Wednesday, March 10, 2010

The Coming Energy Shortage, Part 4: Peak Oil and Northern Ontario - Setting the Scene

A Quick News Report from the Future:

"Today, one of Ontario’s mining giants announced that they will be closing down their refining operation in one of Northern Ontario’s larger urban centres. Mining company executives, commenting from their international headquarters outside of Canada, cited the increasing costs of energy as one of the primary reasons why refining operations will be shifted to Quebec. Around 700 high-paying jobs are expected to be lost when the refinery closes down within the next few months.

"‘Value added business is important in any mining community," the international mining exec commented. "But with rising energy costs, our value added business in Ontario is no longer sustainable. We’ll still take all of the ore we can extract, but we’ll add value to it through refining elsewhere, where it is more affordable to do so. If there isn’t the capacity available in Quebec, or union labour costs prove to be too high, well maybe China will have some spare capacity. Since they’re building all of those economically-efficient coal plants there, rather than investing in expensive wind and solar energy, I’m sure that we’ll find more agreeable terms.

Since Ontario has no laws which require products mined in this province to be processed here, there is no way of saving these 700 jobs unless the provincial government steps in with an economic bail-out package."


Rising energy prices are a threat to all Ontario industries, however not equally so. Disproportionately, industries in Northern Ontario are far more vulnerable to increased energy pricing, due in part to the vast distances to markets for products, but due also in part to the significant amount of energy required by the mining and forestry sectors, which are two of the driving engines of our Northern economy.

We can expect very soon to inhabit the world of Peak Oil, where the demand for energy rises through international competition, but where energy production can not increase to keep pace with demand. The result will be higher prices. If this happens slowly, we here in Canada may be able to bring more renewable energy sources on-stream prior to cushion the blow (although we don’t seem to be making it a priority to do so).

If energy prices rise quickly, we can expect some sort of economic collapse, as some industries find that it makes more economic sense to cease operating, rather than to lose out on their bottom lines. "Loss" here might not just mean losing a return on investment, an actual "loss"; it could simply mean that it’s just no longer as profitable to operate in that economic environment; if an industry believes that energy prices might go down, it may opt to lay off people now and wait to reap higher profits in the future. That approach won’t work for all industries, but it can easily work in the mining sector, where you can leave the rocks in the ground and dig them out later when bigger profits can be made.

As we recently re-discovered here in Northern Ontario, when the waves of recession hit, demand for our products goes down. In Sudbury, when the value of nickel nose-dived, the mining giants started laying people off, or locking them out of their jobs. Is it now any wonder that, as the price of nickel begins to creep back up, Vale Inco has finally begun expressing a smidgen of interest in moving to resolve their 8-month long dispute with striking USW Local 1600?

Getting back to the point I was trying to make, though, is that if energy prices rise quickly, we can expect to find ourselves in a similar situation to where we were at back at the end of 2008 and throughout most of 2009. You will recall that a lot of jobs were lost, and many of them still haven’t been replaced. Many more jobs were saved through massive infusions of public money industries considered too important to fail (such as the auto sector).

In Northern Ontario, however, not very many jobs were salvaged through the economic stimulus. Indeed, the City of Toronto and Thunder Bay’s Bombardier didn’t initially qualify for stimulus spending to cover Toronto’s order for streetcars built in T-Bay, until the Feds finally got creative with their program. As for the forestry and mining sectors? Well, I guess those jobs just weren’t as important as those Southern Ontario auto-sector jobs.

Keep in mind that with Northern Ontario’s much smaller population, the ultimate impact of a lost job in the north is considerably greater than the loss of a job in the south, as the community supports into which the formerly employed individual was paying into will suffer disproportionately. This translates into bigger hits on municipal property tax levies, as homes for which mortgage payments can’t be made are sold or are foreclosed on by the bank, and businesses which used to rely on patronage of the formerly employed are forced to close because their service or product is no longer in demand, thus putting more people out of work.

And keep in mind what I wrote earlier: not all jobs lost here during the recession were as a result of a company losing money on their investment, but rather because they weren’t going to make as much money as they might when times are better. If that’s not contempt for one’s community, I’m not sure what is, however in our current economic system, CEO’s of business aren’t just simply required to turn a profit. Instead, they are charged to make decisions which will generate the maximum amount of profit for their shareholders. So if that means shutting down still-profitable operations in the short term, in order to maximize gains later on, so be it, and don’t worry too much about those employees who have been turfed from their jobs, or how the community will suffer. It’s just not their concern.

I scratch my head sometimes and wonder what kind of Canada we actually find ourselves living in. I don’t seem to recall learning about this place in school when I was growing up. To me, it seems absurd that we would let a multinational company control our natural resources in this kind of way. Especially when their decisions, based on profit motive, are hurting Canadians.

As higher energy prices return us to a recession of the sort which we found ourselves in during the latter part of 2008, what might be the big difference between the next time and the last time? If prices rise quickly, the big difference is going to be that our governments will not have had time to deal with the debt which we’ve accumulated over the past two years, not to mention having begun tackling the structural deficit. Unlike the last recession, when the next one hits, the cupboards will be bare.

Will this tie the hands of our governments, or will they opt to just print more money by mortgaging our children’s future that much further? It’s hard to say, but I think that governments everywhere have started to get nervous about the bills they’re racking up. I just can’t see a 2011 economic stimulus program designed to bail out more failing companies, should various bubbles burst and should energy prices push industries over the edge.

In Northern Ontario, clearly we’ll be at even more of a disadvantage, as none of the primary decision makers have a particular stake in ensuring that our communities here remain healthy. Governmental decisions for the North are made in Toronto and Ottawa, by governments who are largely composed of different political colours than those prevalent in the North (red and blue, as opposed to orange), and where other constituencies receive greater attention, due largely to the number of votes they can carry (there are more federal and provincial electoral districts just within the City of Toronto than throughout all of Northern Ontario; and when you throw those Greater Toronto Area ridings in the mix, well, there’s really no comparison).

On the business side, most of the North’s largest employers aren’t headquartered in the North, or even in Canada. Falconbridge was sold to Xstrata, a Swiss corporation, while Inco was gobbled up by the giant Brazilian mega-miner Vale.

I foresee significant danger ahead for Northern Ontarians, should we continue to carry on in a business-as-usual fashion. What may end up happening, however, may prove to be anything but "business as usual", but it will mean that we Northerners will have to be jarred out of our complacency. With more and more Northerners unemployed, losing their homes, and potentially going hungry, there is a very real chance that we’ll experience the sort of jarring impacts necessary to change our circumstances. Unfortunately, this also might not be for the better.

One last thing before I move along to my next post where I’ll discuss further some of these potentially unsettling impacts we can expect unless we begin planning for the future will be upon us very soon. That "News Report from the Future" I opened this post with. Well, in fact it’s from today (albeit in my own words). The price of energy in Ontario has driven Xstrata to make a decision to ship their product, which is taken out of the ground in Timmins, to Quebec for refining. About 700 people in Timmins will be out of jobs as a result. What does Quebec have that Ontario doesn’t? Might that be less-expensive electricity, largely generated through hydro power? Ontario has chosen to make its past investments largely in cheap coal and expensive nuclear (and has now begun phasing out the cheap coal). With Ontario’s "Feed In Tariff" for renewable energy projects expected to create even higher energy prices in the near future, you can see why Xstrata, concerned about maximizing profits, might want to flee the jurisdiction, and pack as much as they can into their getaway-car (actually their "getaway car" will be a significant number of transport trailers loaded with ore trundling across Northern Ontario’s highways, leaving even more pot-holes behind). Since Ontario’s Mining Act allows a company to process our natural resources elsewhere, why wouldn’t Xstrata take advantage of this opportunity to do so, and make more money?

Of course, that’s little comfort to the people of Timmins who will continue to feel the impact of these lost jobs for decades to come.

(To be continued in Part 5...)

1 comment:

Bluegreenblogger said...

I'm not sure if you've read Rubin's book, 'Your World is about to become a lot smaller'.
In it Rubin calls for a formal recognition of dirty energy as a subsidy, and that countervailing duties could and should be imposed to force the hand of polluting nations. I think that there are real, and potentially frightening geo-p[olitical considerations to take into account when taking such steps, but copared to the ridiculous costs and inefficacy of Cap and Trade, it's becoming clear that countervailing duties are the international cousin of a Green Tax shift. A basic cost mechanism to promote clean energy everywhere. The instance you talk of, where Quebec is the winner of ore processing will become more pronounced under any system whereby dirty energy faces a cost premium, but losing processing to China would be right off the table then.
The logic of multi-nationals being profit seekers is quite natural. That's why they became multi-national in the first place, to shop in different jurisdictions. They do it well, and it's quite right and proper that they do so. The environment in which they take these decisions is created by we the people though, so if we want to change the decisions, it's better by far to change the underlying market structure than it is to cavill at specific decisions. Northern Ontario is in a long term bind. There are no easy and simple solutions. One step in the right direction would be to remove the potential for jurisdiction shopping for cheap but dirty energy.