Canada's cheap and cheerful oil boom is on shaky ground

American Outlook

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Ah, Canada. What not to love? It’s different.

The world’s most inoffensive and polite place, and according to many surveys, America’s favourite foreign country. Well why wouldn’t Americans like Canada? It’s where most of their cheap petrol comes from after all, not the Saudis as most people assume.

Speaking of which, petrol, or gasoline as we call it here, is getting cheaper by the day. Brent Crude fell to below $65 a barrel last week. Something not seen for more than a decade – $40 a barrel – is a real possibility. Great news for American drivers. But for our friends in the north, a disaster.

Canada has been home to one of the most extravagant oil booms of recent memory. Calgary and Edmonton, once considered provincial backwaters, have been the main beneficiaries of Alberta’s Athabasca oil sands, the largest known reserve of its kind on the planet. They are boom cities, with all of the good and the bad that comes with it. But for how much longer?

The Canadian economy isn’t quite like the Gulf states when it comes to dependence on oil. It’s actually pretty well diversified, but that doesn’t mean the drop in the price of oil and other natural resources isn’t going to have an impact. Quite the opposite – much more of this and Canada is going to start hurting worse than when Wayne Gretzky left for Los Angeles.

The main reason is that Canadian tar sand oil isn’t the same as Saudi oil. For starters it costs about $45 per barrel to get out of the ground in the first place, and it’s also heavy and sour. That means a lot of refining before it becomes useable, most of which is done in the Gulf of Mexico. And the Gulf of Mexico is a very long train ride from Alberta, adding about another $15 a barrel to costs. A pretty good deal for a 2,500-mile train ride, admittedly.

Because most of Canada’s oil is not high quality when it comes out of the ground, in oil terms it’s cheap and cheerful. It trades at a discount to West Texas Intermediate, which in turn trades at a discount to Brent Crude. So a barrel of Canadian oil usually goes for about $20 less than Brent – meaning that now it’s already hovering at something like $45 a barrel. The real numbers are far more complex than this simplified explanation but it doesn’t take a genius to see that right now they don’t add up.

An energy risk consultancy, The Carbon Tracker Initiative, reported in October that by its calculations Brent needs to be trading at more than $95 a barrel for 90 per cent of Canada’s tar sand fields to operate profitably, and above $75 for the rest to make a buck. No wonder Canada is in a funk. If oil doesn’t recover fast, the boom is going to become a bust. Very fast.

The Canadian dollar is in the doldrums along with oil, complicating exports and making imports more expensive. Oil companies are already moving to re-examine costs ahead of finalising or initiating new projects, a pretty decent indicator that they think lower prices are going to be around for a while. Short-term, the outlook for the Canadian economy and the oil-heavy Toronto Stock Exchange is pretty grim.

This could all add up to a perfect storm for Stephen Harper, Canada’s Prime Minister, who must be praying for an oil price recovery harder than anyone. Life was pretty easy for the free market enthusiast when the oil and secondary tax revenue was flowing, but it’s getting harder by the minute. By default, his chances of keeping his job at next year’s general election are also suffering.

Desperate politicians looking for scapegoats. Slumping economic prospects. Tough times ahead. Ah, Canada. Turns out they are just the same as the rest of us.

Nike and Adidas take to the court – the litigation court

The world is awash with great sporting rivalries. Liverpool and Everton, Real Madrid and Barcelona… and in my part of the world, Louisville and Kentucky. But perhaps the greatest rivalry is not played out on the field but in stores and boardrooms – Nike and Adidas (sorry Puma).

The race to see who can make the most dough out of gullible sports fans willing to shell out ridiculous sums for shirts and shoes made by sweatshop labour is one for the ages. Nike generally wins, at least in the sense that it’s a larger company with revenue something like 70 per cent higher than its German rival.

That rivalry is now being played out in court too. Nike has decided to take a staff-poaching case to court in its home state of Oregon. Home field advantage, always a good thing. Nike is seeking $10m in damages, a trifling sum in the grand scheme of things, perhaps, but a sign that this rivalry has been taken to another level.

These weren’t ordinary worker drones either, the three gents involved were major players in Nike’s design team. They even had keys to Nike’s Innovation Kitchen, a legendary room on the company campus that’s like Willy Wonka Land for sports kit.

Nike accuses the staff of selling themselves to Adidas by passing on Nike’s shoe design secrets, downloading information on to laptops and using it to lure Adidas into hiring them. Very naughty – if true.

Nike is throwing the usual litigation jargon around, that its business suffered “irreparable” damage by the actions of these designers. Here’s what I don’t get. If you have revenue of something like $25bn, as Nike does, how do its lawyers value “irreparable damage” at a measly $10m? Seems a little half-hearted to me.

The point is not really monetary. Nike (and Adidas) spends a huge sum on R&D and has every right to try to protect its intellectual property. This might seem petty, but if the shoe was on the other foot, Adidas wouldn’t hesitate to lace it up.

Nothing like a huge pipeline to stoke national debate

Maybe the Aussies are jealous of the interminable American debate over the Keystone XL pipeline. Whatever the reason, they’ve now got their own pipeline proposal to argue over, one that might end up looking more like Sarah Palin’s “Bridge to Nowhere” than the Keystone.

At least XL has a reasonable business argument in its favour. Unlike the proposed pipeline between the gas-rich Northern Territories and the people-rich East Coast of Australia, which comes with a nifty AU$1.1bn price tag. Picked up by Aussie taxpayers of course. The debate is less over job creation and environmental concerns and more about how much gas there is at one end and how much demand for gas there is at the other.

Analysts and consultancies have questioned the need and the economic viability. Not surprisingly, the company that would build the pipeline, APA Group, is all for it. At least APA can be sure of one prominent supporter – there isn’t a Government-funded private business venture with potentially devastating environmental risk that Aussie PM Tony Abbott doesn’t like.