The Power and the Money

U.S. ♥ Canada, Earth not so much

  Thoughts on cost overruns in the oil sands will be coming up quickly.  Right now, just the (belated) news that the U.S. government has approved the Alberta Clipper, a pipeline that will move crude from Hardisty, Alberta, to Superior, Wisconsin.   

So what is the environmental problem?  Well, aside from the problems with tailings pools and the like within Alberta, the oil sands release a boatload of carbon.  After all, in order to make the stuff you need to inject steam right into the ground.  That takes a lot of energy.  In other words, you need to burn a lot of stuff in order to get stuff you can burn. 

Dealing with that carbon will be Canada's problem.  If Waxman-Markey passes, it is quite possible that the U.S. will tax Canadian oil exports.  Even if that doesn't happen, the adjustment burden will fall north of the border, unless Canada and the U.S. get together on a combined cap-and-trade system.  Unless ... well ... unless both countries decide that it is just more important to have a big and growing share of North American oil consumption produced in North America, with the rents (such as they are) going mostly to the Province of Alberta. 

One reason why oil sands project run overbudget below the fold.  Full explanation still forthcoming, with the preview that the comment thread pretty much nailed the reasons. 

Cost overruns in the oil sands

  As part of writing a book about the Panama Canal, Carlos and I had to do a lot of research into cost overruns on big infrastructure projects.  We found the usual horror stories.  The Panama Canal went over-budget by a factor of 2.0.  BART exceeded projections by 1.6, and the Washington Metro hit 1.8.  Miami’s Metrorail jumped the limit by 2.1, the Big Dig ran over by 2.9, and the Brooklyn-Queen Expressway beat its budget by an astonishing 5.1. 

Sounds bad, right?  And in the case of the BQE, it is bad.  But you haven't seen overruns until you've seen the private sector try build multi-billion dollar stuff in the Albertan oil sands.  Suncor's Millenium project ran over by 1.6, about the same as BART.  Shell's expansion of the Muskeg River mine has hit 2.2, and counting.  In 2008, Syncrude's Stage 3 expansion passed 2.4.  The Canadian Association of Petroleum Producers estimates that capital costs for ongoing projects are going to average as much as 2.7 times the 2005 projections. 

Not quite the Big Dig, but making the Panama Canal look good.  I have some thoughts as to why this happens, but before I reveal them, what do you think?

Canadian oil taxes: too high, too low, or just right?

  Even if the occasional bout of Canadian sanctimoniousness can make me want to try to bloody some noses, I am a huge admirer of the Great White North.  Which is why, among other reasons, I am trying to figure out whether said country’s tax policy towards its oil and gas industry is too lenient, too onerous, or just right. 

Statistics Canada publishes some very good statistics on the “conventional oil” industry, which, confusingly, includes natural gas but excludes the Albertan oil sands.  Their numbers include operating costs, capital expenditures, and exploration costs.  They also include taxes and royalty payments to provincial governments.  (The Canadian constitution reserves authority over natural resources to the provinces.)  You have to do some digging to get the equivalent numbers from the oil sands, including some figures from the Albertan Ministry of Energy that might not be entirely equivalent, but it can be done.

And the results?  Well, Alberta produced C$79 billion worth of hydrocarbons in 2007, C$22,687 for every man, woman, and child in the province.  Of that, conventional hydrocarbons made up C$55 billion.  The companies that produced those hydrocarbons spent C$4 billion on exploration, C$17 billion on development, and C$10 billion on operation.  That left them C$24 billion in net income, of which the government of Alberta took C$9 billion in taxes and royalties.  Add in another estimated C$2 billion in income tax payments, and you have a total take around 65% of the industry’s net cash flow before financing, which is what the measure really is.  Crushing socialism!  Or, put another way, a sensibly high tax rate, since the royalties are structured in such a way as to essentially exempt new investments until the initial costs are recovered.

That fact, however, suggests that maybe net cash flow isn’t the right denominator.  After all, income taxes are generally applied before investment expenditures.  Alberta is trying to subsidize them.  In that case, isn’t operating income the right measure?  Okay ... using operating income as the denominator, the effective tax rate on conventional hydrocarbons in Alberta drops to 22%.  That seems pretty low.  And, of course, if you just use the government take as a percent of revenues for your calculation, then you get a rate of only 18%.  That is almost tax-free compared to such left-wing hotbeds as Alaska.

The numbers for the oil sands are even stranger.  On the one hand, taxes and royalties as a percentage of operating income was only 28%, and as a percentage of gross revenues were only 19%.  On the other hand, if Statistics Canada is to be believed, the industry reinvested all of its operating profits and then some in 2007.  Royalties came to 150% of net cash flows before financing.  If the idea is to encourage investment despite low profits, then maybe the system is about as high tax as it can get.

So what’s the “right” number?  Are taxes high or low?  For what it is worth, other provinces, like Saskatchewan and Newfoundland, turn out to be even lower tax than Alberta ... but don’t have anything like the amount of investment.  Companies there are taking the money and running. 

Thoughts?

How Canada works

  Want to know more?  I'm not sure that everything in the series is correct, but it's a good place to start learning more about how the country formerly known as a “Dominion” regulates its economy.

Speaking of which, y'all really do need a name.  Just plain “Canada,” well, it lacks dignity.  Get a “Commonwealth” up in here, or maybe a “Federation.”  Something, people. 

Demography matters, and a music video

  There is an interesting (if rarely updated) blog called “Demography Matters.” It's hit a few interesting topics lately.  Randy McDonald is the driving force behind it.  For those of you who don't know him, he wrote the defining takedown of the whole “Eurabia” nonsense, aka the idea that immigration and differential birthrates will eventually give Europe a Muslim majority.  But the blog is a lot more than that.

Here is a discussion of Greenland.  Short version:  considering the country's dependence on Danish expats for skilled labor, even a non-independence independence of the sort negotiated by other microstates could lead to disaster.  The population is shrinking despite high birthrates.  Maybe they'll get lucky and find oil.  More likely they will remain a dependency of Denmark forever, most likely de jure but definitely de facto.

The blog also recently discussed Iran.  Short version:  looks like Europe!  Crashing birthrates could fuel an economic boom if only the place could get the policies right.  In comments there is an interesting discussion of the fact that American birthrates have stayed above replacement ... and that much of that difference is because urban birthrates in the U.S. aren't appreciably different from their suburban or rural equivalents.  The really weird fact?  Canadian birthrates are crazy lower than U.S. ones, even in such similar places as Washington and British Columbia. 

Finally, it presents a scary version of Cuba's future, in which the country enters a demographic death spiral.  All it lacks is a projection of the worst case scenario: what would Cuba's population and age pyramid look like in 2050 if it goes the way of Ukraine and stays there?

Below the fold is a music video.  It is for Randy, for reasons he understands.  Essentially, while not my cup of tea, it shows what can be accomplished in his preferred genre in both aural and visual terms when attempted by two rather accomplished artists.  Enjoy.

Governor-general eats raw heart of freshly-killed seal, “tastes like sushi”

  Well.  I just got this news: 

That is totally cool.  Sarah Palin may stand in front of turkeys getting stuffed in grinders and sit on dead bear rugs and shoot wolves from helicopters, but raw seal heart takes it to a whole ’nother level.  If you want the gory details, go watch here.  (Like, seriously gory.  The heart gets eaten right out of the carcass of the dead seal.) 

But I must correct my internet acquaintance, James Nicoll.  James, Governor-General Michaëlle Jean is not your head of state!  You oughta be ashamed of yourself, James.  Unforgiveable.

In fact, it seems as though Canada’s actual head-of-state may not approve of her representative eating the raw heart of a dead seal:

I love Canada.  First the Queen’s representative banishes parliament, then she eats a raw heart right out of a dead seal.  What next?

Unbecoming Canadian sensitivity

  I am an unabashed Canadaphile.  The Canadian constitution is rather better designed than the American one, other than not having a popularly-elected governor-general.  The health care system is not the one I’d design from scratch, but it has ours beat cold.  The federal system makes more sense.  They don’t fetishize local government.  Plus, they play good baseball and make good hip-hop.  And I have in-laws in the Mounties.  How Canadian is that, eh?

 

With that in mind, Canadian defensiveness towards the U.S. perplexes me, and it pops up in the most unexpected places.  Frex, as I didn’t know until I read Randy’s blog, it seems that Janet Napolitano may have accidently confused the Millennium Plot with 9-11 during a press conference.  OK, that’s a little embarrassing.  I’ve been there myself.  But enough to produce this reaction?  Or this one? 

The Globe and Mail column is particularly confusing.  After all, the sensible ripost to any mention of the Millennium Plot is to say, as the column did, that the U.S. blocked the terrorists at the border and the system worked.  Instead it brings up security theater that has nada to do with Canada (shoes in airports) and stuff that’s really aimed at keeping track of Americans, like requiring passports.  And that after a claim that Janet Napolitano is just like Dick Cheney.  Erm?  From whence this excitement?

Now, there are countries where people are understandably worried about perceived slights from the United States.  Like Mexico, where there are umpty-scrump reasons for people to be defensive with respect to their 800-pound neighbor.  Among other things, Mexico lost its war with the United States.  That sensitivity is why the U.S. needs to apply the same border controls to the northern and southern frontier, or at least be publicly seen to be doing that; otherwise key segments of Mexican public opinion would be enflamed, making cooperation unnecessarily harder. 

But similar Canadian sensitivity I don’t get.

Canadian policy on captured pirates: let ‘em go. ¿¿De veras??

  As our few readers know, we've been covering piracy for some time on this blog.  Our first post on the topic, in fact, took on the myth that European navies refused to enforce the law against pirates.  Only now Robert Farley tells us that the Canadian and Dutch navies went ahead, captured pirates, and released them.  Er?

Well, NATO is not the problem.  It is true that NATO, which is not a sovereign state, does not have arrest powers.  But the national navies operating under NATO command do have such powers.  Now, I'd be happy with giving an international organization arrest powers, but I can see why some politicians might be reluctant to take that step.  That said, the truth is that not only do national militaries have the power to arrest pirates on the high seas, since December they've had the ability to do the same thing anywhere in Somali territory, sea or land.

So if this and this story are correct, something isn't working.  In the Dutch case, it seems to have been a low-level screw-up.  Ships under European command have standing orders to turn captured pirates over to Kenya for prosecution and punishment; ships under NATO do not.  There was a deputy from the justice ministry on board the Dutch ship (for precisely this reason), but whoever it was decided to let the pirates go.  Parliament appears to be annoyed.  At some point, I suppose, we'll find out who made the decision and why.  We might even find that circumstances made it a wise choice.  But it isn't Dutch policy, and it seems to be causing the government some headaches at home.

Canada seems to have a deeper problem.  The Globe and Mail has deeply misinformed its readers by reporting, contrary to fact, that “Canadian sailors, like their NATO allies, lack the authority to make arrests in international waters.”  Of course, the Globe and Mail is parroting what seems to be Ottawa's official line.  After all, the Prime Minister said in Port-of-Spain that the Winnipeg did the right thing by releasing the pirates.  “Those were the appropriate measures under the circumstances.”  Elsewhere, a Canadian admiral alluded to mysterious legal difficulties.  “There's the rule of law that needs to be applied, so we're not currently regularly detaining them, no. There are all kinds of challenges with that.” 

Now, I can understand why a country would fear becoming a dumping ground for pirates ... but it isn't as though hundreds or thousands of them are being captured every year.  Nor is organizing a piracy trial under normal criminal rules all that difficult.  (And they have, by definition, been caught red-handed.) 

So, Canadian readers, I ask you, what the hell?

Yet another modest proposal, in which I outrage my friends by advocating protectionism but please Canadians and Mexicans by saying it shouldn't be aimed at them

  The new stimulus bill requires that all steel be purchased domestically.  Brad Delong is unhappy:

“If there's little excess capacity in the U.S. steel industry — so that the price of steel is high enough to induce people to look outside for suppliers — then a stimulus won't be much needed. If there's a lot of excess capacity so that a stimulus is needed, then steel customers should be able to bargain prices down to marginal cost — in which case foreign producers will have an extremely difficult time competing on price given that steel is heavy and distances are great.”

Well, maybe.  Marginal cost can vary a lot, and there are two steel-producing nations whose companies enjoy almost as good access to American markets as their American competitors:  Canada and Mexico.  The price of the same product imported from the two countries varies between 14% and 65%.  (December price data below the fold.)  Meanwhile, China has achieved significant import penetration, despite prices which exceed Canadian ones by 40% on average, and by 11% in the chief product category China exports to the United States.  The implication is that American firms are high cost.

Normally, the fact that U.S. firms are high-cost wouldn't change anything.  It would make sense to buy the cheapest steel from wherever.  American consumers would save by going to the lowest cost producer, and Americans as a whole would be better off, even if American steel producers would suffer. 

Under depression conditions, however, I'm not sure the above logic still holds.  Under depression conditions, using public money to buy from domestic high-cost producers has three advantages that don't mean anything in normal times.  First, domestic high-cost producers will spend more of their revenues, not park them as saved profits ... after all, they have high costs!  Second, the workers and suppliers of American steel companies (who make up the chief costs of the domestic producers) are far more likely to spend their wages and earnings on American goods and services than their foreign counterparts, keeping the multiplier higher than it would be otherwise.   Finally, having steel mills shut down in American towns and American workers thrown out of work will have psychological costs for American consumers and businesses.  They could worsen the downturn.  Such costs will be much less if the workers being tossed on the dole are in Ontario or Hebei.   In short, when American resources are unemployed and their unemployment looks set to last, buy-USA provisions can make the country better off as a whole.   

More below the fold.

Department of WTF

  This is bizarre.  And this is really bizarre.  Can anyone explain to me why people would write such nonsense?  Please?  I really want to understand.

The country of the future

  Randy McDonald pointed out this odd article about Brazil in the Globe and Mail.  The author lauds Brazil as a particularly good exemplar of economic management over the past few years, while blasting Canada: 

“On the other hand, Canada should have done much better too: Our economy grew dramatically, fuelled by a new resource boom, and our banks stayed on a short leash, so none failed.  But for the most part, we were among the champagne-sprayers. Our wealth fund, which shamefully lies in provincial hands, is needlessly tiny. And a decade of lacklustre government spending by both parties has robbed us of the chance to become a world leader: Our measures of equality and poverty are no better than they were at the beginning.” 

To which I respond:  bollocks!  (I like that word.  I don't think I've ever actually spoken it.  I don't think anyone in the United States has actually naturally spoken it since 1892, although I have been known to say “bollixed up.”)  Brazilian economic management has been fine, but not exemplary, whereas Canada has done everything it was supposed to do. 

Point #1:  yes, Brazil paid off its debt to the IMF.  Very nice ... but Canada never had any IMF debt to pay off.

Point #2:  yes, Brazil reoriented its social spending to bring real results in improving public health and reducing malnutrition ... problems Canada does not have.

Point #3:  Between 1998 and 2008, Brazil managed to hold its net federal debt to 25% of GDP.  It also managed to redenominate most of its debt into its domestic currency.  Both excellent accomplishments.  But Canada's debt was already denominated in its own currency, and in the same period Ottawa reduced the federal debt from 63% of GDP to 30%, a much more impressive accomplishment, and exactly what the author accuses Canada of not doing.   

Two more points below the fold.

This goes out to James and Randy

  I am told that it can be difficult to get the Daily Show in Canada.  So, under the assumption that you might not regularly tune it in on the internets, I present to my Canadian friends the following very insightful group of talking heads:

The Daily Show With Jon StewartM - Th 11p / 10c

Provinces in Peril

Barack Obama Interview
John McCain Interview

Sarah Palin Video
Funny Election Video

Want to know more?  The preceeding story, “Provinces in Peril” is below the fold.

A view from the south

  So our neighbor to the north just prorogued its Parliament.  I have to say that I had never heard the word "prorogue" before.  It was confusing to an American.  And stuff like this didn't help. 

Here's what it looks like from down here, even among the Canadaphiliacs:

Happy Canada Day!

Happy birthday, nation to the north!

For a very interesting post on some of the political developments that preceeded Confederation, see Randy McDonald. 

At times, I wondered if there was a reason other than political inertia why the British didn't make the obvious concession to Canada, and grant representation in Parliament.  Randy's post raises the possibility that the result of such a move would have been another Ireland.

Or not.  I don't pretend to fully understand the dynamics of Irish independence, either.  Can anyone explain why the British never moved to better integrate their remaining North American holdings with the British Isles?  Was such a thing even considered before the first Imperial Federation proposals in 1884?

Still, Britain's loss was America's gain, in that we have a solid, strong, and very admirable neighbor to the north.  So here's to the objectively fairest, justest, and best-managed polity on the North American continent.  The only thing wrong with it (beside the weather) is that she just plain ain't my own.

Which is why, emotionally, I'll be celebrating the birth of the bestestest polity in North America three days from now.  And one even better for the great example across the northern frontier.  So, from a patriotic American, with all my heart, ¡Viva Canadá, viva!