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1010 Class 7: OIL. What is Protectionism. It is the degree to which a government intervenes in the operation of the day to day market in a mixed economy.
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What is Protectionism • It is the degree to which a government intervenes in the operation of the day to day market in a mixed economy. • Even in the most right wing of countries, governments will inevitably choose to intervene to protect what they perceive as in the national interest.
Government protection of strategic assets Should the government of Canada allow foreign investors to buy Canadian natural resource companies?
The Evolution of Protectionist Intervention in Canada Keynesian ideas and formulas were no longer working • Inflation erupted • Unemployment rose • Critical shortages and rising costs of energy changed the economy. ‘Stagflation.’
Stagflation • Between 1974 and 1981 in Canada unemployment was stuck at between 6.8 and 8.3% and GDP ran between 0.2 and 0.9 percent (1976 was 5.9%) • During this period one would expect inflation to fall, it rose steadily between 10.9 and 12.4% • Why
SupplyShocks (p.141) • During the 1770’s and early 1980’s business government relations were transformed by both domestic and international events. • These events destabilized the Keynesian consensus as the dominant economic ideology. • Government was no longer able to meet the expectations on increased state activism.
What else contributed to a slowing economy? New demands were imposed on the economic system, including: • Environmental protection • Extending equal opportunities and rewarding women and minorities • Coping with social costs of unsafe products and working conditions. • The growth of Social welfare spending by government
The End of the Inflationary 1970’s • The stagflation of the 1970’s was brought to an end by economic shifts, including. • Restrictive monetary and fiscal policies. • A drop in energy prices as world wide oil consumption moderated.
The Elusive Goal of Capitalist States • To simultaneously achieving high employment and stable prices. • Oil and price shocks limit that as a possibility.
Economic and Political Periods • First and Second Trudeau eras. • The Mulroney Period • The Chretien Years
Energy Stocks Account for 25% of the TSX. • In 2010 global demand will exceed 2007 – developed world recovering and emerging market demand kept on growing – now up to 86.7 million barrels a day
Total Exploration Expenditures in Canada and the Metal Price Index, 1969-2001
Krieger summarizes: Basically, the minerals industry follows the national economy, although different segments respond to different influences in different ways. Consumer spending, particularly for autos and appliances, helps set the production pace for many metals.
Imperfect Competition An imperfectly competitive industry is an industry in which single firms have some control over the price of their output. E.g. Monopoly, Oligopoly and Monopolistic competition. Market power is the imperfectly competitive firm’s ability to raise price without losing all demand for its product.
Monopolies and prices Competition forces firms to adjust prices to the market. Monopolies allow firms to set prices. Bloomberg news analysis reported, three largest mining companies, BHP Billiton Ltd., Vale SA and Rio Tinto Group are set for record profits totaling $52 billion as they accelerate earnings growth at the expense of their biggest customers.
Leduc 1 On Feb 13 1947, on the sleepy Alberta farm of Mike Turta, 15 km west of Leduc and about 50 km south of Edmonton, Imperial Oils Leduc #1 well blew in. Before that date, Canada had to rely almost fully on oil imports from other countries. Some crude had been found in Western Canada at Turner Valley Alberta, but nothing big enough to spark a new oil boom.
Leduc 1 http://archives.cbc.ca/science_technology/energy_production/topics/378/ http://www.youtube.com/watch?v=RrzdKYJZLE8
Leduc 1 But Imperial Oil, using new seismic technology and portable, diesel powered rigs, persevered, starting in Saskatchewan. In 1946, they drilled 133 consecutive dry holes in the province. Finally, they gave driller Vern Hunter orders to move his rig, Wilson #2, to the Leduc, area, where the seismic crews had found an interesting anomaly. It worked.
Leduc 1 On May 10, 1947, Leduc No. 2 hit the much bigger Devonian Reef, and Imperial Oil began building the town of Devon for its employees. By the end of 1947, Imperial Oil and a group of small companies had drilled 147 more wells in the rich Leduc-Woodbend oilfield. Only 11 were dry.
Imperial Oil http://www.imperialoil.ca/Canada-English/Imports/history/about_who_history.aspx
Oligopolies and Monpolies Oil Industry has an Early history of Monopoly and a late of Oligopoly Product branding Entry barriers Interdependent decision-making Non-price competition (service-based)
Biggest oil and gas companies in Canada http://en.wikipedia.org/wiki/Canadian_petroleum_companies#Market_capitalization_.28December_2010.29.2C_revenue_.282010.29.2C_profit_.282009.29.2C_production.2C_reserves
Oligopolies • Founded initially on the scale and scope elements of production and distribution. • Secured by scale and scope distribution, research, marketing and development.
Oligopolies • Giants can, however, and do stagnate. • Flexibility and innovation can falter in the face of the needs of the dominant brand.
The Politics of Polarization: The NEP • The Trudeau government returned to power in the 1980’s with an attempt to return to the traditional ‘national policy’ type program. Strong central government. • It was called the National Energy Policy. • The NEP was an attempt to take energy revenues from the provinces and protect the east from high oil prices.
The Politics of Polarization: The NEP • The NEP also favored Canadian companies over foreign companies and limited the ability of companies to export oil to the USA and overseas. This depressed prices and reduced revenues. • The NEP held domestic oil prices below world prices. • The oil companies were furious.
