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Saturday, 8 September 2012

Written By: Sanjay Patel

Here is a glimmer of good news for the U.S. Oil imports to the U.S., currently the world’s biggest oil importer drop, as efficiency gains reduce oil demand, and reliance on new supplies such as light tight oil is increasing. In this post, I would like to discuss America’s dropping oil dependency factor.

With less than 5 per cent of the world’s population, U.S. oil consumption, today, accounts for over 21 per cent of the world’s total oil consumption – and it remains by far the largest user of oil, consuming approximately 19 million barrels of oil each day. The U.S imports about 9 million barrels per day of oil and Canada is number one supplier of oil to the U.S. However, the U.S has come a long way since 1970s in imroving its oil consumption.

In one of the previous posts, we discussed the relationship between nation’s GDP and oil consumption. A positive correlation between higher GDP and higher oil consumption continues to hold initially, however, as mature economies have a tendency to become more efficient over time, and able to sustain economic growth while oil consumption slows. The U.S. is a good example of this process of optimization.

 
The below Figure illustrates the production volume of the U.S., measured by GDP, compared with the country’s oil consumption, measure in millions of barrels per day. In the chart, oil consumption for each year between 1950 and 2011 has been paired with economic activity in the same year, or real GDP. We can observe that between 1950 and 1979, the rise in oil consumption kept pace with the increase in economic activity. In the chart, you can see a steep slop – reflecting a high oil dependency factor to grow economy.
 
This lasted until the 1970s, when the Arab oil embargo of 1973, combined with peaking oil production in the U.S., led to two years of recession, followed by above average inflation that continued for a decade. Under pressure, the U.S. managed to cut its oil intensity by almost half. We can see that the slope between 1983 and 2007 is much shallower – reflecting a low oil dependency factor, indicating that a great deal of economic growth was achieved in this period with a smaller amount of additional oil.
 
Continued gains in the efficiency of the U.S. economy are to be expected. According to the International Energy Agency, the U.S. will gradually be able to reduce its oil consumption from 19 million barrels per day (2011) to 14 million barrels per day (2035), while its economy continues to expand. The data points are trending downward in the chart (2011-2035 period) – reflecting a zero oil dependency factor. In other words, zero new oil is required to grow economy. The optimism is justified, if we consider that other developed nations, including Japan and several nations in Europe, have been able to achieve this, we can expect others (China, India, etc.) to follow in the future.
 
(Note: Opinions expressed here are my own and not that of Suncor)

Sunday, 27 May 2012

Written by: Sanjay Patel

After weeks of intense debates, the Calgary Herald conducted an online poll to check what people think about the rising Canadian dollar (commonly called “loonie”). The poll result suggests Canadians are roughly split over NDP Leader Tom Mulcair’s contention that Alberta’s oil sands are responsible for raising “loonie” and its negative impact on country’s manufacturing sector. The Canadian Press Harris-Decima survey, released Friday, suggests slightly more Canadians disagree than agree with Mulcair — 45 per cent compared to 41 per cent — although opinions varied across the country. You may not be a fan of public opinion polls anymore (If you live in Alberta !) but here are the survey results anyways. Read Here.

The issue is, the issue of rising “loonie” is not that simple for everyone to understand. I’m sure majority of the people who took the survey are not well informed about the issue and have sided with one of the groups (i.e. Alberta or Ontario) – like we always do – and either voted in favour or against the rising loonie.

There is a common perception that “Alberta’s Oil industry (and Oil sands in particular) is solely responsible for rising “loonie”. There is also the perception that “Ontario’s manufacturing industry is suffering, but only Alberta is benefiting”.
Before we delve into the details of rising loonie, let us look at some background information first. In last decade or so, the Canadian Dollar has done really well in financial markets, soaring from an average of 0.64 US dollar in 2002 to 1.01 US dollar in 2011. Currently, the “loonie” is at par with the U.S. dollar and it is explained by the soaring price of oil. Canada’s oil reserves are now officially ranked as third largest oil reserves in the world (It used to be second). When higher oil prices lead to an increased oil production which, in turn, increases the value of the loonie (due to the increased oil production and its export) in comparison with the US dollar. While a strong loonie is good news for Alberta’s oil industry, it hurts local manufactures, however. As loonie goes up in price, Canadian products become more expensive for U.S. buyers and as a result the export of manufacturing products (Automobile, wood, paper, etc.) declines.

 

Perception#1: Alberta’s Oil industry (and Oil sands in particular) is solely responsible for raising “loonie”.
It is true that Canada is a net exporter of oil, so the Canadian dollar moves in tandem with the world oil price, but there are many other reasons that are responsible for rising Canadian dollar:
·     Canada is a resource based economy: Although the price of oil has gone up in last 5 years, Canada’s metals and minerals sector have actually performed better over the last five years. According to Patricia Mohr (Scotiabank’s commodities specialist) metals and minerals account for 30 per cent of the value of commodity exports. Over the last five years, prices for metals and minerals are up 12.2 per cent, which exceeds oil and gas at 9.7 per cent, she said.
·     US Dollar has lost value: We all know that Canadian economy has performed much better than the US economy including many other economies around the world following the 2008 recession. The US economy has suffered a lot after 2008 economic and it still continues to post low growth figures. Two rounds of quantitative easing in the US have devalued its currency and we all remember that there was no quantitative easing in Canada. At the end of 2010, Canada was the only country in the G7 nations to have fully recovered all of its output and employment losses during the recession.
The correlation between the loonie and crude oil is breaking down, says Marc Chandler, who is a Global head of currency strategy at New York-based Brown Brothers Harriman. He provides some interesting perspective on this topic. According to Marc, Canada is a net exporter of oil, but not nearly as it may appear as the eastern part of the country that is home to most of the population and industry are substantial importers of oil. The dollar value of oil exports is a minuscule fraction of the overall turnover of the Canadian dollar in the foreign exchange market. Capital flows are more important than trade flows. Read Here.
 
Perception#2: Ontario’s manufacturing industry is suffering, but only Alberta is benefiting.
While it is true that the strong loonie hurts Ontario’s manufacturing sector, don’t you think the leaders of the major political parties have to show some maturity and stop thinking in terms of Alberta’s interest Vs. Ontario’s interest? After all, we are one country and all the provinces & territories of Canada are not fiscally independent of each other. It is simply a mistake to think that only Albertans stand to lose in any meaningful way from stopping or slowing Alberta’s oil sands. Halting oil sands production would take a heavy toll on Canada’s economy.
·      Alberta’s energy industry employees one in every 14 Albertans.
·      The current value of the oil sands plants is over $100 billion. The industry generates billions of dollars of tax revenue for the government and 60% go into federal coffers.
·      The provincial government collects almost $2 billion annually from royalties and this will increase to $350 billion (cumulative) by 2035, according to CERI. If future oil sands development continues as planned, significant benefits will be realized in terms of job creation including royalty and provincial & federal tax collection and its positive impact will be felt across the Canada. Read Here.
·      New and existing oil sands projects will require an estimated $55 billion worth of goods, materials, and services from suppliers in Ontario – Canada’s largest province – by 2035, according to CAPP. Read here.
Let us be honest. Alberta’s oil or oil sands companies don’t set the price of oil. The price of oil is mainly determined in the world oil market based on oil supply & demand dynamics. People who work in Alberta’s oil industry are simply doing their job by supplying energy demanded by our society. Halting oil production from Alberta’s oil industry is simply not an option when we look at the consequences & rewards.
True, there is a positive relationship between the two (i.e. oil price and loonie) and it does have some losses in manufacturing sector but blaming oil sands or to keep the Canadian dollar weak is not the answer. Productivity gains through efficiency improvement in manufacturing sector is one of the options to mitigate the loss of competitiveness caused by a strong loonie. Many countries blessed with the natural resources have experienced the similar situation and Canada can learn from them. Norway is often discussed as a role model in mitigating the economic difficulties caused due to the abundant natural resources. Norway’s experience demonstrates that fiscal & monetary policies such as the establishment of a petroleum fund can help alleviate the effects of strong currency. 
(Note: The opinions expressed here are my own and not of Suncor’s)