1010 Class 7: OIL

1
1010 Class 7 OIL
2
What is Protectionism

• It is the degree to which a government intervenes
  in the operation of the day to day market in a
  mixed economy.
• Even in the most right wing of countries,
  governments will inevitably choose to intervene
  to protect what they perceive as in the national
  interest.

3
Government protection of strategic assets

• Should the government of Canada allow foreign
  investors to buy Canadian natural resource
  companies?

4
The Evolution of Protectionist Intervention in
Canada

• Keynesian ideas and formulas were no longer
  working
• Inflation erupted
• Unemployment rose
• Critical shortages and rising costs of energy
  changed the economy. Stagflation.

5
Stagflation

• Between 1974 and 1981 in Canada unemployment was
  stuck at between 6.8 and 8.3 and GDP ran between
  0.2 and 0.9 percent (1976 was 5.9)
• During this period one would expect inflation to
  fall, it rose steadily between 10.9 and 12.4
• Why

6
(No Transcript)
7
Supply Shocks (p.141)

• During the 1770s and early 1980s business
  government relations were transformed by both
  domestic and international events.
• These events destabilized the Keynesian consensus
  as the dominant economic ideology.
• Government was no longer able to meet the
  expectations on increased state activism.

8
What else contributed to a slowing economy?

• New demands were imposed on the economic system,
  including
• Environmental protection
• Extending equal opportunities and rewarding
  women and minorities
• Coping with social costs of unsafe products and
  working conditions.
• The growth of Social welfare spending by
  government

9
The End of the Inflationary 1970s

• The stagflation of the 1970s was brought to an
  end by economic shifts, including.
• Restrictive monetary and fiscal policies.
• A drop in energy prices as world wide oil
  consumption moderated.

10
The Elusive Goal of Capitalist States

• To simultaneously achieving high employment and
  stable prices.
• Oil and price shocks limit that as a
  possibility.

11
Economic and Political Periods

• First and Second Trudeau eras.
• The Mulroney Period
• The Chretien Years

12
(No Transcript)
13
Energy Stocks Account for 25 of the TSX.

• In 2010 global demand will exceed 2007
  developed world recovering and emerging market
  demand kept on growing now up to 86.7 million
  barrels a day

14
High value
15
Exploration Expenditures in Canada, 1946-2000
16
Total Exploration Expenditures in Canada and the
Metal Price Index, 1969-2001
17
Krieger summarizes

• Basically, the minerals industry follows the
  national economy, although different segments
  respond to different influences in different
  ways. Consumer spending, particularly for autos
  and appliances, helps set the production pace for
  many metals.

18
Imperfect Competition

• An imperfectly competitive industry is an
  industry in which single firms have some control
  over the price of their output.
• E.g. Monopoly, Oligopoly and Monopolistic
  competition.
• Market power is the imperfectly competitive
  firms ability to raise price without losing all
  demand for its product.

19
Monopolies and prices

• Competition forces firms to adjust prices to the
  market.
• Monopolies allow firms to set prices.
• Bloomberg news analysis reported, three largest
  mining companies, BHP Billiton Ltd., Vale SA and
  Rio Tinto Group are set for record profits
  totaling 52 billion as they accelerate earnings
  growth at the expense of their biggest customers.

20
How is Oil Extracted in Canada
21
\
22
Oil Really Early Canadian History
23
(No Transcript)
24
(No Transcript)
25
(No Transcript)
26
(No Transcript)
27
(No Transcript)
28
(No Transcript)
29
Canadian Oil 1920s-1970s
30
Leduc 1

• On Feb 13 1947, on the sleepy Alberta farm of
  Mike Turta, 15 km west of Leduc and about 50 km
  south of Edmonton, Imperial Oils Leduc 1 well
  blew in. Before that date, Canada had to rely
  almost fully on oil imports from other countries.
  Some crude had been found in Western Canada at
  Turner Valley Alberta, but nothing big enough to
  spark a new oil boom.

31
Leduc 1

• http//archives.cbc.ca/science_technology/energy_p
  roduction/topics/378/
• http//www.youtube.com/watch?vRrzdKYJZLE8

32
Leduc 1

• But Imperial Oil, using new seismic technology
  and portable, diesel powered rigs, persevered,
  starting in Saskatchewan. In 1946, they drilled
  133 consecutive dry holes in the province.
  Finally, they gave driller Vern Hunter orders to
  move his rig, Wilson 2, to the Leduc, area,
  where the seismic crews had found an interesting
  anomaly. It worked.

33
Leduc 1

• On May 10, 1947, Leduc No. 2 hit the much bigger
  Devonian Reef, and Imperial Oil began building
  the town of Devon for its employees. By the end
  of 1947, Imperial Oil and a group of small
  companies had drilled 147 more wells in the rich
  Leduc-Woodbend oilfield. Only 11 were dry.

34
Imperial Oil

• http//www.imperialoil.ca/Canada-English/Imports/h
  istory/about_who_history.aspx

35
Oil Industry Structure
36
Oligopolies and Monpolies

• Oil Industry has an Early history of Monopoly and
  a late of Oligopoly
• Product branding
• Entry barriers
• Interdependent decision-making
• Non-price competition (service-based)

37
Biggest oil and gas companies in Canada

• http//en.wikipedia.org/wiki/Canadian_petroleum_co
  mpaniesMarket_capitalization_.28December_2010.29.
  2C_revenue_.282010.29.2C_profit_.282009.29.2C_prod
  uction.2C_reserves

38
Vertical and horizontal integration
39
(No Transcript)
40
(No Transcript)
41
Oligopolies

• Founded initially on the scale and scope elements
  of production and distribution.
• Secured by scale and scope distribution,
  research, marketing and development.

42
Oligopolies

• Giants can, however, and do stagnate.
• Flexibility and innovation can falter in the face
  of the needs of the dominant brand.

43
The Politics of Polarization The NEP

• The Trudeau government returned to power in the
  1980s with an attempt to return to the
  traditional national policy type program.
  Strong central government.
• It was called the National Energy Policy.
• The NEP was an attempt to take energy revenues
  from the provinces and protect the east from high
  oil prices.

44
The Politics of Polarization The NEP

• The NEP also favored Canadian companies over
  foreign companies and limited the ability of
  companies to export oil to the USA and overseas.
  This depressed prices and reduced revenues.
• The NEP held domestic oil prices below world
  prices.
• The oil companies were furious.

45
The Politics of Polarization The NEP
46
How do you brand or differentiate oil products?
47
(No Transcript)
48
(No Transcript)
49
(No Transcript)
50
Canadian Oil 1970s-Today
51
(No Transcript)
52
http//eprinc.org/?p698
53
Proven oil reserves
http//gunn.co.nz/map/
54
http//www.neb-one.gc.ca/clf-nsi/rpblctn/spchsndpr
snttn/2004/ftrrlfthrgltr/ftrrlfthrgltr-eng.html
55
http//www.eurasiareview.com/canada-energy-profile
-worlds-third-largest-gas-producer-and-exporter-an
alysis-22042011/
56
http//www.parl.gc.ca/Content/LOP/researchpublicat
ions/prb0833-e.htm
57
Oil Sands

• Alberta oil not 'foreign,' U.S. official tells
  premiers
• US-Canada oil pipeline - water source threatened

58
Oil Sands History I

• Athabasca tar sands, although there is no tar
  present) are large deposits of bitumen, or
  extremely heavy crude oil, located in
  northeastern Alberta, Canada - roughly centred on
  the boomtown of Fort McMurray. These oil sands,
  hosted in the McMurray Formation, consist of a
  mixture of crude bitumen (a semi-solid form of
  crude oil), silica sand, clay minerals, and
  water.
• The Athabasca deposit is the largest reservoir of
  crude bitumen in the world.

59
Oil Sands History 2

• Commercial production of oil from the Athabasca
  oil sands began in 1967, when Great Canadian Oil
  Sands Limited (then a subsidiary of Sun Oil
  Company but now an independent company known as
  Suncor Energy) opened its first mine, producing
  30,000 barrels per day (4,800 m3/d) of synthetic
  crude oil. Development was inhibited by declining
  world oil prices, and the second mine, operated
  by the Syncrude consortium, did not begin
  operating until 1978, after the 1973 oil crisis
  sparked investor interest.

60
Comparing Oil Reserves
Item Ghawar, Saudi Arabia Oil sands, Alberta est.
Daily production 4.5 million barrels 973 thousand barrels
Available for recovery 125 billion barrels 315 billion barrels
61
(No Transcript)
62
The Oil Sands

• http//ngm.nationalgeographic.com/2009/03/canadian
  -oil-sands/essick-photography
• http//www.youtube.com/watch?vALCTOs2zakc
• http//www.youtube.com/watch?vUYwHR9yb0IM

63
The Oil Sands ENERGY Needs
64
Oil is a Big Trade Issue
65
(No Transcript)
66
The Mulroney Era- 1984-1988

• Mulroney promised that he would reign in
  government deficits, protect social programs and
  create a positive environment for trade and
  investment.
• The highlight of this manifesto became the FTA.

67
Mulroneys FTA

• The 1988 FTA negotiations were very difficult
• In the US we were being killed by indifference
  and in Canada by alarmist, false rhetoric.
• Mulroney to Sec of State James Baker message to
  President
• Ron, how come the Americans can do a nuclear
  arms limitation deal c the USSRbut cant do a
  trade deal cthe Canadians?
• Free Trade Agreement with the US which came into
  effect on Jan. 1, 1989.

68
FTA

• It was supposed to be the sine qua non for
  success relief from capricious U.S. trade
  remedies. Mulroney was jubilant. A hundred
  years from now what will be remembered is that it
  was done. The naysayers will be forgotten.
• 1993 a new Liberal government in Ottawa. They
  didnt rip up the Agreement as promised. Indeed
  on Jan. 1, 1994 NAFTA came into effect. That may
  have been the problem.
• But rather than a point of departure FTA became a
  destination to quote Ambassador Gottlieb.

69
FTA Debate

• John Turner in 1988 Debate asked, Why did we get
  a situation where we surrendered our entire
  energy policy to the United States?
• But is it time to find another customer, e.g.
  China?
• If so, what will U.S. attitudes be?
• What will Canadian attitudes be to Chinese
  Sovereign Wealth Fund Investment?

70
(No Transcript)
71
The Purpose of NAFTA

• To gradually remove tariffs and other trade
  barriers on most goods produced and sold in North
  America.
• It was built on the Canada - The United States
  Free Trade Agreement (1989)
• To eliminate or reduce many tariffs between the
  two countries.

72
The Effects of NAFTA

• Created the world's second largest free trade
  zone
• Brings together an estimated number of 365
  million consumers
• Has a combined annual trade and investment
  flow of over 500 billion US

73
The US Canada Trade Enviornment

• Why has FTA become a destination rather than a
  point of departure?
• Two reasons American hostility, especially
  since 9/11 and the more recent credit crisis and
  the lack of a Canadian strategy.
• Canada is a trading nation more dependent on
  trade than any other developed nation.

74
China / Canada
http//www.cbc.ca/news/politics/story/2011/11/09/p
ol-oliver-oil-sands-china.html
75
(No Transcript)