.”