Japan's nuclear catastrophe, and the UN Security Council's support for Libyan people against Muammar Gaddafi, have financial implications well beyond market volatility.
The Japanese "brand", based on brilliant planning and execution, has been permanently tarnished. First it was Toyota's colossal recalls and now the world discovers that six reactors were built in an earthquake zone, subject to tsunamis, without sufficient fortifications or back-ups to back-ups. Instead, the repair job has become a Kamikaze-like effort by several dozen middle-aged volunteers whose failure will take the world into uncharted territory.
This fiasco guarantees that the nuclear option, to replace fossil fuels and save the world from the effects of over-population, is about as attractive as having Colonel Gaddafi drop by for dinner.
This increases dramatically the probability that two Canadian pipeline projects, and others, will be invited to dinner: The Keystone Pipeline expansion bringing oil sands output to US refineries and the Mackenzie Valley Gas Pipeline will proceed. The US government has been dithering about Keystone's environmental impact (they already have 50,000 miles of pipelines there) and the Canadian government has dithered for decades about Mackenzie, mostly recently over a request to back a small portion of the line so aboriginals can own a piece of the action.
Both governments must approve these lines.
In the US, this is because, without construction of new nuclear facilities, the country will need more oil and Middle East volatility means that region is undesirable as a supplier. So Canada's oil sands are essential. Tellingly, USA Today editorialized in favor of Canada's "dirty" oil.
"The Keystone expansion would provide an extra 500,000 barrels of oil a day from a secure ally and neighbor, enabling the US to offset declining supplies from Mexico and Venezuela and avoid having to reach out to less-stable oil exporters. At a time of rising gasoline prices and turmoil in the Middle East, the US is in no position to be finicky about its oil imports," said the newspaper. "And here's something else to consider: If the US blocks the pipeline, Canadian developers have made it clear they'll be glad to build west instead of south -- and sell oil from the West Coast to China."
The Mackenzie Pipeline will, and should, proceed because increasing oil sands production (which needs natural gas), removal of the nuclear option in Canada and commitments to take coal plants out of service by 2025 will require four times more natural gas than it can bring to markets.
According to Ziff Energy, a leading energy consultancy, the Mackenzie, Alaska gas pipeline, producible shale gas and conventional gas deposits would all be needed and viable in future.
For instance, Ziff said that Canadian conventional gas reserves are declining by up to 20% per year, which requires the replacement of up to 4 billion cubic feet per day of new supplies. That's equivalent to the total production from three Mackenzie Valley Pipelines. Decline rates are similar south of the border and will require at least ten times' more gas.
Power generation is also starting to switch from coal or oil to natural gas for environmental reasons. In June 2010, this was mandated in a Canadian Federal Government policy which will phase out 33 inefficient coal-fired plants in Canada whose economic life will end by 2025. Their licenses will not be renewed unless their emissions are reduced dramatically to the same level as gas-fired plants. The amount of gas needed to replace these 33 dirty coal plants totals 1.2 billion cubic feet per day, or the entire annual output of the Mackenzie Valley Pipeline.
Fossil fuels brings me to the democratization of the Arab world and this week's Libya support in the United Nations.
Ten countries voted in favor of a resolution to crush him some time soon by any method necessary, while the other five -- China, India, Russia, Brazil and Germany -- were smart enough to simply abstain and get out of the way.
This vote was historically significant for two reasons: It was backed by broad-based support for democracy and against tyrants and, secondly, it marked a stepping down by the United States from the role of superpower which, frankly, it cannot any longer afford financially or reputationally.
The fact is that President Obama is delivering on his promises to take the training wheels off Iraq's fragile democracy and to be multilateral and let others do the heavy lifting. As an American taxpayer, and a Canadian one, I applaud his behind-the-scenes community activist role in letting if not encouraging the French, of all nations, to take the lead in the Libya initiative, followed by the British, Arab League and African Union. It's also a sign of fiscal prudence on the part of Washington which is good news for Americans and Canadians alike.
Cross-posted in the Financial Post.
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