The Upside of $200 OilFriday, July 4, 2008
“You are much less likely to be obese in downtown Toronto or Montreal than you would be if you live in their suburbs,” said University of Alberta professor of medicine Dr. Arya Sharma…
Read this article in The National Post
Read related blog posting on Dr. Sharma’s Obesity Notes
The upside of $200 oil
Rising oil prices don’t have to mean an economic apocalypse
Remembered more for his apocalyptic pessimism than his economics, 18th-century parson and thinker Thomas Malthus reasoned that too many people and too little food would eventually lead to rampant starvation. It didn’t. Two hundred years later, the same rigid law of supply and demand is being applied to oil. There is only so much black gold left, doomsdayers say, and a fuel-starved world is looking at the bottom of the barrel.
If we are truly reaching the end of petroleum production–a scenario known as “peak oil”–there are all kinds of gloomy predictions one could make. Facing the future of $200 barrels of oil, analysts are already using terms like “financial tsunami.” They predict that inflation will skyrocket with the price of gas, creating a flashback of mid-70s stagflation. Commuters will become energy refugees, abandoning their homes and their SUV’s and invading the cities. In the meantime, production costs will cripple manufacturers, a scenario that would turn Central Canada’s factories into a scrap heap of rust. “I can’t think of any upside to $200-oil,” former EnCana chief executive Gwyn Morgan told the National Post.
Yet if history is any example, ingenuity can trump disaster. After all, we live in a market economy that can adjust, innovate, and progress. After Malthus’s famous end-of-days scenario, necessity mothered invention: diversified agricultural techniques appeared, legislation led to cheaper food imports and the Industrial Revolution made for greater efficiencies. Almost two hundred years later, the same thing happened. Paul Ehrlich predicted in his 1968 bestseller The Population Bomb that exploding demographics and an imploding food supply would literally decimate the U.S., leaving only 22 million survivors. But the so-called “Green Revolution” stepped in. Pesticides, irrigation projects, and synthetic nitrogen fertilizer contributed to a massive agricultural advance. And population wise, there was another significant development: The Pill.
Stepping gingerly towards the crystal ball, one could also say that there could be unforeseen benefits to the so-called era of “peak oil,” especially for Canada, a stable democracy sitting on lots of energy. A commodities boom will strengthen our international stature, bolster the clout of provincial governments, reinvigorate our cities, and reward entrepreneurship. And it could make us a little skinnier, too.
Some potential benefits:
Beware the Energy Elephant
Petrotyrants such as Saudi Arabia, Russia and Venezuela often try to convert their power in the commodities market into geopolitical power. Then there is Canada, a relatively stable, reliable source of energy with an open, capital market. In 2005, Canada produced 19.1 quadrillion British Thermal Units (Btu) of total energy, the fifth-largest amount in the world, increasing its production by 86% since 1980. Almost all of Canada’s energy exports go to the United States, making it the nation’s largest foreign source of imports. In political currency, peak oil raises our status, giving us a place at negotiating tables where we might not have previously been invited. “The price rise makes Canada extremely important geopolitically,” said Stephen Randall, director for the University of Calgary’s Institute for U.S. Policy Research. “It gives us leverage on a range of issues.” Even when we feel aggrieved, we would not act with belligerence. Instead, a little passive-aggresive hint would do. Remember how Prime Minister Stephen Harper responded when Hillary Clinton and Barack Obama threatened to re-open NAFTA last April? “Canada is the United States’ number-one supplier of energy,” Mr. Harper said, ushering in the era of Canada as an energy elephant. “If we have to look at this kind of an option [a renegotiation] …we would be in an even stronger position now than we were 20 years ago. And we will be in a stronger position in the future.”
Power to the Provinces
In a $200-a-barrel climate, oil-rich provinces will suddenly be flush in petrodollars, and if the premiers of Alberta, Saskatchewan, Newfoundland and even Nova Scotia are prescient, they’ll take the revenue and invest it. A recent Organization of Economic Development report recommends that Alberta should follow the model of oil-rich Norway. The government ploughed their windfall into a foreign asset fund, spending only a fraction of the fund’s income while investing the rest. The result? A famously generous set of social programs and a robust public coffer. Another option is spending the money on economic diversification. “Non-renewables don’t last forever, so the key question is how to build an economy that can be self-sustaining for long time,” said Jack Mintz, Palmer Chair in Public Policy at the University of Calgary. Mr. Mintz suggests earmarking money for traditional provincial needs such as transportation and communication highways, as well as for human capital projects such as education. “We’ve seen that very strong university research centres attract a lot of resources and create spin-offs like jobs,” said Mr. Mintz, adding that cities need institutions that also retain brain power and revitalize their urban core. “We’ve seen that in Waterloo and in Boston.”
The rise of the Mini-City
The average Canadian commute has increased from 54 minutes a day in 1992 to 63 minutes in 2005, and what helped fuel those trips was cheap, underpriced gas, the steroids of suburban growth. But as pump and home-heating prices spike, sociologists foresee a gradual process of re-urbanization: People will save money and time by moving closer to work, even if it means living in a smaller space. “Nothing is going to happen overnight,” cautions Richard Harris, an urban geography professor at McMaster University. “But the spike in price is bound to encourage higher densities in our cities, and that is fundamentally a good thing.”
Housing prices might exacerbate the issue. A study by Royal LePage released in June found the average price of a standard two-storey home in urban areas across Canada had increased 129.2% over the past decade; by comparison, a suburban home rose 110.1% during the same period. “As the price of gas rises, it will put a premium on an urban home,” Phil Soper, CEO of Royal LePage.
The question among sociologists is where the former suburbanites will relocate. That’s where under-performing asphalt comes in. A term used to describe old strip malls and office parks with depressed property values, it has become a hot commodity for urban developers who convert these black holes into mixed-use zoning and build so-called lifestyle centres where most daily needs – shopping, subway, etc.– are only a short walk away. “There is a new demographic of young professionals in the suburbs who are already interested in a more urban way of life,” said Ellen Dunham-Jones, the Georgia-based author of the forthcoming Retrofitting Suburbia. “The increase of oil makes this option even more attractive.”
The Ultimate Slim-Fast Diet
A future exodus from suburbs to cities could thin the population — literally. Medical experts have long correlated obesity with the jump-in-the-Expedition joys of suburban sprawl. A Statistics Canada survey last month spelled out as much: communities with less than 30,000 people had a 20% obesity rate, versus 15% in communities over 30,000. “You are much less likely to be obese in downtown Toronto or Montreal than you would be if you live in their suburbs,” said University of Alberta professor of medicine Dr. Arya Sharma, who said that population density can be an important force for change. “Even for kids,” he added. “They’re more likely to walk to school if they have a pal who lives close by.”
No more clutter.
Large suburban homes are nests for so many irrelevant things. The closer someone is to a city, the less junk they are inclined to keep, according to those whose trade is peddling other people’s castoffs.
“Urban areas have less junk than suburbs” said 1-800 Got Junk’s Darryl Arnold, a franchise partner in Vancouver. “But only because they have less space. My residential jobs in apartments and condos downtown are on average an 1/8th of a load, compared with closer to 1/2 truck load in the suburbs.”
Hamilton Will be Smelly Again
The future of manufacturing centres such as Hamilton, Oshawa and Windsor is a contentious topic among economists. Some argue that high oil prices will drive factories off our continent to Asia, where cheaper labour and fuel costs offset shipping costs. Others, like Jeffrey Rubin, wonder how long that equation will hold. After all, countries like China and India also buy oil, and there’s no telling how long governments can afford to subsidize it. In China’s case, rising oil prices are fuelling inflation, causing some manufacturers to move to other countries in the region. In the peak-oil scenario, Asia might not be as competitive. To import commodities from Canada, and then ship them back to North America or Europe could become no-win proposition for Pacific Rim companies. “The cost of shipping a container from Shanghai has gone from $2000 to $8000 over the past eight years, and it will go to $15,000 when oil goes to $200 a barrel,” said Mr. Rubin, who believes that high oil prices might actually spark a manufacturing renaissance. “The flames will be burning brighter in Hamilton.”
Toronto no Longer the Centre of the Universe
The retreat from Ontario is already underway. Earlier this month, Jack Mintz issued a report that saw Alberta outpacing Ontario in median income and employment growth, and this year its private-capital investment will almost equal that of its eastern rival. Ultimately these trends could alter Canada’s financial landscape, making Calgary, not Toronto, the country’s financial epicentre. “Alberta could end up as the Dubai of Canada,” said Charles Doran, the influential director of the Johns Hopkins Center of Canadian Studies. Along with robust British Columbia and booming Saskatchewan, the West will loom large, as will oil-rich Newfoundland in the east. At the trough of this bowl effect is Central Canada, whose provinces might have all moved into the “have-not category” by then. The prospect raises a dramatic dilemma for banks, whose headquarters are in Toronto and remain crucial to the local economy: why stick around when all the money is out west? The Big Six could end doing what they did to Montreal in the late 70s: Go West. “Where the funds will be located is going to be a real battle,” Mr. Doran said. “If the Bank of Montreal can move to Toronto, it can move to Calgary, too.”
Fewer Pretentious Foods
Fed up with mesclun greens? Wistful for a nice head of artificially grown iceberg lettuce – with a sprinkling of canned corn? You have a lot to look forward to, and so would local farmers. “Forget about that avocado salad in February – it’s more about carrots and peas, which is better for the Holland Marsh guys anyway,” said CIBC chief economist Jeff Rubin, a pioneering forecaster of $200 oil. The cost of importing off-season luxuries such as berries and tomatoes is going up, and already consumers are adapting. A recently released Investors Group Poll reports that 55% of people no longer eat exotic or out-of-season fruits and vegetables.
The Convenience Store Comeback
Another assumption is that cheap gas will deliver us across what urban planners call “food deserts,” or endless gas-guzzling drives to the nearest supermarket to buy a bag of milk. That might no longer be practical. “As gas prices rise, it becomes prohibitively expensive to make these kinds of trips,” said Ms. Dunham-Jones, adding that residents will require the corner stores, the same ones that declined with the rise of big-box retailers.