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From Alberta's 'bitumen bubble' to higher gas prices in East: ‘Cue the outrage’

The Globe and Mail

These are stories Report on Business is following Friday, Jan. 25, 2013.

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A tale of two regions
There’s another side to the “bitumen bubble” that’s costing Alberta dearly: Higher-than-normal gasoline prices that are costing eastern Canadians dearly.

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As The Globe and Mail’s Josh Wingrove reports from Edmonton, Premier Alison Redford warned yesterday that the phenomenon is hurting her province, to the tune of a $6-billion shortfall in oil and gas royalties against this year’s projections.

That’s because the price of Alberta crude is at a marked discount to other world benchmarks, such as West Texas Intermediate and Brent. This gap, which shows little sign of a marked narrowing has been an issue for the province, economists and even the Bank of Canada.

One economist, Charles St-Arnaud of Nomura Securities in New York, calculates that a $50 gap between Alberta oil and Brent costs the country some $2.5-billion a month. Recently that spread has topped $40 a barrel.

The problem is a lack of capacity in the pipeline system, which means Western Canada can’t get its rising supply of oil to refining centres in the U.S. Gulf Coast, eastern North America or the Pacific Rim. Meanwhile, eastern provinces have to import their oil, paying higher, world prices. Canada imports more than 40 per cent of its oil needs.

“The combination of the double discount on Canadian crude oil prices and still-soft natural gas prices (despite this infernal cold!) means that Canadian energy prices are now lagging far behind most benchmark measures (of course with little or no benefit to our consumers, which makes the problem all the more galling),” deputy chief economist Douglas Porter of BMO Nesbitt Burns said in a recent research note.

“While WTI has managed to nudge above levels prevailing two years ago, and is close to flat year-over-year, Canadian energy prices have dropped 7 per cent from two years ago and more than 9 per cent year-over-year,” he added.

“The gap hurts our terms of trade, income, spending, government revenue, capital spending, etc. etc. etc.”

Among those irritants is how it translates into higher prices at the gas pump for eastern motorists. Indeed, the spread in gas prices between west and east was recently found to be at a 10-year by Statistics Canada.

Gas prices, noted Mr. Porter, are being driven more by the even stronger Brent benchmark, and thus are well higher than they should be, based on the WTI price.

“So our producers are getting much less than WTI, and our consumers are paying much more. Cue the outrage.”

(For Mr. Porter's research, see the accompanying infographic or click here.)

Prentice on oil patch
The government’s new foreign investment rules for state-owned enterprises leave plenty of room for such companies to invest in Canada’s oil and gas sector, but investors need to consider not only the higher regulatory hurdles but an uneasy political climate, Canadian Imperial Bank of Commerce vice-chairman Jim Prentice says.

In a speech to an investors conference in Whistler, B.C., the former Conservative industry minister also warned that Canadians needs to be wary lest their uneasiness with foreign, government-controlled companies results in Canada failing to attract needed capital for jobs and growth, The Globe and Mail's Shawn McCarthy reports.

Inflation tame
Inflation simply isn’t on anyone’s radar in Canada.

Consumer prices fell 0.6 per cent in December, or 0.1 per cent when seasonally adjusted, according to Statistics Canada today, bringing the annual inflation rate to just 0.8 per cent.

That annual pace is the same as November’s, The Globe and Mail’s Bertrand Marotte reports.

On an annual basis, food prices are now up 1.5 per cent, slower than November’s pace of 1.7 per cent. Prices at the gas pump are up 1 per cent, and car prices are down by 0.6 per cent.

So-called core prices, which exclude volatile items and help guide the Bank of Canada, rose 1.1 per cent, compared to November’s 1.2 per cent.

For 2012 as a whole, according to Statistics Canada, prices rose 1.5 per cent, the slowest pace since 0.3 per cent in 2009 and well down from 2011’s 2.9 per cent.

“The inflation data certainly support the BoC's dovish turn this week, and suggest that interest rate hikes are highly unlikely this year,” said senior economist Krishen Rangasamy of National Bank.

British economy suffers
Britain now faces the worrisome prospect of a triple-dip recession.

The Office for National Statistics estimated today that the economy contracted in the fourth quarter by 0.3 per cent, which could mean Britain is in the middle of yet another recession, according to the definition of two back-to-back quarters of falling gross domestic product.

“Although not an absolute confirmation, this news does strongly point towards a triple-dip recession for the British economy,” said market analyst Alastair McCaig of IG in London.

The agency also estimated that industrial output fell 1.8 per cent in the last quarter, while services industries made no gains.

“Some of the weakness is attributable to disruptions in North Sea oil production … and there are bound to be commentaries that pin some of the weakness on a drop-off following the London Olympics, although Scotiabank’s U.K. economics group notes that services output wasn’t that bad,” said Derek Holt and Dov Zigler of Bank of Nova Scotia.

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Companies & investments Mentioned In This Article (1)

Company Price Change Volume
Light Sweet Crude Oil
CL-FT
99.94 -1.02 % 230,300