Will Governments Step In as Markets Bow Out?

The future of fossil energy is precarious. We've been warned of the "carbon bubble" for years by scientists, economists and both of the past governors of the Bank of England. They predicted that the markets would sour on fossil fuels which left stock markets around the world holding some $27 trillion of investments in proven oil reserves. 27 trillion dollars in peril.

We've been hearing rumblings coming from the investment class.  Last week, CNBC's brash market guru, Jim Cramer, pronounced the "death knell" for fossil fuels.

Today the CEO of BlackRock, the world's largest asset manager, said they'll be steering future investments out of high-carbon, low-value fossil energy.

In 2013, Britain's Financial Times warned of the enormous vulnerability carried by the markets.

There is increasing certainty that climate change is happening and that its impacts are going to be profound. The International Energy Agency says that the world is on course for average temperature rises of at least 4C, not the 2C targeted by policy makers, adding that if we are to stay within the 2C target, two-thirds of fossil fuel reserves must remain in the ground. 

“The year ahead will be dominated by growing tension between ever-stronger evidence of climate change and the inadequate policy response,” says Nick Robins, head of the climate change centre at HSBC. Awareness of the severity of climate impacts is likely to be further strengthened in September, when the Intergovernmental Panel on Climate Change (IPCC) publishes its fifth review of the science of climate change. 

This implies that high-carbon assets will face increasing regulatory constraints and a growing risk of becoming stranded assets. Yet the average pension fund portfolio has 55 per cent of its assets invested in high-carbon sectors or sectors greatly exposed to climate change, Mr Poulter points out.

That same year the Parkland Institute warned that Canada was succumbing to a federal-provincial resource trap.

Historically, Alberta’s economy has been the most unstable in all of Canada, but the volatility was largely confined to its own borders. Today, aided and abetted by the federal government, Alberta has exported its instability to the rest of the country. 

Those familiar with the tenets of staples theory will recognize the pattern. 

Pioneered by Canadian economist Harold Innis, staples theory emphasized the dilemmas associated with single-resource production. When the world price of a commodity is high, the allure of riches can be so great that people throw all of their effort and money into riding the resource boom. But the price of staples is unstable, subject to, among other things, over-production, replacement technologies, the vagaries of climate, transportation glitches and even fashion. 

Just as the price of a staple commodity can rise quickly, it can drop, bringing economic, social and political ruin. Canada’s landscape is dotted with this story, from towns (Uranium City) to regions and provinces (Newfoundland and cod). Sometimes, of course, the good times return, but often they don’t. In any case, the result is growing economic and political dependency, what Innis referred to as the “staples trap” – easy to get into, hard to get out of. That’s where Alberta and Canada find themselves now. 

Prime Minister Stephen Harper is on record as declaring Canada an emerging energy superpower.  ...Far from being a superpower, however, Canada increasingly looks like a hundred-pound weakling, a single-resource producer, buffeted by pricing over which we have no control, technological innovations that portend a reduction in the value of oil and environmental issues that threaten all of us.

In 2013 I began to worry whether the Canadian people were being set up by the Harper government. Harper is long gone but that worry has only worsened.

If/when the financial markets turn away from bitumen what happens then? Does Harper go on bended knee to the Politburo in Beijing? Does he firesale Athabasca to the Communist Chinese? I suppose that's one option in a scenario that is truly short on options. 

What does a rational person do confronted with such harsh realities? Why am I asking that? This is about Steve Harper, the man who has little time for science or facts or reality. All we need to know about Steve's fitness to handle looming disaster we learned from the gross incompetence he displayed in failing to notice the great meltdown of 2008 thundering down on Canada and the world. You know, the Great Recession he claimed that nobody could have foreseen (except for everyone who actually did). 

Could this be enough to send Steve and his cabinet generals into the bunker? If Big Money deserts Athabasca could Steve choose to fight it out to the end? Could he take a page out of Obama's playbook and warp it into a TARP-style bailout of the Tar Sands? Would Harper's cowed, majority caucus let him double down on an already lost bet?

TARP is a reference to America's Troubled Asset Relief Program spawned by the 2007-8 Great Recession. It allowed Washington to buy "toxic assets" to keep troubled financial institutions from collapsing.

Now you may scoff at the idea that our federal government would ever bail out the financial sector if bitumen becomes a stranded asset. Think again. Ask yourself if that wasn't the underlying reason Ottawa paid far above market value for the Trans-Mountain pipeline? Kinder-Morgan wanted to walk away from that asset. Morneau went to Texas with the government's cheque book in hand and gave those bandits whatever they wanted. No surprise that, when Ottawa, canvassed the market for buyers there were no takers.

How much further will Ottawa go to prop up the Tar Sands? If the markets turn on high-carbon fossil fuels, will Ottawa let Athabasca fall or will it buy out the fleeing investors?  We witnessed what happened in the States when banks were "too big to fail." Are the Tar Sands "too big to fail"? Does Justin have the courage to let it go? We may know before long when Trudeau has to say yea or nay to Teck's proposed massive bitumen mine.