You Don't Say...

Tell me it isn't so...Calgary's house prices are overvalued.

Markets in Regina, Saskatoon, Vancouver, Victoria, Calgary, Edmonton, Sudbury and Montreal are all more than 10 per cent overvalued, as calculated by economists David Wolf and Carolyn Kwan.

Anybody who has lived in Calgary in the last five years knows too well how nutty the housing situation was getting. House prices more than doubled in the space of less than five years - you had to know that was overheated.

I don't know why anybody is surprised by either a cooling of the housing markets or news of significant job losses.

The reality is that with oil over $100/barrel, the only people that really win are the big oil companies. Other sectors of the economy have to pull back when the end prices they pay for energy begin to reflect the inflated commodity prices. There will be a cycle of consumer inflation that we have yet to experience as well - this will further stretch the demands on people's paychecks. I expect 'big ticket' purchases such as homes, cars etc. to slow down dramatically as people adjust to the realities of economic uncertainty.

Whether this turns into a full blown recession or is just pull-back in our economy to reflect the changing situation on the world stage is yet to be seen. I suspect it may produce a "regional" recession - with parts of Canada getting hit harder than others.

I have always been a proponent of Canada expanding its trade network to diversify beyond the massive dependence we have on trade with the United States. Sadly, in the last ten years, none of our governments have acted on that - content to ride the short term wave of a housing-bubble fired spending boom in the United States. Since oil is a 'global commodity', the current price spike is affecting economies around the world, and a more diversified trading network would still result in a net exporter country like Canada experiencing a significant economic slowdown. What it would do is make the recovery cycle smoother, and likely faster as the various regions of the world will recover at different rates. (I fully expect Europe and Asia to recover from the current slowdown quite a bit faster than the US - the US economic picture has depended for too long on growth due to 'bubble spending', and it's going to take quite a while for the economic engine to start producing product again)

Intriguing...

It seems that although Alberta's 'fat, dumb and happy' politicians think that they are set for the time being with revenues from the Oilsands, consumers of that product aren't so thrilled.

The issues around extracting viable (read: refinable) crude out of Alberta's "Tar Sands" projects have been getting a lot of publicity lately, and it's even taking root in the minds of US municipal politicians.

To be perfectly frank, I don't think it's a bad thing at all if we end up having to slow down a bit on development in northern Alberta, and start to solve some of the very real secondary issues that processing tar sands into crude actually entails. This may be the very "tacit" economic pressure that will force the industry to address these issues instead of fighting it every step of the way, or worse telling the public that they are "already dealing with it" and presenting some bunch of greenwash.

Whether "Steady Eddie" up in Edmonton has recognized this for what it is remains to be seen, but at least the anticipated consumers of this product are starting to make noise. My money is on Stelmach doing nothing until government royalty revenues mysteriously start to dry up.

Fort McMurray Is All Upset

Apparently the PC riding association in Fort McMurray is all upset because Guy Boutellier was dropped from Cabinet.

On CBC this morning, they had the riding association president on, and after listening to this woman, I was actually quite annoyed by her assertions.

(1) Fort McMurray is experiencing _all_ of the pain that the current oil boom is creating.

This is so utterly absurd it's almost funny. Anyone who has tried looking for moderately priced housing in Calgary or Edmonton knows this. Fort McMurray certainly started experiencing that crunch well before Calgary or Edmonton.

(2) People in "The South"(™) have access to all the infrastructure in the world

No. Not even close. From where I live, the nearest hospital is close to a half hour drive; and as anyone who tried driving through Calgary's rush hour will attest to, our road system is badly overburdened. I'm not saying that Fort McMurray doesn't have these problems too, but when the claim is made that it's "all good" in Calgary, or that nobody except Fort McMurray feels this pain is made, it's a suspect claim at best.

(3) The 60% of Alberta Voters that didn't bother to vote endorsed the PC's

This couldn't be a more erroneous statement. If the PC's are going to govern as if 80% of the voters spoke in favor of them, we are in for a long, dark period in Alberta's history. Given the voter turnout last election, if I was the PC's I'd be looking at running as if it was a minority government. Just over 20% of voters spoke in favor of the PCs - nearly 60% couldn't be bothered to engage - think on it PCs, you have no idea what that 60% are really thinking.

Alberta's Petroleum Royalty Changes

It's going to take a while for me to sift through the details of the revised petroleum royalty regime unveiled last night by Premier Ed Stelmach.

Just listening to the news driving into work this morning - which was one long "what don't you like" session from speaker after speaker on differing sides of the fence - I came away with the impression that Stelmach may have hit the perfect political compromise - nobody seems to be overly happy with it.

The biggest "stinker" that I see in it is the government reopening the Syncrude and Suncor contracts that were slated to run until 2016. I have some difficulty with opening contracts that are already in play on little more than government fiat. (That said, if the contract and circumstances weren't amazingly generous to the companies, you might find that the company would be standing at the government door with their hand out looking to reopen the contract.

The wailing from the oilpatch players on CBC this morning tells me that the oilpatch didn't win their lobbying war. (I expect that the PC's are going to see a big drop in their "donations" revenue in the coming fiscal year).

Similarly vocal complaints from the environmental lobby and others who wanted a much more aggressive royalty scheme implemented suggest that Stelmach has tried to hit some kind of "middle ground".

I'll reserve a more detailed analysis of Stelmach's changes for when I have time to sift through the gobbledygook and convoluted equations.

Stelmach and the Royalty Review

Ed Stelmach has just been handed his first leadership challenge as Premier of Alberta - a Royalty Review Report that has the oilpatch getting positively "scared" (read - they are dragging out the "nobody will invest" zombie from the closet). You'd have to be the village idiot to believe that one. Alberta's oilsands represent one of the largest sets of reserves for fossil hydrocarbons in the world - the world's need for that energy in the short to medium term is such that it cannot afford to not invest.

Stelmach has a bit of a sticky problem though. If he overhauls things too radically, he will annoy the oilpatch which has been rather generous in its funding of the Alberta PC's. On the other hand, if he doesn't stop the perceived giveaway of resource revenues into foreign-held oil firm coffers, Stelmach stands to look as though he is beholden to the oilpatch and not to Albertans.

Alberta's royalty regime has long been one of the cheapest in the world for oil companies, and in recent months people have started to ask (rightly so) whether or not we are getting our collective "fair share" in this province.

A lot of what I've seen in the reports on the royalty review leaves one particularly vile little wart in the mix - keeping the 1% royalty in place on tar sands projects until "capital costs" have been recouped. The problem with doing this is simple - it's far too easy for the accounting to be juggled and shuffled in order to make it look as though there is a great deal of unrecovered "capital cost" for a very long time. Unless oil prices suddenly crash to pre-1990 levels, which seems quite unlikely, the tar sands remain profitable - even at full royalty costs.

There is a fundamental dishonesty in the claim that "investors won't invest" - it's a form of threat that has little or no validity. While a change in the royalty regime might cause some ripples for a while, it's not like the province can't do with a small slowdown right now.