The Power and the Money

How energy independence could undo globalization

 North America is on the verge of finally achieving the much-vaunted goal of energy independence. In fact, the continent has already achieved that for everything save petroleum, but now the latter is in sight. A combination of increased oil sand production in Canada, shale oil discoveries in the United States, and tightened CAFE standards have certainly made it plausible to believe that North American net energy imports will drop to zero by 2020, if not sooner. In fact, it is possible to imagine a situation where the United States alone achieves energy independence by that date.

But does it matter? Assuming no political reaction, no, it probably doesn’t. North America will still be vulnerable to supply shocks from the rest of the world. If the demand for petroleum rises elsewhere, then domestic prices will rise in line. That said, infrastructural bottlenecks can produce lasting price differentials — it doesn’t matter how much demand rises elsewhere if you can’t ship the stuff to those places — but if North American oil production rises enough, then one can assume infrastructure will be repurposed or built.

Wait ... can no political reaction really be assumed? Consider Argentina. The Argentine government imposes high export taxes on oil. Those taxes partially insulate Argentines from price increases elsewhere. High retail taxes keep consumer prices up, but that is a good thing: policy does not subsidize consumption, but the government captures rents that would have otherwise gone to producers. (The retail gasoline tax runs at 70% of value, with a floor of 53.75 centavos per liter, or 46.9¢ U.S. per gallon. The 21% VAT and 2% provincial tax is then imposed on top.)

Now, the U.S. constitution forbids export taxes. But it does not forbid blocks on export infrastructure. And that is just what you are already seeing in the natural gas space! Last month, the Energy Information Administration reported that LNG exports could raise U.S. prices as much as 54%. Representative Ed Markey (D-Massachusetts) immediately responded: he demanded that the federal government should refuse to certify export projects “before all impacts on American families and businesses are considered,” and stated that he will introduce legislation “that would keep more American-made natural gas in America.”

The same pressures apply to oil, although it will be harder (but not impossible) to stop oil export projects. And while the constitution is crystal clear on export taxes, “No tax or duty shall be laid on articles exported from any state,” it is unclear as to whether the export of a product could simply be banned altogether, under either the necessary and proper clause or as a national security measure.

If the growth of world oil supplies fails to outpace demand, then the result is not likely to be smoothly escalating prices. Rather, the result is going to be ever-increasing volatility in the oil market. Small shocks in either direction will lead to huge price swings. In that environment, export bans would be clearly attractive to consumers ... and some producers might also welcome the market stability that they would bring.

In which case we are back to the pre-1970 world. And let me be clear: I do not think that would be a bad thing. The Persian Gulf would lose its economic significance (at least for North America) even if it continued to grow wealthy from the black gold. The U.S. economy would be insulated from price shocks elsewhere. If imports shrank to a small level (and net imports disappeared) might even be able to get a winning coalition around imposing import duties on oil, which would have all sorts of good effects if the U.S. then again lost self-sufficiency.

If that happens, then the economics and geopolitics of oil will be transformed. The analogy of a big world pool of oil, into which production is poured and out of which consumption is sucked, will no longer hold. A lot of the old-fashioned verities about control of supply will start again to make sense. There is a risk, of course, that as nice as it would be for the United States to insulate itself from foreign shocks, the result might be increased instability and resource conflicts in the rest of the world.

Finally, there is an implication for Canada-U.S. relations: the United States has a vested interest in preventing Canada from building more pipelines to the West Coast. Inasmuch as North American self-sufficiency applies to North America and not just the United States, then the U.S. will only be able to insulate itself from swings in the world oil market if Canada has no other place to send its oil, at least not at a reasonable price and in large quantities. (Oil can be shipped by railroad, but there are bottlenecks, since the number of tanker cars is limited.) Of course, should oil prices become sufficiently volatile, it is possible that Canadian producers would approve of export restraints, in return for steadier prices. But it is just as likely that they will ignore American entreaties and send their oil where it will fetch the highest price. Unless, of course, they can’t.

In short, energy independence does matter, but only in conjunction with political steps that amount to the end of an integrated world market in crude oil.

Fear of a black Canada

 Trinidad almost became an American territory in 1931. It didn’t because the British government was perfectly willing to default on its debts to the U.S. government. The Hoover Administration, sensibly, didn’t push the issue.

The Bahamas, it turns out, almost became a Canadian province in 1911. The colonial assembly in Nassau, backed by prominent Canadian investors in the islands, pushed hard to join. The population of the islands was only 56,000, but there was plenty of money to be made investing in infrastructure: the first telephones were only installed in 1906, and electricity arrived in the archipelago in 1909. The Royal Bank of Canada set up shop in 1908.

Canada’s share of Bahamian imports, however, remained small: $28,392 in 1911, compared to $1.3 million in American imports to the archipelago. Moreover, the fiscal cost of taking over the islands would have been minimal: the federal government spent only 6.1% of GDP in 1911, and transfers to provincial governments amounted to only 0.4% of GDP. (Federal infrastructure spending in the Bahamas would have contributed to economic growth in the islands and likely been a wash for the treasury. It also would have been negligible on the scale of the Confederation.)

So why didn’t it happen? Simply put, Canadian racism ... triggered by a wave of American political refugees. Prime Minister Wilfred Laurier (a Liberal) seemed open to the idea of letting the Bahamas join until, in 1911, a strange wave of racial fear arose from Manitoba. A group of about 1,000 wealthy black Americans from Oklahoma — fleeing the 1907 passage of Jim Crow laws after statehood — arrived at the Emerson border crossing. The result was panic on the prairies.

I’ll turn the floor over to William Thoburn, a Conservative MP from Ontario: “As long as we give the free homesteads in Canada’s northwest, they will come by the tens of thousands. I would like to ask the government if they think it is in the interests of Canada that we should have Negro colonization in the Canadian northwest. Would it not be preferable to preserve for Canada the land they propose to give to Negroes?”

The hysteria soon spread to Alberta. A group of prominent Albertans wrote to the federal interior minister, Frank Oliver, with a series of complaints straight out of an American inner suburb, circa 1970. First, they worried that “Negro immigration” would create white flight and drive down property values. (The idea of rural white flight on the Albertan prairies boggles the mind.) They then went on to worry about their women. “We do not wish that the fair fame of Western Canada should be sullied with the shadow of Lynch Law but we have no guarantee that our women will be safer in their scattered homesteads than other white women in other countries with a Negro population.” To his credit, Premier Arthur Sifton refused to block black immigration.

The panic was especially crazy because Canadian law required immigrants to have on them at least $50 per man, woman, and child. In 2010 dollars, that’s $1,185 — but that figure doesn’t take into account the fact that people were poorer a century ago. When adjusted for increases in average wages, each immigrant was required to have the 2010 equivalent of $7,425. In other words, these were not the huddled masses; these were well-heeled political refugees fleeing the sudden imposition of racial tyranny in their home state.

From the Toronto Mail and Empire of April 27, 1911: “If Negroes and white people cannot live in accord in the South, they cannot live in accord in the north. Our western population is being largely settled by white people from the United States. If we freely admit black people from that country, we should have race troubles that are a blot on the civilization of our neighbours ... The Negro question is of the United States’ own making and Canada cannot allow any part of her territory to be used as a relief colony on that account.”

The Canadian government ordered their agent in Kansas City “to refuse certificates or any encouragement to migration of this class” and “take immediate measures to check this class of immigrants.” It then limited black immigrants to Emerson and North Portal, where it subjected them to degrading medical examinations. It went so far as to hire a black doctor from Chicago to travel to Oklahoma and give lectures about how terrible the Canadian climate was for black people. Finally, in August 1911, with a federal election coming up fast, came this order-in-Council, pursuant to the Immigration Act of 1910, which allowed the government to ban “immigrants belonging to any race deemed unsuited to the climate or requirements of Canada”:

In this atmosphere — with the Liberals under fire for their support of the Reciprocity Treaty with the United States — it should come as no surprise that Prime Minister Wilfred Laurier (a Liberal) would decide against expanding Confederation to the Bahamas on grounds of, in his own words, incompatible “ethnical origin.” Laurier was willing to take West Indian islands as purely colonial concerns, with no representation in Ottawa and no right of immigration, but that wasn’t acceptable to West Indian elites which already enjoyed a modicum of self-government. The Bahamas, for example, possessed a parliament elected by a property-restricted suffrage. (The restrictions meant that white people held 26 out of the 29 parliamentary seats, even though they made up only a quarter of the population.)

When Laurier lost the September 1911 election to Robert Borden, the Bahamians tried once again. The big issue in the election was a proposed tariff-reducing Reciprocity Treaty with the United States. The Conservative Party opposed the agreement, and it used imperial rhetoric as part of its appeal. With pro-Empire Borden as Prime Minister, the (unelected) Governor of the Bahamas, William Grey-Wilson, travelled to Toronto. Among other things, he gave a speech before the Empire Club. In it, Grey-Wilson extolled the wonders of trade and tourism — which were, in fact, the biggest gain from Confederation. The Bahamas would win a secure market for its tropical products, and Canadian companies would gain control of that trade. (They would also cement their domination of Bahamian finance and services.) Grey-Wilson, of course, felt the need to assure Canadians that the absorption of the Bahamas would not lead to black members of parliament sitting in Ottawa:

Now, the constitution of the Bahamas, like the other three B’s of that portion of the Empire, is on a suffrage that is almost equivalent to yours in Canada. I have examined them. Separately and I think they are very much the same. That is to say, any member of a community who is in possession of a house of the value of $10 a year is entitled to vote. That, of course, is practically manhood suffrage. That vote is common to the blacks and to the whites. The inhabitants of the Bahamas are one quarter white and three quarters black.

The result of our elections has been for many years past — and I would remind you that the Bahamas have a constitution almost as old as Newfoundland — that the black man almost invariably elects a white man to represent him. And why is that, gentlemen? You here are conversant with the horrors of the situation in the Southern States of America. In the Bahamas we have no such position. (Applause.) I say that a white woman in the Bahamas, in the most isolated position, is as secure today as if she were in this room now. (Applause.) I defy anyone to say that about the Southern States of America.

Now, gentlemen, why is that? It is not because we have treated the black man as the equal of the white; no. He admits himself — the most intelligent of them with whom I have spoken — he admits himself that he is the white man’s inferior. He admits that he is of a child race, undeveloped; but it is because, being a child race, we have extended to him, as we have to all the other races of the Empire, that universal unswerving British justice.

Unfortunately, Governor Grey’s arguments failed to assuage Prime Minister Borden. In a meeting between Grey and Borden on October 18th, 1911, the Prime Minister rejected the possibility of taking the Bahamas into the Canadian confederation. His reasoning was that the events of the past year had proved that Canadian public opinion would not countenance the admission of a majority-black province, no matter how small or how far away. (The refusal of Toronto hotels to give rooms to black Bahamian visitors only reinforced his point.) The Colonial Office concurred. Worried by the hysteria engendered by the emigrants from Oklahoma, the C.O. reported the following about the possibility of a Bahamian province: “No doubt for the moment the Dominion government would safeguard their interests, but there are signs of the rise of a colour question in Canada and in any case it cannot be long before U.S. opinion gives the tone to Canada in regard the Negro.”

Ultimately, all that came out of the talks was a reciprocity treaty with several West Indian jurisdictions. Reciprocity entailed a 20% tariff cut; it was far from the free trade entailed in political union. It barely dented American domination of Bahamian commerce. And so, much as racism derailed an 1867 attempt by the United States to annex the Dominican Republic, racism derailed what should have been a simple, easy, and mutually-beneficial extension of the Canadian confederation into the Caribbean. Canada eventually absorbed poorer, less strategic, and more troubled Newfoundland, but those islanders had pale skins.

As for the Bahamas, it became part of the United States ... okay, not officially, but watch this space.

Is the U.S. exceptional in its policy towards Arab oil?

 I am a bit confused about what Prof. Quiggin is trying to say here:

The point applies most obviously in relation to oil. The idea that the US can legitimately use its military power to ensure continued access to oil resources rests, in large measure, on the (not entirely unfounded) assumption that those controlling the resources are a bunch of sheikhs and military adventurers who happened to be in the right place, with guns, at the right time. Without the Arab exception, the idea of oil as a special case, not subject to the ordinary assumption that resources are the property of the people in whose country they are found, will also be hard to sustain.

Prof. Quiggin is a very smart guy, and when I say I’m confused, I mean that honestly. The governments of Arab oil-producing states keep almost all of the rents from the oil extracted on their territory; this is just as true of Abu Dhabi, which works with the majors, as it is of Saudi Arabia, where state-owned Saudi Aramco monopolizes production. Moreover, only 9% of the oil produced in and around the Arabian peninsula goes to the United States. Put another way, the U.S. only gets 10% of its oil from the Arab countries of the Gulf. The U.S. gets no oil from North Africa. The U.S. does, of course, use its military power to insure that the oil keeps flowing. But I don’t see that as much different from what the U.S. does with other strategic raw materials, or in regions outside the Arab world.

Matt Yglesias got me even more confused:“Certainly if you were just to look at things in coldly rational terms, the resource-rich country the US should be seeking to dominate militarily is Canada, located conveniently next door. And, indeed, in the first half of the nineteenth century that’s how hawkish American politicians saw things. But it would be politically unacceptable in a modern context to try to bully Canada or Norway into coughing up oil.”

Except ... uh ... how is U.S. policy towards those countries different from our policy towards Saudi Arabia? Canada is not about to embargo U.S. oil; Soviet fleets are not about to blockade Norway. American policy would be rather different if either were true. (And policy was different, when the latter was a real threat.) The oil does belong to the provinces in Canada and the national government in Norway; but ditto in Kuwait and Saudi Arabia and Iraq. What does Matt mean when he implies that the U.S. uses military force to make the Arab countries “cough up oil”?

Quiggin’s main point is about overall U.S. policy towards the Middle East, but I honestly do not what he’s trying to say about oil. Nor do I understand Yglesias’s. Can someone explain?

Race, roads, or regulation? Canadian and American cities

 When asked why Canadian cities are so built-up compared to American ones, Martin Wisse of the Netherlands suggests, “No white flight.” It’s an appealing answer, given America’s massive urban ghettoes, but it’s almost certainly wrong.

 

Consider the differences between Seattle and Vancouver. For an American city, Seattle is very white and disproportionately childless. The city, however, splatters across the horizon, with few high-rises outside the central business district, while Vancouver is relatively compact and its proliferating residential towers reach to the sky. All this despite geography in Seattle that should encourage density!

The Seattle-Vancouver comparison alone should make you doubt the validity of the “white flight” hypothesis. There are other reasons, however, to reject it. Until 1990 none of Canada’s metropolitan areas declined in population — the country didn’t see shifts in economic geography like what turned cities like Buffalo, Detroit, New Orleans, Flint, Akron, Pittsburgh, Dayton, and Syracuse into what they are today. (The 1990s recession changed that, but the places that shrank tended to small, and located in Atlantic Canada or northern Ontario and Quebec.)

More importantly, white flight can’t explain why the nonblack sections of American cities look rather different from their Canadian counterparts. Nor can white flight (by itself) explain why American suburbs strongly resist residential high-rises, whereas Canadian ones (Montreal excepted) take to them with relative zeal. For example, Chicago’s North Side does not look like Toronto, save for a belt along the lake. Nor does Boston’s central and northern urban area — Back Bay, South End, North End, Southie, Brookline, Allston, Brighton, Cambridge, Somerville, Chelsea, Watertown, Arlington, Belmont, Charlestown, and East Boston — look much like East York or Scarborough. It is true, of course, that the great American ghetto is an American phenomenon, created by America’s strange racial caste system, but racial tensions don’t explain why Houston looks very different from Calgary.

So if isn’t race, then what is it? Another possible culprit is roads. American cities have a lot more freeway-miles per capita than their Canadian counterparts. The logic is not that freeways destroyed the neighborhoods that they cut through. I’m sorry, but speaking as someone who grew up in neighborhoods that had roads driven through or beside them, that argument is just stupid. (Yes, this applies to Toronto.) The plausible logic, rather, is that inner city neighborhoods were always relatively undesirable, but without subsidized freeways it would have harder to leave them for lower-density suburbs.

I am sympathetic to this argument, but I have some doubts. (Not least that my wife and I prefer dense inner city neighborhoods to the suburbs.) It is almost certainly true that American-style sprawl requires massive investment in freeways. Fewer freeways, more density. More density, more high-rises. The problem? If density the key, why does Los Angeles look so different from Toronto despite being denser? The 11.8 million people who live in Los Angeles’s urbanized area (that is, the area defined by the lights visible from space at night, minus fringe areas with a population density below 1,000 people per mile) are packed in at 7,068 per square mile, whereas their 4.6 million Torontonian counterparts live at 6,835 per square mile. Perhaps it is the freeway net that allows Los Angeles to splatter its density more uniformly than Toronto, but that feels ad hoc as an explanation, especially since Toronto’s suburbs are actually very densely-populated compared to Boston, Chicago, or New York.

The other possible explanation is regulation. In this view, roads may have contributed to American sprawl, but zoning is what really keeps it in place. For this view to be correct, Canadian zoning has to be less strict than American zoning. Are Canadian cities more likely to approve density, allow smaller lots and narrower streets, require fewer parking spaces, and permit higher buildings? This is not hard to believe, considering the far greater control that provincial governments exercise over municipalities in Canada, but I do not know the answer.

 

In point of fact, the “roads” and “regulations” hypotheses may be hard to disentangle. If a lack of roads drives up land values (by limiting the effective supply of land), then there will be more political pressure to allow dense development. After all, people need places to live. On the other hand, if it is easy to get out to the burbs (via all those freeways) then there will be less political pressure on inner-city areas to permit taller buildings. Cambridge, for example, saw a high-rise boom in the 1970s, which the city deliberately stepped on. As a result, the Central Square subway stop (where we live) is stupidly surrounded by two-story buildings instead of 20-story towers. Our building was built in the early 1990s, and was effectively capped at five floors. Without Boston’s two ring roads (I-95 aka “Route 128” and I-495), the pressure to build up in places like Cambridge would have been harder to resist.

 

In fact, however, it is possible to disentangle between “roads” and “regulations,” by testing for the effect of zoning changes on land values. Of course, it’s never that easy — endogeneity is always a problem. Ed Glaeser has a paper suggesting that zoning is determinative in shaping American cities in California and the East Coast north of Virginia. He has a particularly-detailed study of Boston that supports the zoning hypothesis: market forces (given the existing road net) would make Greater Boston rather denser were the regulations less restrictive. (Newton would look like Brookline; Brookline would look like Brooklyn; and Boston itself would be filled with high-rise towers.) On the other hand, his same work implies that in most of America it is the road net what produced sprawl, and not race or land-use regulation.

In short, most American cities sprawl because the federal government built roads out to the horizon. The exceptions are along the coasts, where U.S. cities would look more like Canadian ones in the absence of tight zoning laws. The increasing segregation of immigrants appears to be an effect of the above, rather than a cause. Of course, the great American ghetto is a striking and horrible thing, but we would have had them with or without freeways and zoning.

Canadian cities really are different

 I was in Toronto last week. I’ll discuss the reasons in a later post. My wife and I stayed out in the suburbs. Our hotel was in Scarborough, right north of Highway 401.  We spent most of our time (when I wasn’t downtown at the University of Toronto) in the further suburbs of Pickering and Ajax. Most of it could be in the United States.

Downtown Toronto is about as generic as it is possible for a North American downtown to get. This is not news. And some parts of the suburbs, like Ajax (pictured above) look like the more depressing parts of Orange County, California, save for the houses being in a slightly different shade of Caucasian skin tone. But even after saying all that, when my father-in-law said that Toronto really doesn’t feel like America, we knew exactly what he meant.

He meant the high-rises. You see giant towers everywhere, where you wouldn’t expect them to be. We were in a 14-story hotel, for example, across a ten-lane freeway from a sprawling shopping center and not far away from subdivisions like the one above, where every house looked alike. But there were two ginormous 30-plus-story condo towers going up right next door. And there was nothing unique about this. High-rises sprouted in parts of the city where you would be very surprised to see them south of the border. You really need to rent a car and drive around to appreciate the difference; hanging around downtown or taking the subway won’t show it to you.

But I am skeptical of both statistics and personal observation. I won’t relax unless they agree. So I went to the Emporis website, and pulled up statistics on buildings over 35 meters or 12 floors. What do you know?Normalized by population Toronto ranks below the high-rise forests of Honolulu and Vancouver, but looks more like the megalopolis of New York (and the D.C.-Arlington core of Greater Washington) than other mid-sized North American cities. Chicago and Philadelphia don’t come close. 

 

Still, the above chart is misleading, because Toronto proper contains 45% of the metropolitan population. In other cities, like San Francisco or Miami or Seattle, the central city is just a sideshow — an important neighborhood, but not representative of the metropolitan area. Miami-Dade, which I know very very well, has a high-rise core and a couple of clumps elsewhere, but nobody would call the place a high-rise city. Ditto San Francisco — Marin and the East Bay and San Mateo are all low-slung places. So I cut out all the places where the center city holds less than a quarter of the metropolitan population.

 

The result is even more dramatic. Toronto is up there with NYC as an outlier. In fact, all Canadian cities are outliers, even the ones that look like they aren’t. Why? Well, central Ottawa, Edmonton, and Calgary contain respectively 67%, 63%, and 85% of their metropolitan populations. Chicago, Las Vegas, Philly, Houston, and Los Angeles, on the other hand, only contain respectively 30%, 29%, 26%, 38%, and 30% of their metropolitan populations. Their central municipalities are a big part of the metropolis, but the cities as a whole feel a lot more low-slung than the central city figures indicate. Central Calgary and Edmonton, on the other hand, feel like parts of much bigger metropoli than they are when you visit, because they’ve got these big crowded bustling and disorderly urban cores than you don’t associate with North American cities that have only a million or so people in them. 

Canadian cities really are different, and it really is something that you can’t fail to notice without needing to look very hard. The only way you’d fail to notice is if your only exposure to America consisted of Honolulu and New York. Now, that isn’t hard to imagine, but it’s gotta be rare.

But this just raises a question: why do Canadian cities sprout so many more high-rises than their American (or Mexican) counterparts? 

ADDENDUM: Another way to slice the data below the fold.

Happy belated Canada Day, with a sporting twist

 Sorry, I missed it yesterday. Anyway, I once again want to wish our northern neighbors a happy birthday. We’ll be making two trips there this year (both for weddings, actually), including my first-ever visit to Montreal. Toronto, whatever, it’s a nice city, but sort of like combining the North Side of Chicago with Minneapolis ... not all that special. Even the G-20 riots were kind of boring. (Which is in fact a good thing, speaking as a veteran of non-boring riots in Mar de Plata and La Paz.) But Montreal! That sounds different.

Please, suggestions for things to do or see on either trip!

Anyway, my only pity for Canada on this birthday comes from the extreme unlikeliness that the country will ever qualify for a World Cup, let alone have a shot at winning. National teams do well based pretty much on a few variables: population, GDP per capita, and number of years playing at the international level. Canada only does well on the second. Moreover, like the United States, its athletes are quickly diverted into the real national sports: hockey, baseball, basketball, and gridiron football. (13 Canadians play in the NFL, and as most of you know, the country has its own professional league, using slightly different rules.)

 
Hockey is a good game, but like soccer, it’s an acquired taste. My entire family in Miami seems to have been converted to the sport by the unlikely arrival of the Florida Panthers to the western reaches of Fort Lauderdale. Season tickets, the whole bit. Yet, well, I can barely watch the sport ... I barely managed to pay attention to the Olympic games. That is not because hockey is a bad game! Sit me down with an expert and I would enjoy it; repeat five or six times and I would be a fan. But it is not a game conducive to enjoyment if you don’t understand it. AFAIK, basketball is the only game regularly enjoyed by people with only the foggiest idea of the rules and tactical subtleties. (I would be one of those people.)

Moreover, if Canada does start to generate world-class players, it will face a catch-22: the best of the best will probably qualify for American or European passports and play for those teams rather than hitch themselves to a losing Canadian team. FIFA rules discourage team-swapping, so the current crop of Canadian players is locked in, but future ones may want to keep their options open. As a nationalist myself, I would be stupid to discount national pride in making those decisions ... but if the U.S. was a no-hoper, then I wouldn’t blame an American for pulling out that old passport from grandma.

Yes, I spent a good chunk of the U.S.-Algeria game mocking the Algeria fans across the street for fielding a team full of Frenchmen. No hypocrisy: that sort of thing is the point of international soccer. You should see what Aldo and Jude and I write on each other’s Facebook pages.

In short, given that Canada is a power in an international sport with high barriers to entry (hockey), a very powerful player in an international sport with low barriers (baseball), and is unlikely to host a World Cup in the near-future, it probably won’t be going anywhere in soccer anytime ever.

My advice to Canadians? Root for the U.S., or if pride won’t allow that, Mexico. See picture above. Best victory since 1862, that was!

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!