2. Sophie Cousineau: The year of the consumer
3. Omar El Akkad: Spies take a toll on Silicon Valley
4. Kevin Carmichael: Politics will guide U.S. recovery
5. Boyd Erman: The great debt run begins to slow
6. Jeffrey Jones: Oil patch turnarounds show their shape
Falling oil prices and the rise of bubble talk
On the U.S. Gulf Coast, home to the world’s biggest collection of refineries, oil is in such plentiful supply that the industry is talking about a “glut.”
That’s quite a turnaround. In 2007 and 2008, when world oil prices went to a record $147 (U.S.) a barrel, the lexicon was one of fear. Oil executives and economists warned about vanishing supplies, “peak oil” and deep recessions as prices galloped forward, chewing into disposable incomes.
The Gulf Coast is swamped with oil because new pipelines are providing a market for surging American oil production. So much oil is spewing into refinery land that the price gap between Light Louisiana Sweet crude and Brent, the global benchmark, is at an all-time high, according to the U.S. Energy Information Administration. In the first eight months of last year, the Louisiana crude averaged $1.45 more than Brent. Since then, it has traded at more than $7 below.
While the Gulf Coast is a peculiar market, the talk is of amply supplied, even oversupplied, oil markets elsewhere on the planet, thanks to everything from slowing growth in China and rising Iranian oil exports to more efficient cars and expanding sources of renewable energy. Little Portugal routinely sees days when most of its electricity comes from wind, hydro and other types of non-hydrocarbon sources.
It is hardly stepping out on a limb to forecast that oil prices will drop in 2014. The big question is: By how much? My guess is that a fall of $10 to $15 a barrel is not out of the question (on Friday, Brent traded at $108 while West Texas intermediate was at $95). That may not sound like a lot but it’s enough to trigger huge problems in the oil-exporting countries, like Russia, where national budgets are dependent on oil exports. In extreme cases, budget shortfalls could lead to civil unrest as politicians find themselves unable to pay off their people.
The forecast for lower oil prices – and lower commodity prices in general – is not universally shared. That’s because the United States is returning to compelling growth and the euro zone is clawing its way out of recession. Historically, energy prices rise in tandem with gross domestic product. While true, the link between GDP growth and energy consumption is breaking down. In the developed world, where services, not manufacturing, are becoming the dominant economic activity, energy efficiency is climbing relentlessly. Meanwhile, growth in the developing world is tapering off. The upshot is that a 3- or 4-per-cent rise in global GDP may not deliver a rise in oil prices.
Soaring U.S. oil production has emerged as the most bearish factor on prices. The International Energy Agency expects the United States to surpass Saudi Arabia as the top oil producer in 2015. Credit shale oil production. Five years ago, the Bakken field in North Dakota produced nothing. Today it pumps out one million barrels a day. The Eagle Ford in Texas spews out 1.3 million b/d. Those two shale fields alone have higher production than the entire Alberta oil sands.
Surging American oil production means lower American imports. Lower demand for imports by the world’s biggest energy consumer can only put downward pressure on prices. At some point, the legislation will change to allow the United States to export oil, an unthinkable scenario two or three years ago. Then, watch out.
The Saudis are not just worried about shale oil; they worry about rising production in Iraq, Libya and Iran, each capable of throwing millions more barrels onto market. Before the 1979 revolution, Iran was producing about six million barrels a day. That fell to as little as one million when the sanctions were at their tightest. At the OPEC meeting last month, Iran’s Oil Minister, Bijan Namdar Zanganeh, said his country would produce four million barrels a day when the sanctions are lifted. Will the Saudis scale back production to make room for its new rivals? Doubtful.
While energy importing countries couldn’t be happier, energy exporters face a grim few years as prices come under pressure, taking down export earnings. Among the big exporters, Russia has the most to worry about.
Oil and gas prices can make or break its economy. The Russian economic collapse of the 1990s was largely driven by sinking crude prices, which dipped below $11 a barrel in 1998. Russia defaulted that year, wiping out most of its banks and sending its debt-to-GDP ratio to more than 80 per cent. The country was saved when prices reversed direction. Oil contributes about 50 per cent to federal government revenues and the embarrassment of riches was spent on social programs, defence and the Sochi Winter Olympics, whose bill is estimated at $50-billion, the highest in the history of the Games.
Russia’s Alfa Bank economists have estimated that Russia this year will need an oil price of $115 a barrel to balance is budget. There’s a good chance Russia will be running a deep deficit this year since prices are already below that level.
There was no doubt that oil was in a bubble in 2008, before the price duly collapsed. With vast new supplies reaching the global markets, and economies becoming less energy intensive, oil could be in one again.
The year of the consumer
Journalists, it is scornfully said, crave the negative. And admittedly, there is some truth to the twisted proverb that good news is no news.
But as failed New Year’s resolutions have yet to rub off the sparkly shine of 2014, let us entertain an optimistic outlook. This will be the year of the little guy – you and me that is.
Canadians haven’t had it easy in recent years with paycheques so motionless you needed a magnifying glass to see them inch forward. However, the stars are now aligned for a relief of sorts. As business, regulatory and political forces now converge, the middle class can catch a glimpse of this consumer oasis.
Things won’t all be perfect in 2014. Stamp prices will jump by almost a third, to 85 cents. And if you live in Ontario well, tough luck: Your electricity bill will spew out sparks as it rises by 9.6 per cent, the first in a series of hefty hikes to come.
But many of the Canadian household’s biggest expenses, from mortgage payments to grocery and cellphone bills, are contained if not facing downward pressures in a low inflation environment. (At last read, Canada’s inflation rate stood at a measly 0.9 per cent.)
How good will it get for consumers? For starters, cheap money won’t end in 2014. As there is still a lot of slack in Canada’s economy, the Bank of Canada has no intention of raising its key interest rate any time soon. That overnight lending rate dictates the rates at which Canadians borrow money to finance almost everything they buy, from computers to cars, homes excluded.
That is welcome news to the Canadians who maxed out their credit cards over the holidays – and many of them would have been so inclined with household credit debt to disposable income hitting a record 163.65 per cent in the third quarter of 2013.
Mortgage rates, which are determined by the bond market, are also expected to remain at historically low levels although they will continue to nudge up.
Moving to the grocery aisles, the competition between retailers will be red hot. Last year, major U.S. chains opened new stores and expanded their food offerings alongside pharmacies and other non-traditional grocery outlets. The food fight provoked by Wal-Mart Canada and Target Corp., which opened 124 stores across Canada last year, is now waged through flyers that offer deeply discounted produce and staples to attract cash-strapped shoppers. So the same forces that have been keeping grocery bills in check will play out this year again.
The retail fight will also escalate in fashion with the arrival of high-end American chains. Nordstrom Inc. will open its first full-line stores in Canada next fall. Hudson’s Bay Co. also plans to open Saks Inc. stores in Canada within two years after acquiring the New-York based luxury chain.
Things won’t be any easier at the lower end, either. After a patchy debut, you can expect Target to gets its act together.
Then there is the long-reviled telecom bill, which the Conservative government has made its life mission to tame. Since December, all new wireless contracts are governed by the Canadian Radio-television and Telecommunications Commission’s new code of conduct, which forbids three-year contracts and their outrageous breakup fees and limits extra charges and international roaming fees.
The government is not stopping there. It hopes to prevent incumbents from charging rival carriers wholesale domestic roaming rates that are higher than the retail rates they charge their own customers. This clampdown could not only help Canada’s struggling upstarts, but may also attract foreign operators such as France’s Orange SA. If the changes are enacted by mid-2014, as expected, they should unleash the wireless competition the Conservatives have been fantasizing about.
Television providers are not escaping the turmoil, as the federal government is setting the table to unbundle channels, a move that could upend the Canadian television industry as a whole. The CRTC must report to Ottawa by May on how subscribers will be able to pay only for the channels they want.
This promise was part of the Throne speech, a political shopping list seen as Stephen Harper’s campaign kickoff. Also included in the Conservatives’ populist bid to get re-elected in 2015 is the vaguely worded promise to limit banking fees, a long-standing consumer grudge. It is unclear how bank fees would be curtailed, but the mere threat of intervention should persuade bankers to lift their feet on the fee pedals.
Of course, once the federal election passes, all bets are off. But Canadian consumers can enjoy 2014 while it lasts.
Spies take a toll on Silicon Valley
To the consternation of the world’s biggest technology companies, there is little doubt as to what is most likely to be the defining tech story of 2014.
This is, almost certainly, the year when the widespread revelations of U.S. government spying stop simply being a public relations headache for the Googles and Apples of the world – and instead start affecting the bottom line.
For months, new information has surfaced almost daily, revealing the extent to which the National Security Administration has infiltrated some of the most popular software and hardware products in the world.
Most recently, in late December, activist Jacob Appelbaum gave a talk at a computer conference in Germany, during which he disclosed an astonishing list of tools and methods used by the spy agency – from hidden devices that were essentially impossible to remove, to new tools that could turn an unsuspecting user’s iPhone into the NSA’s own monitoring device. As Mr. Appelbaum went through several classified documents that outlined the uses of each spying tool, it became clear that virtually every major technology firm in the world had been the subject of NSA spying – many manufacturers’ products were listed by name in the files.
Once again, technology firms found themselves having to reassure customers that their privacy and digital security had not been deliberately compromised. But as the list of revelations about NSA spying has grown, the tone of the companies’ responses has become substantially more antagonistic.
“Apple has never worked with the NSA to create a back door in any of our products, including iPhone,” the company said.
“We will continue to use our resources to stay ahead of malicious hackers and defend our customers from security attacks, regardless of who’s behind them.”
That the world’s most profitable technology company is now willing to lump an arm of the U.S. government in with virus makers and botnet operators is the clearest sign yet that the technology industry is starting to worry about the negative impact the NSA spying revelations is going to have on the bottom line – the likelihood that potential customers, already jittery about trusting tech firms with all their data and communications, will be permanently spooked away.
There are already signs that such fears are starting to morph into actual revenue losses. In November, a Cisco executive said the spying revelations have had an impact on business, especially in China – and that was before several new disclosures about the scope of NSA spying were made public.
But just as the Snowden revelations have forced the major tech companies into damage-control mode, the resulting heightened customer focus on privacy and security is also creating a wealth of market opportunities for a host of smaller tech companies that specialize in keeping data safe and away from spying eyes.
The phone call encryption company SeeCrypt, for example, saw interest in its product skyrocket in the immediate aftermath of the first Snowden leaks. BitTorrent, the company behind the popular file-sharing network, has seen similar interest in its new chat tool and its Sync service, which offers a secure way for users to keep multiple copies of the same file up to date.
“Growth is partly due to benefits BitTorrent Sync offers, such as speed, no limits on size and cost savings,” said Christian Averill, BitTorrent’s director of communications. “But there is no question that the revelations of ... NSA abuses have created an acute awareness of the risks presented by relying on the cloud.”
Politics will guide U.S. recovery
There remains one serious headwind holding back the U.S. economy, one that will blow most of the year.
For the first time since the Great Recession ended in June, 2009, the recovery is starting to look like … a recovery. Employers are hiring about 200,000 people a month, credit is expanding for the first time in four years and state and local governments are spending rather than cutting. The world’s largest economy could grow at a pace of around 3 per cent for the first time in nine years.
That’s good, but it could be better. There still are 1.3 million fewer Americans working than there were at the beginning of 2008. Companies have little incentive to rehire them any faster than they already are. There still are too many reasons to be cautious. The biggest is political uncertainty. That fog won’t start to lift until Nov. 5 – the day after mid-term elections determine whether the Senate remains in Democratic control, or whether Barack Obama will spend his final two years as President looking up at a Capitol Hill run by Republicans.
U.S. politics will grip international investors in 2014 because the relative optimism about the global economy’s prospects is geared almost entirely to the U.S. outlook. Pavilion Global Markets finds that when American equities rise, global stocks follow. The lack of panic at the Bank of Canada about Canada’s lacklustre growth is rooted in confidence that the U.S. is on the verge of buying a lot more exports. America is once again the world’s undisputed economic leader.
Investors will continue to worry that Congress could once again knock the recovery off course.
Economic growth might have approached 4 per cent in 2013 if not for premature spending cuts and tax increases. Instead, gross domestic product likely expanded at only about half that rate. These policy decisions were the result of various budgetary showdowns between increasingly intransigent Democratic and Republican lawmakers. This year’s legislative calendar includes more such moments, including a vote over the debt ceiling some time between February and the spring.
Positioning for the mid-terms will determine whether these votes go smoothly, or whether they become staging grounds for politicians to prove their commitment to “principle.” The Republican Party senses opportunity in the Senate, where seven Democratic incumbents face tough re-election fights in states won in 2012 by Mr. Obama’s challenger, Mitt Romney. Republicans need a net gain of six seats to claim a majority.
Congress may have corrected its suicidal tendencies. Lawmakers in both chambers passed a two-year budget by surprisingly large majorities late last year and House Speaker John Boehner publicly confronted the conservative groups that egg on the hardliners in his caucus.
This counts as a positive only because expectations for America’s lawmakers have sunk so low. Almost no one expects Congress to do anything that could help the economy in 2014.
Max Baucus, the retiring head of the Senate finance committee, spent much of 2013 working on a bipartisan overhaul of the tax code that would include a lower corporate rate. It’s the kind of thing on which political legacies are made. Mr. Baucus planned to present legislation by early this year.
But election-year politics got in the way. Last month, Mr. Baucus gave up on tax reform and agreed to stand as Mr. Obama’s nominee as ambassador to China. The chances of getting something done are greater in Beijing than they are in Washington.
The great debt run begins to slow
We’ve been talking about it for years. Canadians have to stop running up debt at madcap rates. In the next 12 months, it will begin to happen.
A confluence of already slowing borrowing trends and the spectre of rising interest rates will make 2014 the peak for Canadian personal indebtedness. After that, Canada will face what the U.S. endured for years – a deleveraging economy where consumers are more concerned with renovating their balance sheets than their kitchens.
The economic effects will be myriad, but probably not catastrophic. Personal disposable income is growing, thanks in part to a low-inflation environment. That means many Canadians will still have the ability to buy a few things while socking away savings and tackling their debt.
But the change will usher in a brake on consumer spending and on the housing market, and a tougher time for banks and for retailers who depend on consumer spending.
Don’t mistake this for the year that Canadians stop running up their debt. Growth in credit is slowing but an outright decline in lending is probably a few years off. But this could well be the year where Canadians stop increasing their debt faster than their incomes.
That means that the closely watched debt-to-disposable income level, now at a record level of just over 163 per cent, may have seen its apex.
At the moment, credit growth and disposable income growth are running at about the same rate, at around 4 per cent. But credit growth is heading down steeply, while income growth is holding up.
Royal Bank of Canada analyst Darko Mihelic, who covers the big banks, said in a report Friday that he expects personal loan growth will slow to 2 per cent this year and next. Mortgage loan growth will drop to 4 per cent in 2014 from 5 per cent, and to 3 per cent next year.
Personal leverage already shows signs of peaking. The ratio of household debt to disposable income is rising much less quickly of late. Over the past two years, it has risen a little under four percentage points to 163.65 from 159.77. That compares to a rise of 4.5 percentage points in the two years prior to that, and a jump of about 13 percentage points in the two years before that.
The slowdown has occurred even as low interest rates have made it easier for consumers to make payments on their elevated debt load.
Canadians simply aren’t willing to borrow much more, because they can’t, or they won’t after years of being warned that interest rate increases must come some time.
That some time is now.
All through 2014, expect the five-year mortgage rate to tick upward, following underlying bond yields. Right now, the five-year bond is a touch under 2 per cent. By year-end, it will be closer to 2.5 per cent, if economists are correct. By 2015, it will be more like 3 per cent.
Personal loans tied to the prime rate will remain cheap, as nobody is really expecting much if any movement in the Bank of Canada’s key overnight rate in 2014. But as the year goes by, talk of an increase in 2015 will start to percolate, driving home the notion that borrowing costs are going up.
By the end of the year, it will be clear. The borrowing binge will be behind Canada, and the long cleanup will begin.
Oil patch turnarounds show their shape
Under new CEOs, some of Canada’s biggest-name energy producers spent much of last year devising turnaround strategies with large doses of tough medicine – asset sales, job cuts and slashed dividends.
Now, it is time for the bosses at Encana Corp., Talisman Energy Inc. and Penn West Petroleum Ltd. to perform, or the onetime market stars – and still pillars of the Canadian oil patch – could disappear in takeovers or breakups as asset-hungry U.S. firms start to look north again.
In 2013, expectations of drastic strategic revamps did not necessarily translate into stock gains, as may have been the case in previous years when commodity prices were stronger and there were fewer jitters about rising costs.
Encana, which hired former BP PLC executive Doug Suttles as chief executive officer, slipped 2.4 per cent through the year. Penn West stock suffered an 18-per-cent drop, even as it brought in David Roberts, formerly of Marathon Oil Corp. Talisman, under Hal Kvisle, had the best performance of the restructuring trio, gaining 9.8 per cent. Of course, the big gain came in October as activist investor Carl Icahn disclosed his interest in the company.
For all three, much depends on some resurgence in the energy asset market as they seek to jettison properties and pay down debt. Talisman had a head start, having unloaded $2.2-billion (U.S.) of a $3-billion target in the past 12 months.
Mr. Kvisle, who has served notice that his tenure as CEO will be up some time late this year, must still strike deals to offload exploration and production stakes in the Alberta Duvernay, Norway and Kurdistan as well as pipeline and processing assets in the Marcellus region of the northeastern U.S.
Still, calls have not ceased for Talisman to split in two, with one firm operating the Asia holdings and the other in the Western Hemisphere. This would be Plan B, if the strategy to focus on pumping more lucrative liquids-rich gas and international oil under the current umbrella fails to excite.
At Encana, Mr. Suttles will winnow down its main operation regions to five from two dozen, while splitting off its royalty-free lands into a new public company. The trick will be living up to promises of boosting output of oil and liquids-rich gas, and Encana’s recent outlook for 2014 disappointed some analysts.
Investors may not wait patiently for share price gains after having their dividend chopped. A pleasant surprise in the past month, though, has been a jump in the price of natural gas, something Encana still has gobs of.
Penn West has the toughest road to recovery, having struggled with years of missed production forecasts and management shakeups. Mr. Roberts is looking to sell up to $2-billion of assets to cut debt and refocus on unconventional Alberta light oil.
Penn West’s struggle will be to win investor favour as its production falls during the next two years of asset sales. The early reviews have been mixed.
Investment bankers in Calgary have said U.S. money appears to be seeping back into Canadian energy. That’s positive for plans to sell assets and for the overall market, but if the new bosses’ strategies are slow to bear fruit, it could mean willing buyers for the entire corporations too.