Wednesday, July 29, 2009

BC Power Generation Ruling

In an interesting decision yesterday, the BC Utilities Commission (BCUC) ruled that current BC Hydro acquisition plans are “not in the public interest” and refused to allow them to go ahead. This includes the Campbell governments plans for privately-owned “run of river” hydro projects that were intended to change the numbers in the government's greenhouse gas emission policy.
The Campbell government is possibly Canada's greenest government, having passed into law a requirement that BC reduce greenhouse gas emissions from 2007 levels by at least 33% by 2020 and 80% by 2050. One of the methods by which they hoped to achieve these targets was to increase power production in the province, but have that power generated by smaller-scale hydro projects (the “run-of-river” projects). Then, in a very controversial move, the Campbell government decided that they would encourage these projects to be privately owned and developed.
Typically, this set off a firestorm of protest in the province (BC, after all, keeps its conservatives in check by occasionally electing the social-democrat NDP—in the last election less than 5000 strategic votes would have flipped the outcome). A broad spectrum of affected citizens, spearheaded by Rafe Mair, a former radio talk-show host and currently writing regularly in The Tyee, have been keeping the heat on both the private power companies (primarily Plutonic Power Corp, who saw their share price fall 24% yesterday), called IPPs or independent power producers, and the provincial government. The heat comes mostly from broad-based environmental concerns—we've learned over the years that even hydro power comes at a price—from the effect on communities, the forests, and on the sport and commercial fisheries.
One of the interesting rulings from BCUC is that BC Hydro will not be allowed to downgrade their Burrard Generating Station from 5000 GWh to 3000 Gwh. If the ruling stands, private power generation projects will have to be reduced by a similar amount—thus the fall in Plutonic's share price yesterday.
The ruling suggests that the government and BC Hydro have been purposely overestimating BC's power requirements in order to justify IPP entry into the market. Lori Winstanley of COPE, quoted in the 29 July '09 Globe and Mail, says quite plainly that “[w]e have a very flawed energy plan in this province...the government cannot continue to exaggerate the need for power.” The BCUC did approve a BC Hydro plan to spend $418 million on demand side management, which is a good thing as there are significant gains that can be realized by simply reducing demand in the province. But one of the reasons for increased demand on generation capacity is that a large amount of power from BC is sold south into the US, and BC Hydro isn't seeing that demand drop at any time in the future. Particularly with the growing demand for low greenhouse gas emitting power, which is only set to grow from south of the border. And US dollars are important to BC Hydro—they made billions on Enron's whipsawing of the California utility market.
And the BCUC also approved BC Hydro's spending of $41 million on continued consultation on the proposed Site C mega-project dam on the Peace River, so there's still hope for US dollars to flow long-term into BC Hydro's coffers. 'Caused it's always about the money, innit?

The Oil Refiners Conundrum

Irving Oil Ltd. and their partner BP PLC have decided to stop their planned construction of an $8B oil refinery that was to have been built in St. John, and they have done so on the basis of a report that looking out over the next thirty years, oil consumption has now peaked. There are now a number of analysts that believe that even if the economy recovers, gasoline consumption peaked last year, and we will never achieve those levels again.
Some analysts are suggesting that with the economy still tanking and excess inventory of gasoline and other refined products piling up (there's a million barrels per day of production capacity sitting idle in North America at the moment, and surplus inventory has hit a 24-year high), crude oil prices can be expected to tank—possibly as low as $20/barrel.
So even though refiners have seen their margins rising to a ten-year high (according to numbers released by MJ Ervin and Assoc. in 1998 refiners were seeing an annual average margin of 6.7¢/litre which has risen to a year-to-date average of 15.6¢/litre this year), they are not planning any more production capacity and are, in fact, abandoning planned expansion. Plans such as Royal Dutch Shell's now abandoned plans for a refinery near Sarnia, Ont., that was to handle production from the Alberta oil sands. Shell has also delayed the expansion of its Texas plant for two years—obviously wanting a better read on future North American consumption patterns before building what may well prove to be capacity that's surplus before it even comes on line.
Of course, if crude prices do fall to $20/bbl, a massive oversupply could trigger a steep fall in gasoline prices, and stimulate demand. But if North American governments hold to improved mileage rate requirements for new cars, even increased demand may not make up for the current oversupply.
But other analysts are suggesting that, particularly with the Saudis keeping a lid on their production in order to stabilize prices, prices may yet rebound to the $100/bbl level before dropping back into the $50-$60 range. If that is the case, demand is likely to fall even more than projected, leaving North America with a growing oversupply problem and refiners facing decent margins, but considerably less volume from which to get those margins.
So refiners are caught in a bind; legislated drop in demand and oversupply means falling volumes and lowered overall profits. Or legislated drop in demand, higher crude prices bringing a corresponding drop in consumer demand, and oversupply at refineries meaning lower consumption and a steadily rising oversupply. Either way, there's not going to be a lot of construction going on—even as the current refineries age. And if North American governments ever get really serious about global warming, these antiquated refineries will not only not be expanded, but will begin closing to meet emission requirements—which will finally take out the excess capacity, but will not encourage anyone to build new plants. Ultimately, this could mean that North America will be entirely reliant on shipping crude overseas ( that is, oil sand crude, making it even less economically viable than it is today) and importing refined hydrocarbons. Which is, contrary to my expectations, already happening.

Saturday, July 18, 2009

So What's the Big Whoop about Deflation?

So Canada has registered it first “technical deflation” in 15 years in June 2009. More than a few people are having a very quiet freakout about this. A few, like Ken Rogoff (former research director at the IMF, now Harvard economics professor), John Makin (economist with the American Enterprise Institute, a hard-right conservative outfit) and Paul McCulley (portfolio manager at Pimco—who run the world's largest bond mutual fund) suggesting that this might be the time to bring back inflation—perhaps as high as 6% for a couple of years.
The spark behind this is the release of the consumer price index for the last couple of months, showing that in May and June, prices for consumers fell for the first time in years. While you and I might think this is good news, economists and businesses think differently about this. If the CPI is dropping, it begins to make sense, as a consumer, to put off spending money on anything. Why buy now, if in a month the price will have dropped? Does it make sense to spend 20K on a car if, by waiting a year, you can save $1100 (assuming an annual 6% deflation rate)? Of course not, particularly when not buying accelerates the deflation rate.
Again, as a consumer, this sounds great. Prices falling, money worth more instead of less (inflation eats away at the value of the dollar, making it worth less. Deflation reverses that), it sounds like good times for all. But with everyone sitting on their money, businesses find no reason to stay in business, or if they do, they certainly don't need to be as big. So as consumer spending falls, unemployment rises and the economy contracts. And if nothing kicks this pattern apart, it stabilizes into a long-term nation-crippling problem. Just ask the Japanese, who have been grappling with a structural deflation problem for over a decade now, since the collapse of the commercial real estate bubble.
We're not necessarily in that position here in Canada, as the major reason for our fall in the CPI is primarily the result of a 19% fall in gasoline prices. Although, nationally, prices increased at the pump 6.8% from May to June, prices have dropped 24.3% since this time last year. It should be noted that natural gas, car, and house carrying costs have all fallen over the last year as well, helping drive the CPI into negative territory. Phillip Verleger, a U of C professor and energy economist, is now forecasting a drop in the price of oil to $20/barrel (as predicted by peak oil theory, which forecasts a series of spikes and slumps in oil prices), which will hammer Oilberta—not so much in resource revenues, but in cancelled oil sands projects, unemployment, and concurrent collapse in consumer spending which will ripple out through the economy—and will continue to push the CPI into negative numbers. But, if you strip out the effect of oil/energy pricing from the current numbers, inflation is still tripping along at 2.1%, which is why this period is referred to as “technical deflation.”
So this is why our governments are all Keynesian now. The possibility of structural deflation is scaring the hell out of all of them and the corporate community. The system we live under is predicated on continual growth, and stabilizing that growth (removing the bubbles and crashes, inflationary and deflationary cycles) has been made job one for governments. Both corporations and the public dislike uncertainty, so uncertainty must go.
From an environmental point of view, a sustained period of deflation might be just the thing we need. But a deflating economy will have more trouble making the shift to a green(er) future than one that is growing. An expectation of profit is essential for businesses in order to get them to make changes in their business models.

Thursday, July 16, 2009


OMFG. I've woken up from a nightmare that was driving me crazy. I had this nightmare that George Lucas, the guy who directed that reasonably nice little film American Graffiti had made an SF-like film called Star Wars that had destroyed cinema for thirty years. Thankfully, I know its only a dream because today I saw Moon, directed and original story by Duncan Jones. Thankfully, we now have an heir to Kubrick, Wise, and Roeg.
A tremendously self-assured debut feature from Duncan Jones, the film has a feel not unlike 2001, Silent Running, and even The Day The Earth Stood Still (not the remake). The film concentrates on a small story told against a very large backdrop, and Jones never bothers to tell you everything. Just as Kubrick dropped you onto a Pan-Am flight into orbit and didn't bother to backstory it, Jones does much the same. Why is Sam 1 dying? Well, Jones doesn't tell us, he let's us figure it out. The story about Sam and his wife and child? Maybe I'm the only one, but I didn't see the twist of the knife waiting at the end of that thread. Just hadn't thought of it.
The film develops slowly, focusing tightly on Rockwell's character of Sam Bell (very tightly—the credits list only 8 actors and one of them, Kevin Spacey, exists only as a voice). Sam is nearing the end of his three-year contract running a mining station on the border between light and dark on the moon. With 14 days to go, there's a problem; Sam grabs a crawler,heads out to fix the rock-combine, and has an accident. He awakens back in the base, cared for by Gertie (voice of Kevin Spacey), the HAL-like operating system that supports Sam. Restricted to base, Sam decides to head back out to the mining unit (yeah, it really looks like a combine harvester) where he finds the previous crawler. He climbs in and finds himself, dying in the driver's seat.
This is a film about loneliness and exile, about the things that make us human and the things that keep us human, about those who would exploit them for their own ends and those of us who are unthinkingly complicit. That this is a young man's film is obvious in the ending, where there still remains a belief that there are things that people will not put up with. Had Jones been twenty or thirty years older when he developed this film, I don't think that the casual belief would appear. We can be conditioned to accept anything, just ask Bush and Cheney.
I don't want to give away the ending—not that it's that important, but its the process of getting there I don't want to deprive you of. This is a tightly observed, carefully directed film that accomplishes the unthinkable—it makes me appreciate Sam Rockwell as an actor, not something I ever thought would happen. The twists and turns, the expectations set up and knocked down show a confidence with the idiom, and a strong awareness of the pop culture effect Jones' predecessors had. Whether this film will have the same type of effect remains to be seen, but this is a first feature from a young director, made for about 5 million, and is entering its third week running in Victoria. It's getting great reviews and solid word of mouth, so who knows, this may turn out to be one of the most significant films of the summer. Just don't go expecting Transformers—this is way smarter and way more adult.

Corruption, Private and Public

Here in B.C., some of us have been paying attention to the Basi/Virk trial—these are the guys who got arrested in 2003 when the RCMP raided the Ledge, hauling off cartons of files and papers. B&V are charged with fraud and corruption relating to the sale of BC Rail to CN. More precisely,leaking information, rigging the deal, and taking payoffs. Their defense is based on “just following orders” to get the interest (and, by extension, price) up on the sale. They deny having accepted money in any way (other than their salaries, of course), but acknowledge that they leaked information—though on the instructions of higher ups, including from our premier. So their lawyers subpoenaed all emails relating to the sale of BC Rail, including those of the premier.

It turns out, to no one's surprise, that the email records were destroyed. Of course there are rules concerning such things; “Government records destruction must be suspended during court orders for Demand for Discovery.” Also “Records disposition must be suspended during legally mandated reviews (e.g. Litigation, document discovery, and commissions of inquiry).” “Well,” said the business charged with keeping track of government backups, “that was more than 13 months ago, and they've already been trashed.”(or words to that effect.) Except that now it comes out that some email backup records from pre-May 2004 were discovered during the election campaign earlier this spring—including some of the premiers email. And somehow, someone in a position of power decided that the tapes should be destroyed. And so they were, during a campaign in which the court case was an issue. Funny how that happens, isn't it?

And Gordon Campbell “cruised to an easy win,” returning as premier for the third time. “Cruised to a win” in an election in which 4,500 votes, in the right ridings, would have almost exactly reversed the outcome. This is the kind of crap that sent Dick Nixon down. It's sunk quite a few Canadian politicians as well.

The question of whether the sale of BC Rail was corrupt isn't in doubt; by admission of Basi/Virk, it was. But naturally this won't make a damn bit of difference to the sale. Nothing can be allowed to interfere with that. Instead, at best, it will cost a couple of flunkies their jobs and maybe some jail time. Gordon Campbell is expected to retire before the next election, and every effort is being made to see that he remains un-tarred by this particular brush (although his bio will always record that he was a convicted felon when elected for the third time (having been convicted of felony DUI in Hawaii)). He will, of course, be cared for by those for whom he's made boatloads of money over the last two terms. But anyone actually paying a price for corruption in government? Not gonna happen.

This is one of the failings in our current system of government; there is a real and serious lack of accountability. CN knew damn well that it was participating in a corrupt process, but there will be no piper for them to pay. A couple of schmucks will have their lives ruined (maybe—they too may be cared for in the end by the rich pricks ripping apart the commons for private profit).

But what would happen if the sale was nullified? The billion dollars BC took for BC Rail returned to CN, and CN not compensated for “improvements” (the line has not only not been improved, but in fact has been the scene of numerous speed-based derailments, including the one that dumped highly toxic chemicals into the river outside of Squamish a couple of years back. CN paid a few bucks for the massive destruction of salmon at the time, but apparently no changes have been made to the way they've been doing business in the region. The number of derailments since bear witness to that.), but what if CN was actually taxed to recover all the profit they've made on the line since its sale? After all, a case could be made that, by participating knowingly in a corrupt bidding process, these profits are in fact proceeds of crime, just like any pot dealer's car. Corruption flourishes because of economic benefits. If you remove the benefits, you can slow or stop corruption.