Costs and profit

[cowman]

Linda: I would suggest you aren't really up on the real estate market? The average house in Red Deer is $212,000! well that was last month...who knows where it might be now!
But I do agree with your analyse of the problem...to a certain extent! Barring federal intervention this boom is going only one way...UP!
For those of us who lived through the NEP, we know how the Canadian government can **** our region and literally destroy our economy? The bumper stickers(Please God give us another oil boom...we promise not to piss it away this time) are very appropriate today? But in reality what caused the end of the oil boom? Wasn't it defacto the federal Canadian government?
As in any supply demand situation there will be corrections? A false correction where the feds jumped in and destroyed the Alberta economy is hardly the real world? Hopefully the people of Alberta will never let those Eastern dogs **** us like that again?
I don't think eastern Canada ever realized just how much we resented being screwed, like the screwing we got with the NEP? Try it one more time...and I believe we will be ready to go?
My hopes and dreams....

[cakadu]

I'm not convinced that the feds would try anything like the NEP again. The GST is working just fine for them now in terms of bringing in additional dollars, which was something that was missing the first time around. The higher fuel goes, the more tax they collect, so why bother trying to get things in check.

Look at how much money the oil companies in this province are making on the price of oil right now. There appears as though there will be no end to the windfall. The higher things go, the further they have to fall.

But all is not rosy for everyone and that gap just keeps getting larger and larger. Many stuck in middle incomes are finding themselves sliding towards the lower end of the scale simply because costs such as heat, electricity, gas etc. are getting out of hand and not for any other reason.

We are also behaving as though the oil will never run out. It is a non-renewable resource and even though the estimates on when it will run out vary, there will come a time when even the best producing wells just won't cut it anymore.

For all intents and purposes, we are sitting at zero unemployment here in Alberta - it is at less than 4%, which is considered full employment. While the oil patch and related industries are booming, other businesses aren't faring quite so well because they can't find workers.

As near as I can tell, we are very much out of balance and everything, no matter what it is, tries to find an equilibrium.

[cakadu]

Linda, GST is one thing, envy of the wealth of Alberta is another. If the Feds get enough griping from some other provinces they may come up with some chocolate coated NEP. I certainly agree that the gap is getting larger between those with wealth and those that are just getting by.
As far as supply and demand for gasoline goes if a significant number of people start driving those goofy little Smart cars the demand will sure go down !! I could not believe the number of them in Vancouver. Somehow I just can't see them catching on in rural areas. In some of our highways they would disappear in a pot hole !

[farmers_son]

Cowman said “For those of us who lived through the NEP, we know how the Canadian government can **** our region and literally destroy our economy? The bumper stickers(Please God give us another oil boom...we promise not to piss it away this time) are very appropriate today? But in reality what caused the end of the oil boom? Wasn't it defacto the federal Canadian government? “

I think it is interesting to consider that when the price of oil goes up it is because of demand in the U.S. or China or world wide but when the bust comes it is because of the federal Canadian government. I thought this paste offered a more objective analysis of the bust in the early 1980s:

Begin of paste:
“During 1980 and 1981, the national economy [U.S.] began to slide into one the worst declines since the Great Depression. Because Houston's economy was stronger in 1981 than in any of the preceding twenty years, its abrupt decline in the spring of 1982 left most business and community leaders in shock. Increased world production of oil, conservation of energy spurred by higher prices, and a worldwide recession during the early 1980s changed the dynamics of the oil business by creating a worldwide oil glut. OPEC lost its power to set prices, domestic production dropped, and the economic incentive to drill, especially for high-cost oil, began to disappear. The result was a significant decline in the number of oil rigs actively used for drilling. With this decline came decreases in new orders for all types of oil field equipment and services. Within eighteen months, the Houston economy lost 100,000 jobs. The city once considered recession-proof soon saw its unemployment level exceed that of the entire nation.
End of Paste

Is the suggestion then that the NEP caused the bust in the U.S. oil economy too?

[blackjack]

...f_s ...even though you some times irritate the heck out of a guy...thanks for bringing balance to the board...

[FarmRanger]

The rise in gasoline price depends on supply versus demand and the elasticity of each. Demand is pretty inelastic (doesn’t drop as much with price increases) so when we have a reduction in supply, prices tend to rise more. I’m not happy about paying these ridiculous prices for fuel either, but at least I can understand why it’s happening. Like a lot of other people, I have a limited ability to reduce my consumption by very much.

I did a search on the NEP and found the following quote on FreeAlberta.com (I can't personally verify it's accuracy, and I don't know what fills in the ...., but it sounds par for the course)

"The major factor behind the NEP wasn’t Canadianization or getting more from the industry or even self-sufficiency. The determinant factor was the fiscal imbalance between the provinces and the federal government.... Our proposal was to increase Ottawa’s share appreciably, so that the share of the producing provinces would decline significantly and the industry’s share would decline somewhat." -Rt. Honourable Marc Lalonde, Minister of Energy
Unquote

We might still have had a recession, but don’t you think it could have been compounded in Alberta with this kind of predatory legislation from Ottawa?

With this in mind, when current Ottawa politicians start saying things like "This is a recipe for government involvement to restore market forces", it makes a guy think that maybe he wants to distort market forces instead, and not for the benefit of Albertans.

[farmers_son]

It is an oversimplification to say that the rise or fall of any commodity depends on just supply and demand. In a free market system competitive forces do play a role and must be considered. There is real reason to question if competition is effectively keeping energy prices at the pumps in line with costs. For example, I think if we saw the same level of competition within the energy industry that we see in the airline industry the price of gas would be much lower, even with the same supply.

Regarding the NEP, I do not think there is too much question that the NEP was ill conceived and bad for Canada. I do not want to be accused of defending the NEP. Although the NEP is portrayed, at least in Alberta, as a battle between Alberta and the federal government it was far more about relations between the United States and the Canadian government. While both countries were trying to achieve energy self sufficiency the NEP clearly favoured Canadian ownership of its industry at the expense of American companies. The NEP had caused a considerable amount of tension not only between Ottawa and the provinces, but also between Ottawa and the United States.

The legacy of the NEP is NAFTA and a continental energy policy embedded in the larger FTA. The significance of the continental energy policy being part of NAFTA is that this arrangement cannot be undone or dismantled without dissolving the entire agreement. This should ally any fears of a NEP like program ever being put into place again.

While the NEP is gone and is replaced by NAFTA the effect on other primary sectors was that with energy depoliticized it could no longer be used as a weapon in tit for tat disputes over issues such as softwood lumber or beef.

There is a very interesting dissertation on Canada’s energy policy at:
http://www.mtholyoke.edu/acad/intrel/Petroleum/nemeth.htm

[cowman]

farmers son: Definitely the worm was turning and oil was on its way down in the eighties. Again that was simply supply and demand at work.
The NEP was exactly what Farm Ranger said....an attempt to stop the growing wealth and power of one of the colonies...for the benifit of the heartland! It transferred massive amounts of dollars from one region to another...in the "National interest"?
Without a doubt it stopped the shift of head offices from moving west and it bankrupted many Alberta businesses!
By the time Mulrooney finally lifted the NEP the damage was done and oil prices were depressed once again.
And now we are facing the same type of circumstances? World oil prices rising rapidly, Alberta, BC, Sask. in a rapid boom, Quebec crying for more money and Ontario talking about how things are getting tough? Liberal politicians making noises about more "sharing" and "balancing" of the country?
What a total slap in the face for Martin to ressurect Marc Lalonde, perhaps the most hated man ever, in Alberta? This is dealing with western alienation? You bring in the man who totally destroyed our economy and has absolutely no shame for doing so? I would suggest he is there for one reason...to bring in another "sharing" program!
The Liberals are not likely to make a move until the election. They need a majority to play their games...and I suspect they will get it? There is a very good chance the BLOC will be the official opposition, the NDP lapdogs fawning at their Liberal masters feet, with the Conservatives being confined to the west and a few seats in the maritimes.
Quebec will face an election shortly after the federal election and the provincial Liberals look very shaky there right now? Charest has been making some pretty strong noises about needing more money from the federal government. Where will that money come from?
Ontario is also making a lot of noise about their situation and how they cannot be expected to continue to transfer money to Ottawa? The McGuinty government is in trouble right now and needs some solutions? Who will make up the shortfall if the federal Liberals decide they need to support him?
NEP II is coming...one way or the other! It might be disguised as something else but the net result will be to take more dollars out of the west and give it to Quebec and Ontario! The Liberal party will sacrifice the west to appease their power base in Quebec and Ontario...do you really doubt it?

[cowman]

I think that Ralph and crew are going to come up with a few ways to spend our surplus pretty fast during their meetings this week . If the cash isn't in the bank its pretty tough for the feds to get their hands on it.

[FarmRanger]

Unfortunately, supply and demand has very little to do with costs right now. Prices rise to compensate for a reduction in supply (temporary, I hope). In a free market, price increases are the only legitimate way to ration a limited supply.

I suspect that demand for airline travel is a lot more elastic, if prices rise too much, people just stop flying. Some people are required to travel by air for work, like I’m forced to burn fuel to operate my farm. I suspect though, that there are more people who won’t fly than won’t operate their cars when prices rise.

[farmers_son]

I would add that in a free market competition is the only legitimate way to prevent price gouging. Supply and demand elasticity is a means of describing the relationship between price and either supply or demand. It is not an indicator of either the presence of absence of competition within a market. As you point out, price of fuel does not serve to ration use, at least in the short term.

While the price of oil has dropped 10% from its high after Katrina, we have not seen similar decreases at the pumps. Light crude closed at $64.08 on Friday, the same level as a month earlier. One month ago the price of gas at the pumps was 96.9 cents, today it is 112.5. One month ago Unleaded Gas futures were trading for $1.89 U.S. gallon, Friday the close was $1.93 and the trend was sharply down. But adjusted for the stronger Canadian dollar Unleaded Gas futures are trading lower today than a month ago, CAN$2.27 per U.S. gallon versus CAN$2.29 U.S. gallon mid August. The increase at the pumps of 16 cents a liter over a month ago is nothing less than absolute gouging.

I think it is very open to question whether supply and demand is at work here. Price gouging and market manipulation account for the retail price of gas being 112.5 a liter instead of the 96-97 cent range as it was a month ago. We simply would not see this kind of retail pricing if competition existed within that market. Supply and demand… I think not.

[FarmRanger]

Good points f_s, but you have to remember that its refining capacity that’s been affected. Its all well and good to have oil, but if you can’t get it refined, then you still have a shortage of gasoline. Futures traders may indeed expect refining capacity to come online again, I’m just saying it would be wise to be leery of federal Liberals making any comments about oil companies.