It’s the “bubble’s” fault. According to Alison Redford a “bitumen bubble” triggered a nose dive in oilsands crude prices resulting in a $6 billion shortfall in Alberta’s resource revenues and leaving Albertans $6 billion short for the upcoming budget.* Ouch!
Is this true? Is the “bitumen bubble” the culprit? What is a “bitumen bubble” anyway?
Here’s the scoop on “bubbles”. An “economic bubble” develops when the price of product skyrockets because investors are speculating about its price in the future—they’re convinced that the price will rise. This “irrational exuberance” has nothing to do with the intrinsic value of the product. The price expands on thin air and like a soap bubble, bursts with no warning. *Poof* Prices collapse, investors jump out windows and financial chaos reigns.
The history of economic bubbles, starting with the tulip mania bubble right through to the dot.com bubble and the US housing bubble, demonstrates that bubbles are a very bad thing.
Now compare the economic bubble scenario to Premier Redford’s “bitumen bubble” rationale. There is no “irrational exuberance” driving up the price of bitumen. The so-called “bitumen bubble” did not burst because sanity somehow returned to crude oil markets causing prices to plunge. Quite the contrary. Crude oil producers know that bitumen is undervalued, not overvalued, in the market place by simply looking at the the difference between the WTI price and the Western Canadian Select price.
To put it bluntly, Redford’s “bitumen bubble” is a myth, a clever PR hack’s attempt to explain or obscure (who knows with this government) a much more serious problem.
What we’re experiencing is a market dislocation caused by (1) Alberta oilsands producers oversupplying the market with bitumen, (2) a lack of pipelines to take this bitumen to the US Gulf Coast and Asia and (3) increased competition from Bakken (North Dakota) producers who are moving into Alberta’s US and Eastern Canadian markets.
This market dislocation will continue until producers develop new markets and lay down new pipelines to serve them. Don’t expect this to happen any time soon.
When Premier Redford dropped the bitumen bubble bomb her implicit message was this: Brace for 6 billion dollars of collateral damage to education, healthcare, infrastructure, etc. Equally troubling was how she delivered this message.
On Wed Jan 23 she sent an email to PC party members (“As loyal party supporters, I wanted to let you know first”) foreshadowing her speech but essentially saying nothing. On Thur Jan 24 she told the media that contrary to past practice, they would not be receiving advance copies of her 8 minute speech and furthermore they were prohibited from reporting on the speech for a full hour after she’d given it.** How much time does it take to digest 8 magnificent minutes?
The speech, like the “letting you know first” email, was as light as air and burst upon contact with reality.
It contained only two pieces of new information. One was the confirmation that the deficit was indeed the $6 billion number that the media had been floating for weeks. The second was the announcement of the first annual Alberta Economic Summit, a vehicle for business leaders and academics to have yet another “conversation” about the budget. This is the third “conversation” the government has had with Albertans about its budget. Last year Ron Liepert chaired an invitation-only roundtable and the government kicked off the Dollars and Sense survey project. Apparently they still haven’t gotten it right.
The 8 minute speech was both vacuous and bizarre. At times, the Premier was defensive—it wasn’t her fault that the government missed its 2012 oil price forecast, a bunch of analysts had made the same mistake. (She failed to mention that these analysts continued to update their forecasts throughout the year as oil prices fell, while the government waited until the fourth quarter to raise the alarm).
The Premier’s efforts to cosy up to Albertans with references to her father and her daughter Sarah did nothing to support her allegation that Alberta has world class healthcare and quality education, and the use of multiple jump-cuts after she finished each sentence was jarring (it did however allow her to correct any flubs along the way).
Forgive me, but I’m uneasy. The Premier’s “state of the budget” address, starting with a catchy but fallacious reference to a “bitumen bubble” and ending with the “we’ll get through this together” pitch tells me that the government plans yet another round of austerity cuts without making any effort to re-think the structural problem (its continued reliance on volatile resource revenues) that got us into this mess in the first place.
We could wait patiently for another four decades while they figure it out…or we could show them the door in the next election and elect someone with creative ideas and more fiscal sense.
I’m all for bursting the PC’s bubble and starting fresh with a new government. What about you?
*Premier’s Address to Albertans, Jan 24, 2013
**Calgary Herald, Jan 26, 2013, A9