Saturday, March 21, 2015

Canada Crude Falls Below $30; BMO Seeks Oil Sands Cost Cuts


Evidence of some N.A. variety of crude oil (Canadian) is transacting around $30 bbl.  Story here at Bloomberg.

The producers are getting some advice from a bank (maybe their bank?) here:
Canadian heavy oil prices fell below $30 for the first time in more than six years as Bank of Montreal warned that oil sands producers must cut costs.

The cash costs of oil sands producers must shrink to remain competitive in the “new normal of lower oil prices for longer,” BMO analyst Randy Ollenberger said in a note today. The majority of Canada’s crude comes from oil sands in Northern Alberta and is among the most expensive to produce. Companies including Royal Dutch Shell Plc and Cenovus Energy Inc. have cut costs and suspended projects as prices plunged.
This Canadian bank is seen here recommending that these Canadian oil producers lower their terms of trade in USD terms for this oil that they are producing and selling into the U.S. market in order to remain competitive on price.

No mention is made of the exchange rate between the USD and the CAD here by either the bank or the oil firms.

The only thing being discussed and acted upon are the factors effecting the price in USDs at which  the product can/will be competitively offered.

So we should never be making statements like "a nation can always de-value its currency to become more competitive...." as a policy action like that is almost never observed; while what is observed is firms "cutting costs" and lowering their prices of their export products in terms of the currency of the target nation for the exports like we see here in Canada and recently here in Switzerland.

So logically, any resultant change in the observed exchange rate between the free-floating, non-convertible currencies of the export and import nations would have to be somehow a post hoc result of these leading actions by the firms/banks involved in the international trade.

Indeed if we were to say "a nation can always devalue its currency..." while at the same time asserting  the currencies are "free-floating" we would be making a logically inconsistent statement within our theory.


9 comments:

Matt Franko said...

YV: "Analysts like Krugman, Weisbrot and Rubini make the utterly good point that Greece would benefit enormously from a devaluation of its currency. Of course it would. Argentina does, indeed, provide a brilliant example of how a massive devaluation can help a country escape a debt-deflationary cycle. As, for that matter, does Iceland. However, what they are neglecting is that it is one thing to break a peg linking your currency to some other hard currency (as in the case of Argentina), or to devalue your floating currency (as did Iceland), ...."

http://yanisvaroufakis.eu/2012/05/16/weisbrot-and-krugman-are-wrong-greece-cannot-pull-off-an-argentina/

When the Swiss recently removed their peg, the CHF went UP not down...

And then he says here "devalue your floating currency..."

Whhaaaaaaaatttttt??????

Brian Romanchuk said...

The Canadian economy is fairly highly integrated with the U.S. economy. There are limits in practice to how far the value of CAD can move versus the USD, and those limits are much less than the volatility of the prices of Tar Sands output. Additionally, almost all of the equipment is imported, so the capital costs are largely in USD terms. Additionally, the skilled labour can cross the border fairly easily, so some labour costs are effectively in USD terms.

This is not a great case where a free-floating currency helps. The weaker CAD matters much more for traded services and manufacturing, where there is a greater labour cost, and USD selling prices are more stable.

Matt Franko said...

Brian it looks like last 6 months oil is down over 50% (usd terms) while the CAD is down about 13% vs USD.... so like you say there is more to it than just oil...

Brian what are the big products going from Canada to the US?

I'd assume oil, grains, electricity (which I assume is regulated), forest products, ...

Maybe we have pharma going up that way...some finished goods..

i have the Canada running constant trade surpluses with the US over the last years...

https://www.census.gov/foreign-trade/balance/c1220.html

I'm trying to make the point that "currency devaluation" is most often NOT a policy you see being implemented... but the currencies do move... via a process which is at least not well understood...

rsp,



Brian Romanchuk said...

Pretty much everything is traded; exports are an insane percentage of Canadian GDP (40%). For example, auto production is highly integrated across the border. Canadian cities are strung out along the border, trade is naturally North-South. I believe Canada is still the US's largest trade partner. But oil and natural gas were a big driver of surpluses.

Canadian tar sands output has probably falle more than other oil. I think it's called Western Canada Select, and it is an inferior grade that is largely landlocked and trades at a huge discount to Brent.

Brian Romanchuk said...

As for devaluation, it's rarely directly attempted amongst the developed countries. You get it indirectly, as Canada did, but it's the result of hard-to-manage capital and trade flows.

Anonymous said...

Matt -

Did you see Warren's post where he touched on this?

http://moslereconomics.com/2015/03/19/qe-the-dollar-and-the-euro-jobless-claims-us-trade-deficit-philadelphia-fed-survey/

Matt Franko said...

Move, yes I dont really understand Warrens reasoning there perhaps what he is talking about (currency trading) i'd think could move the observed exchange rates a bit (Mike has insight into this via his "market composition"...)

but lets say last year in mid-2014 the EUR was at like 1.40 and recently it was at 1.05-ish so for a big move like that I have to think something else is going on there...

I'd agree with Brian above where Brian says "it's the result of hard-to-manage capital and trade flows..."

This sounds like Brian is on to it here... I am of a similar mind on this... I'd add "trade terms influenced by domestic fiscal policies" in the two nations as I am really of a mind that govt fiscal policy is being the basic "source" that is "driving" the economy....

So a demand shock due to an austerity policy will compel an exporter to lower the price...

We can look at Switzerland recently where they actually had a fixed FX going between the CHf and the EUR and the SNB would change out a EUR for 1.2 CHF then, when they stopped this abruptly, the member banks would pay about 1.0 .... the Swiss tried to get price increases imposed at first but that doesnt fly in this fiscal backdrop of austerity in EZ and "muddle thru lite" here in the US...

now as the swiss firms have been "cost cutting" we see the rate drifing back up towards where it was as the swiss firms work to become "more competitive" ... my link in the post documents that they are throwing some "non-essential" Swiss workers out of their jobs to become "more competitive"...

So somehow, the real terms of trade are being reflected in the exchange rates (which makes sense...) so major changes in the real terms of trade between 2 nations will cause major changes eventually in the observed/published exchange rates...

And I dont see a typical policy of "devaluation" occurring overtly from the govts, it seems to be the non-govt mercantilists and their crony banker financiers that are taking actions to modify prices of the goods exported/imported into nations that then is reflected in the published exchange rates...

I dont think they really understand what is happening these 2 parties (mercantilists & bankers) just react in defensive self-interest to the austerity and the way the system is regulated, the exchange rate is seen to adjust...

In the forex, "Cause" is the self-interested actions of the mercantilitsts/bankers and "effect" is the adjustment in the exchange rate... imo...

So if you could watch for major leading adjustments in trade terms (price not quantity) between two nations in products that are meaningful % of flows, you may be able to front run major moves in the forex imo...

rsp,

Anonymous said...


2009 Canadian exports graph

http://www.neb-one.gc.ca/bts/nws/spch/archive/2010/cndnnrgfct/cndnnrgfct-eng.html

Anonymous said...

More info from BIS on FX flows and derivatives:

http://www.bis.org/publ/qtrpdf/r_qt1312g.htm