Some of the most important business stories of 2012
America got its oil swagger back
Nathan VanderKlippe in North Dakota
Williston was once a forgotten backwater, a small town on the windswept plains of North Dakota that produced grain, a few dwindling trickles of oil, and little else. Today, with those trickles swollen into one of the world’s fastest-growing torrents of crude, it has become a kind of economic Ellis Island, a haven for refugees from a stagnant economy. They arrive in trucks and buses and RVs, live where they can and often find work within days, if not hours. Men who have rarely seen snow drive 18-wheelers across ice-slicked roads. Occasionally, they find themselves wheels-up in the ditch. Trainee hard-hats, differentiated by colour, proliferate at drilling rigs. Injury lawyers have set up websites devoted to prosecuting workplace injuries. There have been deaths.
It’s a boom, and every bit as messy as one would expect. But the mess extends far beyond Williston, as the surge of oil flowing from North Dakota upends the energy order of the world’s largest oil consumer. Last year, the region’s Bakken oil play produced just over 550,000 barrels per day. Twelve months later, it’s well over 700,000. According to the state, it’s headed to 900,000. If you believe the optimists, it could hit 1.5 million. Either way, the Bakken is only one of a rush of new oil plays that are fundamentally re-shaping energy in North America. For proof, look no further than the International Energy Agency, which in November predicted the U.S. will vault past Saudi Arabia to become the world’s largest oil producer. So much oil is flowing from new plays that it’s creating supply gluts and pitching prices downward, with North American oil routinely selling for $20 to $25 (U.S.) a barrel less than international blends.
What does it all mean? For the U.S., it’s hard to see a downside. Suddenly, billions are pouring into drilling the Lower 48—billions that just a couple of years ago would have been destined for shores far away. Jobs are being created. A sudden bounty of domestic energy is lessening dependence on foreign supplies, a change that stands to reshape the global political order, too—although the U.S. needs so much oil that it will rely heavily on overseas oil for years to come.
For Canada, the picture is less clear. Judging by national-scale demand figures, Canadian crude will have a home in the U.S. market long into the future. But Alberta oil doesn’t reach much of the U.S. today—it struggles to reach California, has limited access to the Gulf Coast and can only get to the Eastern Seaboard on rail cars. Companies like Enbridge and rival TransCanada are hard after ways to reach each of those markets, but environmental opponents are working equally hard to block their plans. If the pipelines go through, there’s little reason for concern. But if they’re slowed, or blocked, Canada faces real problems in getting buyers for what has become one of its most important exports. North Dakota, in other words, stands to leave its biggest mess north of the border.
The bubble goes pfft
Brent Jang in Vancouver
A 13-year-old home in Vancouver’s South Cambie neighbourhood went up for sale for $2.995 million last August, just four weeks after Ottawa tightened mortgage borrowing rules. The listing touted that the house had been “lovingly cared for by the original owner.” Among the highlights were five full bathrooms and two half-baths.
In South Cambie and other parts of the city’s coveted west side, such a home would have sparked a bidding war in the spring of 2011, when some detached houses sold for as much as 50% over the asking price.
But in a cooling real estate market, there weren’t any takers for this property in the early going. Even a price reduction in mid-October to $2.75 million failed to generate buzz. In November, 90 days after being listed, the home at 675 West 53rd Ave. finally sold for $2.48 million, or 16.9% lower than the original asking price.
Tales of homes languishing across Vancouver have become common in what was Canada’s hottest housing market just a year ago. For single-family detached homes sold in Greater Vancouver in April of 2011, the average number of days on the market was 34. By October of 2012, it had risen to 67 days.
Last July, federal Finance Minister Jim Flaherty chopped the maximum period for a government-insured mortgage to 25 years from 30. He also cancelled government-backed insurance for homes above $1 million. Year-over-year sales in the fall slumped in major Canadian markets such as Vancouver, Toronto and Montreal.
Investors who once flocked to buy condos in Greater Vancouver are now in no hurry. In one condo project in suburban Burnaby, it took a full year after the marketing campaign began in 2011 to sell 80% of the units. Such a project would have sold out within months back when the market was still hot. Meanwhile, renters who couldn’t afford to buy are playing a waiting game, figuring that in a softening market, prices have a way to tumble before hitting bottom.
While the west side has taken a hit, average prices in Greater Vancouver were on track to drop 5.9% in 2012—far from a collapse. Low interest rates should prevent a full-on panic, but housing markets in Vancouver and the rest of Canada will still be in for a bumpy ride in 2013.
Europeans are really, really mad
Eric Reguly in Barcelona
What impressed me most about the mass anti-austerity protest in Barcelona in mid-November was that it lacked the rage and violence that had turned Athens into a war zone several times this year, after Greece’s would-be saviours decided repeated stabbings were the best way to revive the bleeding country. I have covered several riots in Athens; at one of them, I was lucky to make it back to the hotel without injury. In Barcelona, however, I felt like I had been invited to a street party.
By rights, the protests in Barcelona, Spain’s second city, and Madrid, should have been as ugly as those in Athens. Spain’s jobless rate, at 25%, and youth jobless rate at 54%, are both higher than Greece’s, in fact the highest in the Western world. If there is one country that needs austerity-lite, it is Spain. Greece’s collapse would not wreck the euro zone. Spain’s would. Its economy—as big as Canada’s—is the euro zone’s fourth-largest.
Hundreds of thousands of people filled the broad boulevards of central Barcelona that night (no one protests during siesta). There was nasty humour: Using red spray paint, protesters edited “Santander” bank to read “Satan” bank. There was beauty: The red and yellow haze from the smoke canisters enveloped street fountains, giving the water spouts a surreal Apocalypse Now halo. There was variety: Spaniards of all ages and colours and professions were on the march.
And, yes, there was anger, in a gentle sort of way. It united them. José Manuel Asensio, 55, employed at a phone company, was angry at the government and the European Union for bailing out the clapped-out Spanish banks when millions were out of work. “We are paying for the banks,” he said. “The bank profits are private and their losses are public.” Luis Aborco Fronco, 33, an unemployed painter, directed his anger at Spanish prime minister Mariano Rajoy, whom he accused of being the lapdog of that she-wolf of austerity, the German Chancellor. “Mariano is a slave of Angela Merkel and the European Union,” he said, carrying a placard that blared, “There is no future.”
As the austerity programs destroy jobs and wreck families—and send hundreds of thousands into the streets across Europe—there is talk of a sort of civil war developing in Greece. Spain is not there yet. But the patience and civility of its vast armies of unemployed are reaching their limits.
He won, but the battle isn’t over
Konrad Yakabuski in Washington
By the time I got to Wisconsin in late fall, it had already become the poster state for the ideological civil war splitting the United States. Republican Governor Scott Walker, elected in 2010, had turned governing into a take-no-prisoners exercise in union busting. He had faced down a recall, and Republicans, emboldened by their sudden success at the state level, grew more confident that they could prevail in the presidential election. Their hopes of taking the state were given a lift in August when Mitt Romney named Wisconsin congressman Paul Ryan as his running mate.
If Wisconsin is Democrat-leaning—Obama won by 14 points in 2008—then Madison is its beating Democrat heart. The best part of the state capital—home of Wisconsin’s eponymous university—is its downtown, which sits on a narrow isthmus between two glistening lakes. On a crisp fall day, just as the sun set over Lake Mendota, I arrived at a University of Wisconsin theatre, along with some 200 academics and activists, to watch director Brad Lichtenstein’s documentary As Goes Janesville. Highly praised yet little seen, the film chronicles a Wisconsin town coming to grips with the closing of its GM plant.
As the film’s title implies, the fate of places like Janesville might just herald that of the entire country, the way the ups and downs of a certain car company once foreshadowed those of the nation. I had been to Janesville, Paul Ryan’s hometown, the day before seeing Lichtenstein’s movie. The silent GM plant, a hulking complex that once housed 7,000 decently paid workers, spoke volumes about the diminished circumstances of the American working class. When the plant closed in 2009, some Janesville workers were offered transfers to GM facilities in other states. But most faced a stark new world where their 20th-century skill sets and high-school educations foretold, at best, a grim future of low-wage jobs.
I thought of this as Walker, caught on camera by Lichtenstein, outlined to a billionaire supporter his “divide and conquer” strategy aimed at neutering the state’s public sector unions. Fuelling resentment toward government employees and their “cushy” working conditions had allowed Walker to win over a silent majority of Wisconsin voters when he moved to eliminate most collective bargaining in the public sector.
“What happens to one worker affects us all,” countered Tammie Murray, a Madison resident who helps retrain and find jobs for laid-off workers. As we had waited together outside the theatre earlier, she told me: “Until people stand up for each other, and stand up for each other doing better, they won’t do better themselves.”
When the votes were counted on Nov. 6, most Wisconsinites seemed to agree. They sided once again with Obama, though his margin of victory was cut in half from 2008. While a superior ground game and clever social media strategy helped Democrats, Obama’s promise of a “fair shot” for all also resonated with Wisconsinites weary of the Walker way. The civil war continues, but the fight no longer seems so lopsided.
Oh no, they’re in trouble, too
The BRIC nations—Brazil, Russia, India and China—were supposed to supercharge the world economy. What happened? Iain Marlow talks to Ruchir Sharma, head of emerging market equities and global macroeconomic strategy at Morgan Stanley, where he manages about $25 billion. He’s the author of Breakout Nations: In Pursuit of the Next Economic Miracles.
You’re speaking to me from India, a so-called BRIC nation whose GDP growth sputtered to its slowest in seven years. What went wrong?
In India’s case, the boom that took place for much of the last decade was mistaken for being a local boom. A lot of people here thought it was all about them. It led to a lot of complacency. There was no real reform, and the entire focus was on redistribution of wealth. And so, on a per capita basis, government spending nearly doubled in the last decade. India is now paying a price for that.
Can India’s failure to live up to expectations be extrapolated to other BRICs or emerging markets?
I feel much more negatively about Brazil and Russia than India, because these countries are very dependent on high commodity prices to sustain even the growth rates they’ve had, whereas India’s at a stage now where it will benefit from lower commodity prices. And India’s per capita income is about a sixth of Brazil’s or Russia’s. The richer you are, the more difficult it is to grow, because you need to innovate. With India, basic economic reform is enough to get you going.
In your book, you come down pretty hard on the hype surrounding China. How has it distorted how people think about the global economy?
Because China did so well, and at the same time other emerging markets also saw an acceleration in growth over the last decade, a lot of people began to think that there were a lot of Chinas around. The growth game began to look very easy, almost undermining the effort that China had made. The second thing is the power of the commodity boom. Because a lot of manufacturing shifted to China, it sucked in a lot of commodities to build up these manufacturing bases and other infrastructure. That lulled a lot of the commodity-producing companies into thinking that commodity prices were likely to remain high and keep rising.
What does a slowdown mean for a resource-rich country like Canada?
In the last 200 years, commodity cycles have followed this pattern: one decade up and then two decades down. Economies like Canada’s have been successful because they’ve been able to diversify. They’ve been able to use the commodity windfall well. What Canada and others are now going to probably realize is that it’s back to basics—this massive windfall in commodity prices, which helped cushion the blow over the last decade, is not going to be available any more.
What have you seen in your travels this year that could tell us something about where the world is going in 2013?
One thing that strikes me is how some issues are so common across markets, especially political issues. Income inequality is a thing that I’m hearing everywhere, from Santiago to Seoul. The other issue is over-indebtedness. Even in China, they’re concerned about debt.