Oil and the recession
It's hard to believe that oil, now trading below US$40 a barrel, hit $145 less than six months ago. Here's a graph that shows the price of oil for the past twenty-odd years:
Those prices are in nominal dollars, so there's some inflation adjustment necessary, but the point is pretty clear: $40 oil would have been considered high until the past three years. Even during the first Gulf War, oil only kissed $40 for a week before tumbling back to the teens, where it essentially stayed for a decade. Oil didn't touch $40 again even after 9/11 (it actually fell) and neither did it during the 2003 invasion of Iraq. Oil started trending up a year later. And then it just went nuts.
That was great for Canada, where Alberta oil companies soon had a larger presence on the TSX exchange than Toronto banks did -- to the benefit of every pensioner and investor in the country. Without the oil patch's royalties, Canada would not have had surpluses in the past five years, and our national unemployment rate would now be higher than the U.S., not a full point lower (when measured in the same way they do). The oil sands created as many jobs in Ontario as it did in Ft. McMurray.
So what now? Obviously some projects that required $75 oil to be economic will be cancelled or scaled back. But Canada's oil patch was booming under $40 oil five years ago. It was even making money -- at least the junior sector was -- during $20 oil. And under Ralph Klein, $30-something oil was more than enough to bring in 10-figure government surpluses.
The heady days of the past few years are over, that's for sure. And Ed Stelmach's tenure as Alberta's premier will move from embarrassing to dangerous -- not only has he increased taxes on the oil patch, but he's jacked up spending bigger and faster than any NDP government would have dared. Watch for ten-figure deficits to return -- and, hopefully, the emergence of a viable political alternative.
Alberta will survive, and Canada will, too. Unlike the U.S., we don't have structural problems with our banks -- so-called "ninja" mortgages (no income, no job, no assets) with zero down were simply non-existent in Canada. True sub-prime mortgages simply don't exist here, and what exposure our Canadian banks had to U.S. junk mortgages has been containable.
In other words, we're better off than just about anyone else in the G7 -- we've paid down debt, and we've already engaged in an enormous stimulus program: a massive tax cut that is already working its way through the economy.
But my point today isn't about Canada's relative strength, even as an oil-exporting country in an era of falling oil prices.
My point is about how the tumbling price of oil will affect our international enemies -- especially Iran, Venezuela and Russia.
Here's the Wall Street Journal on Iran -- where public works projects are being abandoned en masse, and national anger is building. Crude oil represented 80% of Iran's government revenues -- a number that is drying up like a puddle in the desert sun. Read the story for fascinating details on how ordinary Persians are reacting -- and how domestic discontent is rising. "What has the government done with $200 billion in oil revenues?" read one Iranian newspaper's headline. The answer is obvious -- a nuclear program and the subsidy of its colony, Syria, and its expeditionary terrorist army, Hezbollah. I'm going to keep my eye on Debka to see if they come up with an analysis of how Iran's economic problems impact Hezbollah's war of attrition against Lebanon and Israel.
In Venezuela, Hugo Chavez has actually managed to reduce oil production by 25% over his tenure, through sheer incompetence and economic malfeasance, a feat that was masked by skyrocketing prices. (And, much of what was produced was given away below market prices as foreign policy bribes to other countries Chavez was trying to woo.) Like Iran, Venezuela is heavily dependent on oil -- it represents 80% of its exports, and accounts for 50% of its government revenues.
This story hints at Chavez's response: punishing Venezuelans by clamping down on how much money they can spend outside the country. He's also doing some more blamestorming -- expropriating more assets, such as a shopping mall. But, like his bosom buddy Ahmadinejad, it's a certainty that his military and foreign policy ambitions will be trimmed.
Russia's Vladimir Putin is looking at his country's economic collapse as a buying opportunity. Like Western governments, he's happy to bail out companies using government money. Unlike Western governments, Putin probably isn't afraid to use the word "nationalization" -- but instead of the "people" owning the companies this time around, it's more than likely that he, himself, will. Putin is the chairman of the government bank that is running the bail-outs, and as part of his conditions, he installs directors on company boards, and rules limiting corporate executive decision-making. The man didn't make his $40 billion fortune from his KGB pension.
Russia's decline may be a boon to Putin, but for Russia's geopolitical ambitions, it will be a problem, if less acutely than for Venezuela and Iran. Already, there is internal economic unrest, with violent protests of the sort not seen in years. And, according to the World Bank, while Putin is stuffing his pockets, things for the average Ivan, Igor and Mikhail are about to crater. Here's the AP:
Among emerging markets, Russia has been one of the hardest hit by the global financial crisis and plunging oil prices, the mainstay of the Russian economy. These factors have put the national currency under intense strain and triggered massive stock market losses and capital outflows from the country.
Russia, which grew at over 8 percent last year, is facing a severe slowdown in growth, and possibly even recession next year, analysts say. Torrid figures released earlier this week showed that industrial output had plunged 10.8 percent in November from the previous month, signaling a dramatic slowdown in the final quarter.
About half of Russia's budget comes from oil and gas; the U.S. government estimates energy accounts for 20% of Russia's GDP. Just a few months ago, taxes on producers amounted to about $100/barrel. That's what's been funding Russia's provocative nuclear bomber flights over Canada's Arctic, and the Russian navy's excursion to Latin America.
My math tells me that Canada's energy sector is about 7% of our GDP ($85 billion out of a $1.2 trillion economy). That's huge, but it's not Iran huge, or Venezuela huge or even Russia huge.
I think we'll get through this global recession better than most -- and if it weren't for other countries (mainly the U.S.) dragging us down, we clearly wouldn't have a slow-down at all. And Canada's oil patch has shown that it can be profitable at even $30 oil -- though tax-and-spend Ed Stelmach and tax-and-expropriate Danny Williams have likely impaired the industry by an effective $10/barrel.
There aren't a lot of silver linings in the world economy these days. But one of them -- and it's a big one -- is that a lot of brutal dictators have just had their oil-fuelled ambitions clipped.