Diane Francis on American Politics

Thursday, February 02, 2006

America's Number One Economic Problem

National Post Thursday Post Feb. 2:

NEW YORK CITY - The President's State of the Union address finally admitted that America's biggest substance abuse problem is its excessive consumption of gasoline.

Once the world's biggest oil producer, the U.S. is now - as some New York tabloids proclaimed yesterday - “an oil addict”.

So is Canada where per capita consumption levels are actually higher than south of the border.
Fortunately, Canada has lots of oil and is a sizeable exporter. By 2020, Canada will be one of the world's five biggest oil exporters, thanks to the oil sands.

Even so, Canada must dramatically adapt its energy policies in ways that are similar to what the gasoline-guzzling Americans have to do. This makes good economic, as well as environmental sense: A barrel of oil backed out at home means another barrel can be sold to the Americans or Asians.

The President's speech was truly significant because it will mark an overdue change in policy direction which will affect North America and the rest of the world too.

It means that even Republicans will begin to realize that oil imports are their single biggest economic problem. In fact, the need for a remedy is far more urgent than the President's speech portrayed.

Today, roughly 40% of the Americans' gigantic trade deficit is oil imports alone. Only 20% of its oil comes from Saudi Arabia and the other wobbly regimes. Most comes from Canada, Mexico and the North Sea.

What the President did not say is that the world is only a handful of terrorist attacks away from oil jumping to US$100 a barrel or greater. His regime last summer saw the same frightening oil crisis simulation that was enacted at the recent World Energy Forum in Davos which was attended by three dozen of us.

Created by non-profit Securing America's Future Energy in Washington DC, the scenario was that terrorists had shut off indefinitely about 3.5 million barrels per day (only 4% of world total) by attacking “chokepoints” - entry to the Bosphorus Sea in Turkey and Valdez in Alaska.

The economic scenario showed that this supply disruption could cause prices to hit US$125 a barrel or more, and cause an immediate recession by shaving 3.5% off the world's Gross Domestic Product.

The only good news was that oil supplies would be forthcoming immediately, according to the officials who participated in the mock emergency cabinet meeting staged as part of the simulation.

“About 1.5 million barrels a day could be provided out of the International Energy Agency (IEA) strategic reserves around the world of four billion barrels plus another 2.5 million a day could come from Saudi Arabia,” said a participant in the simulation who asked to remain anonymous.

But increased security costs, loss of consumer confidence and the destruction of growth would take its toll. So would more attacks at other facilities.

Such vulnerability has been kept out of the public's eye or has been unrecognized.
That's why the speech was needed and will hopefully spark an appropriate debate and focus attention in Congress.
Ironically, Congressional protectionists have targeted China rather than oil even though its exports to the U.S. are a fraction of the oil bill. Besides that, China's imports end up mostly on Walmart store shelves, giving consumers huge savings and Walmart shareholders huge profits unlike oil imports which increasingly benefit dangerous regimes.

My guess is that Canada and Mexico will continue to be valued oil exporters because both they are economic partners who are huge customers for American goods and services. Besides in Canada, many American oil companies are big players and will profit from future oil sands, arctic and offshore production.

However, Canada and Mexico both depend greatly on American prosperity which is why the President's pronouncement was welcome, if inadequate. He talked about subsidies to develop alternative fuels such as ethanol plus clean coal technology.

But even cutting 10% out of usage, which would be drastic, won't be enough. Prices are going to increase because there will be increasing demand from North America, Europe, China and India. On the supply side, production will decrease everywhere except Russia and Canada. And well-planned terrorist attacks could aggravate this situation.

Clearly, the U.S. should undertake a couple of important policy shifts sooner rather than later.
Washington should mandate, and subsidize, its domestic automakers to produce only smaller hybrids from now on. That would cut the oil bill while also bailing out the auto sector.

Washington should also immediately increase ethanol subsidies and requirements, already around 10% of the total fuel usage. This would enhance subsidies to its farmers who suffer from Europe's protectionism.

And Canada should also encourage conservation, although it cannot mandate hybrids without the U.S. taking the lead. Ontario's move to enhance the use of ethanol should be increased and copied throughout the country.

But most importantly, Canada must realize that as the country reaches the big leagues of oil production, it must also undertake greatly enhanced security to protect pipelines and production facilities.

Oil may be Canada's number one economic trump card going forward, but it also places a bull's-eye firmly on this nation's forehead.


Wednesday, February 01, 2006

Oil Imports a Problem. Duh!

Oil imports represent roughly 40% of the U.S. trade deficit which is too high at 6% of GDP. The State of the Union speech represents a long-overdue and, frankly, inadequate shift in policy.

Next problem is the health care bill which, at 16% of GDP, is not only vastly understated but 50% higher than the bills of Canada, Switzerland, Japan and most European nations.

The health care tab is vastly understated because it doesn't include: the toll in productivity due to sick, uninsured workers; the cost to the economy as a result of the carving out of workers who have grave illnesses and cannot be insured or employed as well as the cost to the economy of litigation by insurers and plaintiffs over medical expenses.

Stay tuned on both issues.