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Poloz holds firm on rates but warns our potential growth is lower now

10/23/2015

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The Globe and Mail
Bank of Canada Governor Stephen Poloz is warning that the oil price shock could weigh on Canada’s economy for at least another two years.
The central bank kept its key overnight lending rate unchanged at 0.5 per cent Wednesday, after cutting it twice this year.
But the bank downgraded its economic outlook for next year and 2017, citing a “complex” transition away from the once-booming resource sector.

After flirting with a recession earlier this year, the Canadian economy will grow just 2 per cent in 2016 and 2.5 per cent in 2017, the bank said in its latest monetary policy report. That’s down from previous forecasts of 2.3 and 2.6 per cent, respectively.
Low oil prices are continuing to sap business investment and put a dent in the value of Canadian exports, overwhelming some of the improvements elsewhere in the economy. The bank now expects spending in the energy sector to drop another 20 per cent in 2016, after a 40-per-cent drop this year.

Mr. Poloz said it will take up to two years for the recent rate cuts to work their way through the economy. “We need to be patient and let monetary policy do its work,” Mr. Poloz told reporters in Ottawa.
And he pointed out that the non-energy side of the Canadian economy is gaining steam, buoyed by those lower interest rates and the cheaper Canadian dollar.
Vast swaths of non-energy exports are in full recovery mode, according to a separate analysis of more than 4,000 exports, also released Wednesday by the bank. Exports of hundreds of items, including building products, aerospace and fabricated metal, have grown by at least 10 per cent a year since the recession.

More worryingly, the Bank of Canada warned that the potential growth rate of the economy may be weaker than expected because of “capacity destruction,” some of which may never come back. The result is that the potential growth of the economy is “likely to be in the lower part of estimates” this year and next.

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Ambrose Evans-Pritchard sums up the state of the oil market

8/8/2015

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The Telegraph
If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.


The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.


The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.


Bank of America says OPEC is now "effectively dissolved". The cartel might as well shut down its offices in Vienna to save money.
The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year - and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. "We've driven down drilling costs by 50pc, and we can see another 30pc ahead," said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. "We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days," he said.

He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.

Until now, shale drillers have been cushioned by hedging contracts. The stress test will come over coming months as these expire. But even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good.

The wells will still be there. The technology and infrastructure will still there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 - since the threshold keeps falling - they will crank up production almost instantly.

Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia's giant Ghawar field, the biggest in the world.

Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.


In hindsight, it was a strategic error to hold prices so high, for so long, allowing shale frackers - and the solar industry - to come of age. The genie cannot be put back in the bottle.
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Canadian Household Debt Study

7/29/2015

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CPA Canada
Senior debt via CBC
Food banks in Alberta via CBC
Consumer bankruptcies on  the rise

Our conclusions include the following: Households’ perceptions are not responsive to signs indicating a possible deterioration in the economic environment; however, households are aware of their susceptibility to specific negative financial shocks. A number of recent developments suggest a possible deterioration of Canada’s economic prospects; those include the decline in international oil prices and Bank of Canada’s target interest rate. However, households outside Alberta did not view these changes as having the potential to affect their financial wellbeing: 
• Nearly half (49%) of households said these changes would not have a noticeable impact on their financial wellbeing over the next 12 months. 
• In total, 34% of households said the changes in oil prices and interest rates were likely to prompt them to decrease their current pace of savings, while 22% thought they were likely to borrow more than was initially planned as a result of the shift in economic conditions. 
• Further, households that reported having no wealth were much more likely to say that the changing economic environment would prompt them into more extensive borrowing and lesser effort of saving. While providing substantive insight into provincial or regional differences is difficult without a deeper level of data, it is clear from the survey results that households in Alberta are different than in the rest of the country, likely because Albertans will be more directly affected by the recent decline in oil prices. While only 16% of Canadians surveyed expected a negative change in their financial situation because of changes in the economic outlook, 34% of Albertans expected to be negatively affected by such change. 

Our primary finding is supported by evidence that the behaviour and attitudes of households has changed very little in the face of the change in economic outlook and the increased uncertainty since mid-2014. A comparison of the results from the two waves of CPA Canada’s Households Public Opinion survey—spring of 2014 and winter of 2015—suggests that households did not noticeably change their approach to managing finances in light of the shifting economic conditions and the attention drawn to those developments by various observers. By comparison, when asked how they would react to a specific, quantifiable economic shock, households showed both understanding and the willing to take appropriate financial measures to protect their wealth.



For example:
 • Seventy-nine per cent of mortgage holders agreed they would have to make adjustments to meet their mortgage obligations should their household income decline by 25% for at least three months. Forty per cent of mortgage holders said they would have to cut back on spending and the same percentage said they would have to use cash or money in savings accounts to ensure mortgage obligations were met. 

• All property owners felt that a 15% decline in housing prices would be associated with some negative consequences in addition to psychological discomfort. Twenty-four per cent of property owners said the decline in housing prices would reduce their retirement savings, while 21% thought they would have to cut spending. The perceived impact of the price decline was greater for non-retired households and those with lower levels of equity in their homes. 

While Canadian households rate themselves highly in terms of financial discipline, not many households are paying attention to signals of potential economic weakness and are taking measures that could help mitigate financial vulnerability. A total of 65% of Canadian households assessed the level of their financial discipline as somewhat or very strong. 

However: • Only 60% of households with debt said they paid off a portion of their outstanding debt on a regular basis (weekly, bi-weekly, monthly, etc.)

. Forty-one per cent of households with home equity lines of credit (HELOCs) did not make regular payments that covered both interest and principal to repay the outstanding balance. 

More than half (53%) of non-retired households said they did not save on a regular basis and 30% of households reported that they had no wealth.

 • Few households said they kept themselves well informed regarding the value of their wealth: 25% had either never calculated their wealth or last calculated it about a year or more ago; as many as 20% of those surveyed did not remember when their household last assessed the value of its wealth. 

• Few households monitored changes in external economic and regulatory conditions; 24% of households said they did not usually watch the key external factors that could affect their financial wellbeing. 

• A full 51% of non-retired households said they did not have a special reserve fund for unexpected financial emergencies. About a fifth of those who had such a fund said that the emergency savings would allow their household to cover regular expenses for no longer than four weeks. 


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WTO: Trade Protectionism is on the Rise

7/11/2012

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The NY Times on how trade protectionism is accelerating. 
"Global Trade Alert, a respected independent survey, titled a June update on trade protections “Debacle.” It bumped up its estimate of the number of protectionist measures enacted in 2010 and 2011, by 36 percent, and warned  that countries had many more coming.

The European Union also issued a report finding a “staggering increase in  protectionism” in recent months."

From the WTO report summary:
"Implementation of new trade restrictions continues  unabated …

Since mid-October 2011, 124 new trade restrictive measures have been recorded, affecting around 1.1% of G-20  merchandise imports, or 0.9% of world imports.    The main measures are trade remedy actions, tariff increases, import licences and customs controls.  There were fewer new export restrictions introduced over the past seven months than in previous periods.
 
The more recent wave of trade restrictions seems no longer to be aimed at combatting the temporary effects of the global crisis, but rather at trying to stimulate recovery through national  industrial planning, which is an altogether longer-term affair.  In addition to trade restrictions, many of these plans envisage the  granting of tax concessions and the use of government subsidies, as well as  domestic preferences in government procurement and local content  requirements.
 
Accumulation of trade restrictions has become a major concern …
 
The new measures restricting or potentially restricting trade that were implemented over the past seven months  are adding to the trade restrictions put in place since the outbreak of the  global crisis.  The accumulation of trade restrictions is now a matter of concern. The trade coverage of the restrictive  measures put in place since October 2008, excluding those that were terminated,  is estimated to be almost 3% of world merchandise trade, and almost 4% of G-20 trade.

The accumulation of trade restrictions is aggravated by the relatively slow pace of removal of existing measures.  Out of a total of 802 measures that can be considered as restricting or potentially restricting trade implemented since October 2008, 18% have been eliminated.  At the time of the last monitoring report in October 2011, around 19% of the restrictive measures had been removed, which means that the rate of removing restrictive measures is actually slowing down.

 Moreover, the accumulation of restrictions has to be considered in  a broader perspective where the stock of trade restrictions and distortions that  existed before the global crisis struck, such as in agriculture, is still in place. "

I identified the issue close to the inception of my blog.
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Saudi Arabia continues to over promise and under deliver oil production

10/10/2011

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Saudi Arabia has been constrained for some time now, at least the last five years, in its ability to deliver excess capacity to a tight market. Five years ago they cut production as oil prices were rising. Those who subscribe to peak oil theory have viewed this as evidence that Saudi production was in permanent decline.

Their behaviour during the supply disruption caused by the Libyan civil war cast further doubt on the Saudis ability to act as the marginal supplier to the global market.

What’s more, the house of Saud announced a 100 billion dollar investment in renewable energy so that it could increase oil production.

The Saudis promised investments that would raise production to 15 million barrels. Recently, they have recanted on these promises citing the supply coming from Brazil and Iraq as sufficient to satisfy global demand.  

All of this behaviour is very strange for the country with the supposed largest oil reserves in the world and the lowest cost of production. By  their actions one should begin to question the truth of either of these two assertions.

 The implication of Saudi Arabia being an “emperor who has no clothes” is that the cost of extraction of unconventional oil coming from sources like Brazil and Canada are much more likely to drive oil prices than marginal costs have in the past. Unconventional projects take a long time to  complete, so we are unlikely to see the oversupply response we have seen in response to past price spikes.

The volatility in oil markets is going to increase, as unconventional production delivers an ever increasing share of the world’s production. Political crises and production disruptions will lead to immediate and severe price spikes in the absence of a moderating supply source. 

Only a stable Iraq, with a significant investment in its field,  could possibly replace Saudi Arabia as the “go to country” for incremental oil  production in times of global disruptions. Imagine that. 

Editorial note Jan. 07/12 : My refined thinking has it that oil demand continues to drive prices given the relative tightness between supply and demand. I wrote an article for the Geopoliitcs of Eenrgy which primary thesis was that oil demnad would be more volatile than suppy over the next 10-25 years.


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