Costs and profit

[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.

[cowman]

I wonder how a big powerful monopoly union is much different than a corporation that has a monopoly? I guess that definitely isn't a free market either?
We lament the fact government doesn't set limits to a monopoly situation in beef packing, but in reality how is education and health care any different?
Don't these powerful unions basically force the government to pass laws that protect their monopoly?
And in reality they have been price gouging as well as they are the only game in town?
I think the whole concept behind Wayne Easters report on agriculture was about increasing market power for primary producers? Or bemoaning the lack of market power?
Aren't Cargill/IBP dealing from a position of market power right now? Aren't the doctors and teachers dealing from a position of market power right now, also?
If farmers had market power they could pretty well do whatever they chose...pretty well like Cargill/IBP and the doctors and teachers?
Would that ever happen? Would a government ever allow it to happen? Well definitely not in Canada where the whole country operates on a policy of exploiting the peasants for a source of cheap food.

[farmers_son]

What you are really talking about is competition. It could be argued that labour unions are a means of employees increasing their bargaining position with their employer. When it comes to increasing their wages they may have created a competitive advantage over if there was no union. The downside is they pay dues.

Cargill and IBP do have market power because of their dominance in their industry. Doctors have market power not only because of the service they provide but because the universities limit how many doctors are graduated creating an artificial shortage.

If we realize the effect of competition is to drive all profit out of an industry then we can understand why the oil companies not to mention Cargill and IBP seek ways to limit competition’s effects on their enterprises.

Farmers have no market power. Another way of describing the primary producer and agriculture is nearly pure competition. We are told and have come to believe that our low returns are a natural result of supply and demand. While supply and demand do work to match production to demand that does not explain why many industries are profitable while primary agriculture is not when they all face supply and demand issues. In the case of Cargill and IBP they are part of the same value chain yet they are more profitable than the producer. Competition does explain how different industries can sustain different levels of profitability whether those industries are the energy industry, the health care industry or primary agriculture. The five forces of competition are:

1) Competitive Rivalry
2) Power of suppliers
3) Power of buyers
4) Threats of substitutes
5) Threat of new entrants.

You can see that these forces are all in play in primary agriculture, explaining our low profitability. Likewise you can see how Cargill and companies like them use these forces to maintain their competitive advantage.

Anyone interested in reading more about the Five Forces there lots of information on the Internet. One good source of information is at:

http://www.quickmba.com/strategy/porter.shtml

[Horse]

It seems quite obvious that those making exorbident wages or profits from the oil sector feel all is well ,but the other 3/4 of the population are footing the bills and no way to recover thier costs,
I wonder how many of thge farmers of today are making thier income from farming and how many are hiding taxes in the farm and pretending to be farmers.

[cowman]

Horse: Do you think you are the landed gentry or something? That the world owes you a living?
Hey if oil is where the money is then get into oil.... if your desire is to make "exorbidant wages or profits"! No one holds a gun to your head and tells you, you have to keep losing money raising crops or cattle?
Everyone makes their own choices in this world? In Alberta you have one hell of a lot more choices than just about everwhere else? I see kids, eighteen, nineteen out hustling, making a buck and getting ahead in a big way...is there any reason any other person can't do that?
There is no reason anyone, in Alberta, can't be successful and share in the wealth!

[farmers_son]

I think Horse has a point. While Cowman is correct in saying that if oil is where the money is then people would be expected to leave agriculture to go seek their fortunes in the oil sector. And certainly we are fortunate to have the oil and gas here close to home in Alberta and Saskatchewan rather than just being on the paying end of the stick.

But after all this is an agricultural discussion site and one would expect the discussions to focus on agricultural issues. I for one still believe that farmers should farm, should be able to earn a decent living and pass the farm down to their children instead of having to sell out to an oil industry executive. The high cost of energy is a very, very serious problem for agriculture throughout all of Canada. The prospect of people having to leave their farms to seek employment off farm because farm returns are not enough to support a family is a serious issue also. It should not have to be that way.

Cowman said “There is no reason anyone, in Alberta, can't be successful and share in the wealth!” That is all fine and good. But who is going to look after the farm? We need agriculture in this country too, not just oil and gas. If we want an agricultural industry then it needs to be profitable too.

[FarmRanger]

Whoa! I agree with you f_s, didn't think that would ever happen! hehe

I think the difficulty lies in finding workable solutions to the problems of low commodity prices and high input costs. We don't want more programs that allow our suppliers and buyers to just skim off any government support we manage to get as farmers.

Countries that have ignored simple market forces have weakened their agriculture industries in the long run, do we want to do the same?