Big pain at the gas pumps

By Jason Kirby with Chris Sorensen - Wednesday, May 25, 2011 at 10:05 AM - 12 Comments

Sheila Boardman/CP

When gasoline prices in Central Canada hit record highs in early May, Industry Minister Tony Clement did what he always does when consumer rage boils over: he donned his populist cape and channelled citizens’ fury against a shadowy adversary—in this case, Big Oil. Standing in the driveway of a Toronto home, flanked by black and white Volkswagens and facing a wall of TV cameras, Clement bemoaned the lack of transparency in how pump prices are set. He then vowed to summon executives from the refining, distribution and retail industries to Ottawa for hearings. “All I know is that prices are going up and down and sideways and no one really knows why,” he said.

He was partly right, in that prices are zig-zagging wildly. At the start of May, oil and gasoline prices reached punishingly high levels, rekindling dark memories of the spike in energy costs that tipped the global economy into recession in 2008. Then, in the span of just a few days, oil prices, along with most other commodities, went into free fall. Gas prices have begun to drift down too, though not nearly as fast. But by the time MPs actually get around to holding hearings several months from now, the price of crude may well have fallen to the point that this most recent bout of pain at the pumps will have been forgotten—or it may have soared so high that the only affordable way anybody will be getting to Parliament Hill is by bicycle.

But where Clement was wrong was in his contention that nobody can explain what’s behind the extreme price movements. On the contrary, a growing number of experts in the industry as well as academia have come to the conclusion that excessive speculation by traders and investors, aided by ultra-low interest rates and easy money, is severely distorting the market. “You simply can’t explain these levels of volatility by supply and demand because market fundamentals don’t shift that quickly over such a short period of time,” says Michael Greenberger, a law professor at the University of Maryland who, in the 1990s, was in charge of the trading and markets division at the Commodity Futures Trading Commission, the U.S. government agency that regulates commodity futures. “Most observers now believe speculators are actively manipulating oil prices.”

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Econowatch: May 2011

By Erica Alini - Wednesday, May 18, 2011 at 4:35 PM - 3 Comments

A funny thing happened on the way to the Tory majority. Partway through the federal election campaign, around the time the words “NDP” and “surge” appeared together for the first time, the S&P/TSX index lost its footing. Economists were quick to read the tea leaves: global investors clearly feared Canada might end up with a weak, wobbly minority government headed by socialists. Instead, Canadians voted for the strong, stable majority promised by Prime Minister Stephen Harper, at which point investors ran screaming for the exits. Over the next four days, the market shed five per cent of its value.

Were investors saying a Harper majority was worse than an NDP minority? Of course not. The episode simply revealed that investors believe the main factor driving Canada’s economic future isn’t which party sits in power, but whether commodity prices stay high. The resource boom was the reason for our strong employment, resilient housing sector and phenomenal stock market returns of the last decade. In the same way, the dramatic rebound in commodities in 2009 enabled Canada to sail through the recession mostly unscathed—whatever the Tory’s Action Plan ads claimed. Investors know this, and that the reverse is also true. A sharp commodities correction could cripple the economy. Continue…

Energy efficiency rules

By Jason Kirby - Tuesday, April 26, 2011 at 11:00 AM - 0 Comments

Aga Luczakowska/Bloomberg/Getty Images

Procter & Gamble, the consumer products giant behind Tide, Crest toothpaste and Gillette, has told its suppliers to regularly report their energy consumption rates. The thinking is simple: if P&G can drive down its suppliers’ energy costs now, it could enjoy a price advantage over competitors later on if oil prices keep rising.

The program began last year with a survey to P&G’s raw material suppliers and even ad agencies, asking for information on energy consumption and greenhouse gas emissions, according to a story in Fast Company. More than 80 per cent responded, and of them, 94 per cent reported their electricity usage. This year, any company that doesn’t fill in the form won’t be able to do business with P&G.

The company has a big carrot to accompany its sizable stick. Suppliers who lower their energy consumption or offer useful energy efficiency advice get a higher rating, which will translate into a boost in business from P&G.

America's next automaker?

By Chris Sorensen - Thursday, April 14, 2011 at 11:28 AM - 7 Comments

Shares of carmaker Tesla Motors recently soared 21 per cent after U.S. President Barack Obama pledged to cut America’s dependence on overseas oil and an analyst released a bullish forecast for electric vehicles. It was an unexpected vote of confidence in a species of environmentally friendly automobile that has so far exhibited few signs of catching on with mainstream consumers—mostly because of high prices and a lack of recharging infrastructure.

Nevertheless, Morgan Stanley’s Adam Jones suggested that Tesla was poised to become “America’s fourth automaker” thanks to rising oil prices and increasing government efforts to push consumers toward the technology, including subsidies. “In our view, the conditions are ripe for a shakeup of a complacent, century-old industry heavily invested in the status quo of internal combustion,” Jones wrote. “The risks are high. So is the opportunity. Enter Tesla.”

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Iran: bracing for a backlash

By Katie Engelhart - Saturday, February 13, 2010 at 4:34 PM - 3 Comments

Since last summer, when demonstrators took to the streets to protest what they viewed as the fraudulent re-election of hardline President Mahmoud Ahmadinejad, Iran has faced its worst upheavals since the Islamic revolution of 1979. For weeks, until a bloody crackdown by the regime in large part quelled the disturbances, proponents of the so-called Green Revolution united in a show of defiance against the ayatollahs. The response—thousands were detained and dozens killed in clashes with police—brought harsh criticism from the West, as has the government’s recent announcement that it is ramping up its nuclear program, viewed by many as a means of gaining nuclear arms. Now, with Tehran facing the threat of new sanctions that could further hurt the country’s faltering economy, the regime is bracing for more unrest. But that may come at its own initiative: with his government facing insolvency, Ahmadinejad has proposed a radical overhaul of the system of massive state subsidies that have kept life tolerable for Iran’s citizens.

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Econowatch

By Steve Maich - Thursday, May 28, 2009 at 9:00 AM - 3 Comments

When will things go back to normal? That is the only question that seems to matter: when will this strange and frightening episode pass? It’s a fair question, but not exactly the right one. What most really mean is: when will my house price begin soaring again? How long before my stocks triple? And when will I feel safe to max out my credit cards again? Over the past 15 years that became “normal,” or at least common. But that isn’t coming back soon.

The reality is, everything we see happening around us is part of the process of returning to normal. For the past decade or so the laws of financial gravity were suspended. Now they are back in force, and those who soared the highest have the furthest to fall.

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A silver lining for Russia

By Nancy Macdonald - Thursday, October 30, 2008 at 12:00 AM - 8 Comments

Amid the global financial bloodbath, few have been as hard hit as some of Russia’s oligarchs: the Kremlin-friendly super-rich. Aluminum magnate Oleg Deripaska, Russia’s richest man, has lost $16 billion in a month. Rumours suggest Deripaska—also embroiled in a political scandal in London—has sacked his servants, replacing them with cheap help from the provincial town of Tula. Russian No. 2, Roman Abramovich, who owns Britain’s famed Chelsea Football Club, has lost half his fortune. The word is he’s postponed his wedding to 26-year-old ex-model Daria Zhukova. Since the market peaked in May, Russia’s 25 richest men have lost a combined $230 billion, 62 per cent of their total worth; when the dust eventually settles, some will have been made “formergarchs,” forfeiting their metals, mining and telecommunication empires.

But it’s not just the oligarchs who are suffering. At a time when Prime Minister Vladimir Putin’s Moscow has been flexing its global muscle, the economic crisis could substantially weaken Russia and help curb its aspirations. At first glance, the country appears to be in deep trouble. Its two key stock indexes have lost over two-thirds of their value, wiping out nearly $1 trillion in wealth. Capital flight is running at over $12 billion a week. And the price of oil, crucially important to the Russian economy—and Russian power—has tumbled more than 50 per cent from a record high of $146 per barrel just three months ago. This week, it hit $64 a barrel, its lowest level in over a year.

In fact, the Kremlin has been forced to adopt a $200-billion rescue plan to shore up its troubled banks and companies. It’s unclear, however, whether the average Russian knows about these elite-level discussions, or, indeed, about the financial crisis itself (less than three per cent of Russians have mortgages or invest in the market). According to the English-language newspaper Moscow Times, Russia’s three main channels—Channel One, Rossia and NTV—have either played down or completely ignored the collapse of the main stock market, the RTS, which halted trading for the fourth time last week, after stocks took another plunge. Ekho Moskvy, Moscow’s independent radio station, says the Kremlin has banned state media from using the words “financial crisis” and “collapse.” (Russians do know, however, that Putin—whose personal popularity, one month into the crisis, has risen to 83 per cent—received a tiger cub for his 56th birthday this month, and that the prime minister, a marshal arts enthusiast, has released a judo DVD.)

Rather than financial ruin, however, some experts are predicting that Russia could emerge strengthened from the global meltdown—and in a position to exert even more pressure on its neighbours and others. The country is cash-rich, thanks to $1.3 trillion in oil and gas revenues over the past eight years, and the Kremlin is sitting on a $500-billion cash reserve: the world’s third-highest hard currency reserves. As well, Russia is largely debt-free (at 8.5 per cent of its GDP). The price of oil, meanwhile, is still double what was considered high just a few years ago. “Here in Russia, officials and experts see the crisis as much as an opportunity as a danger,” says Harvard University Russia expert Henry Hale, reached in Moscow. “They see opportunities to play a stabilizing role in the world economy, and to expand Russian influence.”

Indeed, while state media have downplayed Russia’s financial crisis, they have covered the West’s economic problems; ordinary Russians know that when Iceland was tottering on the brink of financial ruin, it turned to Moscow—not the International Monetary Fund, Washington, London or, indeed, any Western capital—a telling indication of Russian might. (At press time, Reykjavik, which last week agreed to a $2.1-billion loan from the IMF, was continuing discussions with Moscow for a loan worth as much as $5 billion.) And Russia has since announced a $2-billion loan to Belarus, a part of the former Soviet Union still within its sphere of influence. In return, Minsk has pledged to resume common currency negotiations with Moscow, edging it one step closer to all-out union with Russia.

But across the former Soviet sphere, where Russia has stoked separatist fires in recent months—handing out Russian passports in the Ukrainian republic of Crimea, and invading Georgia over the issue of breakaway South Ossetia—banking systems are teetering on the brink of collapse, making those countries more susceptible to the influence of their cash-rich neighbour. So far, they have gone elsewhere for aid. This week, Ukraine, whose stock market has fallen nearly 80 per cent this year, and which recently saw a panic run on deposits, received a $16.5-billion, two-year loan from the IMF; Hungary, its neighbour to the immediate southwest, whose currency and stock market are in free fall, will also receive a “substantial financing package,” from the institution.

Flying is hell

By Steve Maich - Thursday, July 24, 2008 at 11:12 AM - 0 Comments

No this is not a post about how my 9:00 pm flight out of Pearson was canceled last Thursday. Mind you – it’s a pretty good story. (Have you ever had a flight canceled because the plane’s parking brake refused to release? I have. I finally made it to Las Vegas, only 15 hours later than planned.)

It’s not about Jason Kirby’s excellent cover story from last week either.

This is about my friend Derek DeCloet’s column in today’s Globe and Mail. Derek takes a hard look at the unbelievably low market values ascribed to major airlines today. Seems like just about everybody is expecting the industry to tumble right back into the bankruptcy disaster it only emerged from a couple of years ago. My favourite snippet: “Right now, Southwest, Delta, Northwest, American, United, JetBlue and US Airways combined aren’t worth as much as Canadian National Railway.” Amazing.

Derek asks why Air Canada is being priced as a distressed company when it is not (yet) is any real financial danger. He goes on to answer the question, looking at debt, leases, warrants, break-up value etc. (Seriously – you should read it.) But there is one aspect of the flight experience that he doesn’t mention: customers are being asked to pay substantially more, for a service that is getting substantially worse. Nobody knows that better than the business guys who are flying these airlines on a regular basis. We tend to take for granted that we’re all hooked on air travel and that will not change, but price and service have a funny way of messing with our habits. If oil prices stay above $100 a barrel for an extended period, I believe people will fly a lot less than they do now. The stories are already beginning to emerge of people opting not to fly home for holidays, and companies looking for ways to avoid sending people to distant meetings and conventions. People tend to assume that demand for air travel is inelastic and eternal. But then, we used to think the demand for SUVs was pretty inelastic too.

It's all speculation

By Steve Maich - Wednesday, July 23, 2008 at 10:34 AM - 0 Comments

Just about every day, I continue to get letters and emails from readers, about this column from a few weeks ago, in which I argued that speculators are not really to blame for the soaring price of energy. Whatever role they play in the market tends to be positive, eliminating pricing inefficiencies and generally smoothing the rise and fall of futures contracts. The price increase is due to high demand, stretched supply and a shortage of refinery capacity.

It was, um, not a crowd pleaser. The general consensus among my correspondents is that speculators are evil, they are trying to ruin the lives of innocent ordinary folk, and dorks like me should lose our journalism licenses.

Well, the U.S. government task force charged with getting to the bottom of the speculator scandal issued its report yesterday. Bottom line: speculators aren’t to blame. The oil price is the result of high demand, stretched supply and a shortage of refinery capacity. Never easily daunted by mere facts, the Senate voted unanimously(!) to press ahead with debates aimed at curbing price speculation in the futures markets.

We do not want to hear that we are the cause of the oil price rise. And politicians do not want to be the ones to press that unpopular reality. So off we go to bizzaro world, where the facts don’t matter. Only emotions do.