All bias, no information: on the market’s (over)reaction to the NDP victory.

Here we are in day two of the Glorious New Albertastani revolution. The buildings are still standing, but markets are apparently nervous. Headline after headline notes the fear gripping the petroleum industry about what this “leftist” government will do. One analyst described the situation to Bloomberg using phrases like “completely devastating” and “extremely dangerous.” Executives and analysts dropped the dreaded u-word—uncertainty—yesterday, and oil prices rose slightly even as oil sands producers’ stocks fell somewhat as the market digested the news. Whether they processed it correctly is another matter, of course.

At base, all a market does is aggregate the perceptions of a self-selected set of monied actors, which in turn are based on the information available combined with their own intellectual biases. Right now, it’s collecting almost all bias, and no information. Simply put, markets are aggregating collective misperception at the moment.

Indeed, the market actors—and even more so the market analysts predicting doom—seem to be unduly discounting the information that is available. Rachel Notley and the NDP have pledged to hold off on a royalty review until prices have recovered. They have also committed to an independent review, which is more than the Conservatives managed under Ed Stelmach. If royalty rates do go up—and that’s an open question—they will do so in a manner that ensures Alberta remains comparable with other oil-producing regions with which it competes.

The promised corporate tax increase to 12% is actually lower than the rate was in 2003. It’s on par with Saskatchewan and 1% above BC—in other words, it’s a very competitive, reasonable rate for a left-of-centre government in a business-friendly province. Max Fawcett writes convincingly about the overall reasonableness of the NDP’s approach to business, albeit in that notorious lefty rag Alberta Oil Magazine.

Alberta has elected an eclectic new government to be sure, but the signals it has sent out mark it also as a pragmatic one—they would not have won otherwise, and stand no chance of winning again unless they stick to that pragmatism. Indeed, I have a hunch that Albertans, even some deeply suspicious of the new government, may be pleasantly surprised how nice it is to have a government that knows it has to listen and be responsive to the concerns that people express if it hopes to stay in power.

Basically, the only way this doesn’t work out is if market fears become self-fulfilling, and business goes to war with the new government rather than work with it, as happened in Ontario twenty years ago (h/t to Geoff Solomons for that link). Don Braid writes well about that possibility in the Herald. My hunch is that will not happen in this case however, given how much value it would leave on the table for businesses so heavily invested in the province already. Sunk costs and all that, sure, but there are only so many places with oil in the ground in the world, and very few of them are more hospitable to business—a fact that really won’t change much.

It’s probably true that profitability will decrease marginally under an NDP government. They are raising corporate taxes, after all. It’s also true that a cautious approach is sensible in the face of the unknown.  The key word is marginal, however. If markets continue to price in a significant risk factor going forwards, I have two words: buy now.  Once more information becomes available in the form of concrete actions, the market will eventually correct itself.  The market is not always right, but it usually gets there sooner or later.

photo credit: pump jack southeastern New Mexico via photopin (license)

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Canada and the US: Global Laggards?

So, the chastisers become the chastisees.

In an odd coincidence of timing, the US and Canada both came in for significant critique from senior UN actors on separate issues today. The US was on the business end of a statement statement from experts at the UN Office of the Commissioner for Human Rights regarding the grand jury acquittals in the police killings of Eric Garner and Michael Brown. Meanwhile, UN Secretary General Ban Ki-Moon called out Canada for its particularly poor performance on climate change in an interview with CBC’s Peter Mansbridge released today. Neither is a sight one would not have expected even a decade ago, but both incidents suggest that the two countries have, in their own way, fallen far behind on on issues of global significance, and are hearing about it from the key representatives of the international community.
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Legends in Our Own Minds

Separating the Myth and Reality of Canada’s Position on Climate Change

In what we hope will be a recurring feature at PATWD, this is a guest post written by Kate Neville, a recent PhD graduate in political science at the University of British Columbia, and Jennifer Allan, a PhD candidate in the same program. It offers a clear-eyed appraisal of the contradictions that exist between Canadians’ environmental politics and our national self-identity.

*****

“No more than one or a few decades remain before the chance to avert
the threats we now confront will be lost and the prospects for
humanity immeasurably diminished.”

~World Scientists’ Warning to Humanity, 1992 (as quoted by David Suzuki)

Two decades later, at the opening of 2013, the warning penned by over 1700 scientists in 1992 seems to have been largely ignored by the political leaders of the world. At best, our collective responses to climate change seem to be small, incremental changes in regulatory limits. Economic penalties linked with emissions are paltry. The conversation at the United Nations Framework Convention on Climate Change (UNFCCC) — the world’s negotiating platform on climate change — seems to focus more on capturing and sequestering carbon than reducing emissions.

So what has been Canada’s response? Unfortunately, our attitude towards the environment is riven by contradictions Continue reading

Canada: Emerging Energy Super-power?

Prime Minister Stephen Harper likes to tout Canada as an emerging energy superpower. However, I would argue that – in fact, I did argue that – in many ways, the country’s current approach to energy is more reminiscent of a declining power. Follow the link for the full essay, posted over at The Mark.

[UPDATE: The Mark News seems to have mothballed its entire archive, so I’ve reposted the essay in its entirety here]

Declining Superpower: The Vulnerability of Canada’s Energy Policy

By Stewart Prest

Prime Minister Harper has taken to Canada, “emerging energy superpower,” for instance during a foreign mission to China earlier this year. The language has sparked debate about both whether Canada is an energy superpower, and whether it should actually strive to become one.

Before weighing on either question however, it is worth spending a moment to understand what the analogy really implies, before deciding whether it applies to Canada, and whether it ought to.

Credit for coining the term “superpower” in its present usage generally goes to the Cold War by American W.T.R. Fox, an American professor of international relations who used the term to describe the world’s preeminent military powers at the close of WWII.

As the Cold War emerged, it became clear that the world’s two true superpowers, the USSR and US, were distinctive in a number of ways.  First, both countries possessed an enormous industrial capacity relative to the rest of the world. They similarly had massive natural and human resources to draw on.

Second, the superpowers were unique in their ability to project force anywhere in the world, and by any means necessary. Beyond military capacity on land, sea, and air, both also invested in diplomacy, espionage, cultural exhibitions, scientific research, and international prestige. They were relentless in their pursuit of power.

In addition to these two qualities however, the US defence community also displayed a third distinctive quality, a critical component of its ongoing ability to maintain superpower status: it has exhibited relentless willingness and ability to improve, to remain the undisputed leader in every field that mattered.

Just as the USSR was entering its period of terminal decline in the 1980s, the US began laying the theoretical and organizational groundwork for the so-called Revolution in Military Affairs (RMA). It invested heavily in new techniques and technologies, and reduced investment, or abandoned outright others considered obsolete. It did not matter how expensive the old methods had been to develop, or how reliable they had proven in the past.  All that mattered was their value going forward.

The result of that revolution is that the US can now project force with a precision and efficiency unimaginable even two decades ago. Its predominance is such that nuclear deterrence, once a central pillar of US defence strategy, is now an increasingly an after-thought. As a result, the country is well positioned to remain a global superpower for decades to come, and in doing so, no longer even needs to rely on its expensive and increasingly obsolete nuclear deterrent.

To summarize, we have three core elements associated with successful superpowers: 1) a tremendous resource and productive capacity; 2) the aggressive pursuit of a diversified portfolio of capabilities, along with the ability to deploy those capabilities abroad; and 3) a relentless commitment to innovation and improvement including, when deemed necessary, through costly and highly disruptive change.

So, how does Canada measure up to such standards? Is it really an energy superpower?

With regard to capacity, the answer might be a qualified yes. According to the CIA World Factbook, Canada has the third-largest proven oil reserves in the world. The country likewise focuses a significant portion of its economic and human capital in fields related to energy.

On the second and third superpower characteristics – diversified projection (i.e. export) capacity and a commitment to robust innovation – Canada falls far short of superpower status, however.

Simply put, Canada’s claim depends almost entirely on its continued production and export of petroleum products. This production in turn depends on the continued centrality of oil to the global economy; indeed, it depends on continued demand for historically expensive oil.   The country has emphatically failed to diversify its export energy sector, and shied away from any innovation not related to the production and export of expensive oil and gas. In our superpower analogy, it is clinging to the comfort and reliability of an increasingly outmoded nuclear deterrent, even as its competitors are embracing a new Revolution in Energy Affairs (REA).

This is, quite simply, not how an emerging energy superpower would operate. Indeed, it more closely resembles a declining superpower, one with significant capacity, but without the strategic vision to understand the changes occurring in the world around it.

Conversely, and existing or emerging superpower would guard against the possibility that global demand for its oil might one day collapse, whether due to competition came from increasingly an increasingly robust global renewable energy industry, or indeed from a decrease in the price of oil due to, for instance, a sudden increase in domestic production in the US.  Instead, it would aggressively pursue a diversified export portfolio, one capable of withstanding any shift to the market.

The true emergent global energy superpower – China – realizes this and is acting accordingly. China is interested in buying up a share of the oil industry in Canada and many other countries.  It is also, however, a massive domestic producer of coal-fired energy and the largest producer of solar cells and wind turbines in the world.

Some of these choices will undoubtedly prove less sustainable than others in light of what we now know about climate change, but no matter what the future holds, China will be a dominant energy player in global energy markets, not only as a consumer but increasingly as a producer as well.

In short, to truly be an energy superpower, Canada must become relentless in its diversification and commitment to innovation. Most particularly, it must focus not just on how power is generated today, but also on how it will be generated tomorrow. It needs to take seriously the REA currently underway.

This is harder than it would have been 10 years ago.  A globally competitive green technology industry cannot be created overnight. Nonetheless, it is still possible with the right incentives at provincial and federal levels.

A good start would be, as Chris Turner has argued persuasively elsewhere, to emulate German policy and commit to a feed-in tariff, one that pays a higher fixed rate for energy produced more cleanly. Such a move will shape the marketplace for energy, without the unproven complexity of a cap and trade system or the ugly politics of a carbon tax.

If it is to work however, that commitment must be on a large scale and over a long period of time. More modest experiments, as Ontario has unfortunately found, simply do not exert sufficient influence on producers’ decisions to significantly influence the marketplace.

Oil is polluting. It is expensive. It is unpopular. It is also increasingly replaceable. One day, it will be replaced completely. Those who don’t anticipate this in time will find themselves, sooner or later, alongside other failed superpowers on the scrapheap of history.

photo credit: Mark Witton via photopin cc