The constitutional background to the current situation

FOR IMMEDIATE RELEASE            

November 28, 2008

Eugene Forsey on Dissolutions, Coalitions and Minority Government

Ompah, Ontario – “If Eugene Forsey were alive today, the democratic options open to Parliamentarians in the upcoming confidence vote would be much clearer,” says Helen Forsey, daughter of the late Senator and constitutional expert.

“My father would be telling politicians and media alike that there is no need for a fresh election, and no need either for any formal coalition of opposition parties to replace the Conservative government if it is defeated in the House.”

She cites the straightforward explanation of the process given in her father’s popular reference book, “How Canadians Govern Themselves”, published by the Library of Parliament and now in its 6^th edition.

“If a Cabinet is defeated in the House of Commons on a motion of censure or want of confidence, the Cabinet must either resign (the Governor General will then ask the leader of the Opposition to form a new Cabinet) or ask for a dissolution of Parliament and a fresh election... If a minority government is defeated on a motion of want of confidence very early in the first session of a new Parliament, and there is a reasonable possibility that a government of another party can be formed and get the support of the House of Commons, then the Governor General could refuse a dissolution."  

Forsey is concerned that a lack of understanding of the constitutional options could lead to costly and undemocratic decisions that would seriously undermine Canadian democracy. “There’s a lot of confusion and misinformation in the public discussions around the expected vote on the ‘financial update’ package,” she says. “If we assume that a defeat in the House will automatically trigger an election, that gives the government a great big stick with which to beat the opposition and the electorate into submission. That’s what happened last time, and we mustn’t let it happen again.”

Even knowing that the Governor General can refuse to dissolve the new Parliament and ask the Leader of the Opposition to form a government, there is still a mistaken belief that this would require a formal coalition, she says. “Canadians must not allow this democratic opportunity for an alternative government to slip away just because no coalition emerges. Ordinary minority governments can work perfectly well if they respect the spirit of cooperation and openness Canadians want and need in these challenging times.”

For more information, please see attached backgrounders, and contact: 

Helen Forsey, Ompah, Ontario (613) 479-2453 (home office); hforsey@magma.ca (until December 15^th,2008),         hlforsey@sympatico.ca (after December 15^th, 2008)

John Whyte, Law Foundation of Saskatchewan Professor, College of Law, University of      Saskatchewan, Regina, (306) 966-5606; (home 306-757-9775), john.whyte@usask.ca

Donald Wright, Dept. of Political Science, University of New Brunswick, Fredericton, NB, E3B 5A3, (506) 458-7494, wrightd@unb.ca

Backgrounders

A.  Minority government – no need for a coalition!

There is suddenly much talk of a possible coalition of opposition parties, and the impression being given is that without such a coalition, a defeat of the Harper government would “force an election”. As the late Senator and constitutional expert Eugene Forsey and the entire history of Parliamentary Cabinet government make clear, this is simply not true, and it is vitally important to get rid of that mistaken assumption. Canadians must not allow our current opportunity for a change of government to slip away because no coalition emerges.

1. We don't need a coalition; regular minority government represents a simple and totally viable alternative. Common or garden minority government could work just fine, as it has lots of times in the past. The largest opposition party would form a cabinet, and introduce legislation deliberately designed to gain the necessary support from the House. This would involve consultation, discussion, co-operation, on each bill or policy, but it would not require any formal agreement among the parties. Whenever the parties holding the balance of power wanted changes to the proposals, they would negotiate with the (new, more co-operative) governing party so as to get something they could all at least live with. One example is the way the NDP won important concessions from the Paul Martin minority government on a number of issues.

2. Regular minority government could happen immediately; a coalition would take time. We almost certainly don't have the time right now to achieve the kind of formal agreement a coalition represents. Coalitions involve complex negotiations and delicate balancing which can be very challenging and time-consuming. They can also be internally divisive, at least temporarily, within the parties themselves. With a potential confidence motion coming before the House immediately, it is not realistic to ask three very different parties to slap something together in just three days. 

3. A formal coalition among the three parties currently in opposition in our Parliament would have serious structural drawbacks. The differences among the parties on some issues are enormous, and each party is apt (quite rightly) to be vigilant about not compromising its basic principles and identity.  Moreover, a coalition usually involves a cabinet that includes members of two or more parties, and the issues around who gets which positions could easily scuttle the whole thing. Even if a formal coalition were agreed to initially, the price each party would have to pay might soon become too high for many of its MPs (eg. if the Bloc demanded to be put in charge of federal-provincial relations, this would certainly be too much for many federalists in the other parties.)

4. A formal coalition might well be less stable than a regular minority government. Under current conditions - given the particular parties involved and the issues we are facing - a coalition could easily fall apart, which would leave a very bad taste in people's mouths and make further co-operation considerably more difficult. (In a regular minority situation, the parties can fail to agree on a piece of non-essential legislation without incurring any serious repercussions at all.)

To sum up, a coalition might be great, but it would have its drawbacks as well. What we absolutely do need now is an alternative to the current regime, a more co-operative and democratic minority government which would consider the input of the other parties in developing legislation and policies that could win the support of a majority of MPs. No coalition is needed for this – it is simply the way minority governments have always tried to work, before bullying and bluffing became a shameful new norm.

B.  An election if necessary – But not necessarily an election! Eugene Forsey explains constitutional options

By Helen Forsey

After our costly and frustrating October 2008 trip to the polls, Canadians are once again being held hostage to the notion that a government can never be defeated in the House of Commons without triggering an election. If Eugene Forsey were still alive, we would know that the weapon being held to our heads is only a toy gun.

The late Senator Forsey was widely recognized and respected as an expert on Canada’s constitution. Whenever political dilemmas loomed or processes needed clarifying, politicians, media and citizens alike sought his lively and learned counsel. Today, with our country again facing the uncertainties of a minority government, a multi-party opposition and difficult times ahead, his input is urgently needed.

The first thing he would point out in our current situation is that our Constitution provides safeguards against a series of unnecessary elections. One of those safeguards is the right of the Governor-General, in certain circumstances, to refuse a government’s advice to dissolve Parliament and instead to call on another party in the existing House of Commons to try governing.

If the Canadian public, the politicians and the media had understood this vital element of our Constitution and invoked it early in the last Parliament, things could have unfolded very differently from what they did. The opposition parties could have voted together against the government on one of its confidence motions and defeated it. At that point the Governor-General, rather than automatically granting a dissolution and plunging us into an early election, could have called on the Leader of the Opposition to form a cabinet and try to get the support of the House to govern. If the new government had then developed its legislative and budgetary measures in ways that would gain majority approval by our elected representatives, the 39^th Parliament could have got on with its work, and quite possibly worked very well.

But nobody, from the Governor-General to the opposition politicians to the media to the general public, seemed to realize that this was an option! Now, after all the hassle and expense of the recent election, we’re back in essentially the same place. And the minute the PM decides that this new Parliament also “isn’t working” as he wants it to, it could happen again - unless we start understanding and implementing the options our Constitution provides.

“If [a government] loses its majority support in the House of Commons, it must either make way for a government of the opposite party or call a fresh election,” states Eugene Forsey in “How Canadians Govern Themselves”, his now-classic popular reference book published by the Library of Parliament. “In Canada, the government and the House of Commons cannot be at odds for more than a few weeks at a time. If they differ on any matter of importance, then, promptly, there is either a new government of a new House of Commons.”

Contrast this clear either-or alternative with the false assumption that if the Commons doesn’t agree to the government’s program, there has to be a fresh election. “The Canadian Constitution very sensibly allows governments to appeal from Parliament to the people when the public interest so requires,” Forsey explained. “But it does not follow that it provides no means of protecting fundamental democratic rights against abuse of these powers. It does; and the means is the reserve power of the Crown as guardian of the Constitution.”

My father defended those “reserve powers” as a pillar of our democracy. His PhD thesis on the royal power of dissolution of Parliament documented the constitutional precedents and the logic behind them, and demolished the popular but mistaken theory “that the Crown is just a rubber stamp for Cabinet, or that if it isn’t, it ought to be.” In particular cases, he argued, the power of the Crown to refuse a dissolution may be all that stands in the way of a government “spanking the electorate into submission” by repeatedly forcing them back to the polls.

“Unquestionably, the [reserve] power exists,” he wrote, citing the instances of its use and the wide range of constitutional authorities and politicians who upheld its propriety. “Unquestionably also, it is a power to be exercised only in very special circumstances: ordinarily the Crown must follow the advice of the cabinet. But many people feel that there must be no exceptions whatsoever. Is this in fact a safe doctrine?”

One of the scenarios he used to make his case against the “rubber stamp” theory starts with a familiar situation. “Suppose the government gets a dissolution, and no one gets a clear majority,” he wrote. “The government retains office and meets the new Parliament - as it has a perfect right to do - hoping to pick up enough votes to keep it in power. But the new Parliament defeats it. It declines to resign; governments don’t automatically resign on defeat. Instead, it asks for a second dissolution, and upon a further defeat in the ensuing Parliament, a third, and so on, until the electors give in or revolt. Is the Governor-General bound to acquiesce in this game of constitutional ping-pong from electorate to Parliament, from Parliament to electorate again, back and forth interminably?”

In 1926, Mackenzie King accused Parliament of having “ceased to be in a position to make a satisfactory decision” about who should govern. In 2008, Stephen Harper blamed a “dysfunctional” Parliament that “wasn’t working”. Both meant the same thing: a Parliament which failed to do what they wanted it to do. And for both men, the prescription was also the same: get a willing Governor-General to dissolve the unsatisfactory Parliament and bring on another election.

Forsey called this “a ‘heads I win, tails you lose’ theory of the Constitution. It bears not the faintest resemblance to parliamentary government,” he said. “Yet on the rubber stamp theory of the Crown’s powers there is no escape from it, no protection against the Cabinet dictatorship it would rivet upon the country.”

“It is the rubber stamp theory which is undemocratic,” he concluded. “It makes existing governments irremovable except by their own consent. Such a doctrine is a travesty of democracy. It delivers every Opposition gagged and bound into the hands of any jack-in-office. The jack-in-office may loosen the gag and the ropes - [perhaps] so much that we don’t realize they’re there. But he can tighten them again whenever he pleases, and as tight as he pleases. This is not democracy. It is despotism; more or less benevolent, perhaps, for the moment, but despotism none the less.”

The antidote is an understanding of the reserve power of the Crown to refuse a dissolution, and the political will to demand that it be used when necessary.

All this is not to say that it would be simple for the Crown to refuse her cabinet’s advice. As Eugene Forsey noted, a Governor-General would rightly be reluctant to do so without excellent reasons, and without a new cabinet willing to accept the responsibility. The reserve power on dissolution comes into play only in exceptional circumstances – when the latest election is still relatively recent, no great new issue of public policy has arisen in the interim, and the makeup of the new Parliament provides the practical possibility of an alternative government.

But the fact that the reserve power exists is one key to counteracting the paralyzing sense of helplessness that has turned so many Canadians off politics. It means we can choose to move from frustration and wishful thinking to the practical possibility of the opposition – a majority in this new Parliament as in the last - forming a government. The various parties would have to set partisan selfishness aside, but there would be no need for a formal coalition, just enough cooperation for each bill to pass. That, after all, is how responsible minority government works.

Democratic alternatives become real options when we understand and insist on the constitutional principles surrounding dissolution. Whether or not we like a particular government, having those options is essential to maintaining our democracy. We need not be hamstrung by the constant fear of another election. We must shake off our ignorance of the constitution and use the tools it offers to make our parliamentary system work for us.

Writer Helen Forsey is a daughter of the late Senator Eugene Forsey. She is currently working on a book about his legacy to Canadians.

Reference material:

Forsey, Eugene A., Freedom and Order, McClelland and Stewart, Toronto, 1974. See especially: “The Crown and the Constitution” (pp. 34-50), “Mr. King and Parliamentary Government” (pp. 87-109), and “The Problem of Minority Government in Canada” (pp. 109-123.)

Forsey, Eugene A., How Canadians Govern Themselves, Library of Parliament, 6^th edition 2005. See especially pp. 28-29.

Forsey, Eugene A., A Life on the Fringe, Oxford University Press, Toronto, 1990. See especially pp. 102-108.

Evatt, H. V. and Eugene A. Forsey, Evatt and Forsey on the Reserve Powers, Legal Books, Sydney, 1990. This volume includes the entire text of Forsey’s The Royal Power of Dissolution of Parliament in the British Commonwealth, with his new Introduction, “The Present Position of the Reserve Powers of the Crown”.

We would most likely have been spared both this latest election and the continuing curse of a Harper government. Our current affliction is largely due to our collective political ignorance, exploited and manipulated by the Powers That Be to create the “learned helplessness” so evident now in our battered and bruised electorate.

The specifics will depend on how the situation unfolds, but the deciding factor will be the opposition’s collective willingness to

call Harper’s bluff early in the new session. Backed by informed public pressure, they should defeat him in the House as soon as he starts pushing his reactionary policies, and demand the chance to govern sensibly and co-operatively in his place.

If the opposition lacks the gumption to do this, or if the Governor-General simply knuckles under and grants Harper another dissolution, the public outcry should be so loud that Eugene Forsey will rise from his grave to join us.

Harper’s minority Conservatives spent their first term in office demonstrating their contempt for the people and their representatives. They systematically sabotaged the work of multi-party committees, used Orders-in-Council to avoid Commons debate and defy the law, and took the art of parliamentary bullying to new heights by declaring every government bill a matter of confidence, daring MPs to defeat it.

On the “rubber stamp” theory, any such defeat in the House would automatically trigger a new election, something opposition politicians are generally reluctant – for good reasons and bad – to provoke. Whether or not Harper knew that premise was false, he was certainly willing to bet it wouldn’t be challenged. Sadly, he was right. The opposition parties mouthed their platitudes but never mentioned any constitutional alternative. While they played dead, Harper was able to keep pushing through his appalling legislation and stay in office till the time of his choosing.

************************************

My father was writing in 1953, but more than half a century later Canadians are again being held hostage to the false notion that a government can never be defeated in the House of Commons without triggering an election.

After our recent futile trip to the polls, we are a country massively frustrated and disillusioned with our own politics. Our alienation is due to many elements – our continuing enslavement to the “first-past-the-post” electoral model, short-sighted partisan vote-grabbing among rival opposition parties, macho posturing and point-scoring that freezes out more collaborative approaches or dismisses them as “weak”.

Although he died in 1991, his writings continue to provide detailed analysis and guidance on how our sophisticated system of Parliamentary government works.

our vast ignorance of our own Constitution, particularly the sophisticated safeguards it offers against abuse. One of those safeguards is the right of the Governor-General, in certain circumstances, to refuse to dissolve Parliament and instead to call on another party in the existing House of Commons to try governing. If the public, the politicians and the media had understood this vital element of our Constitution and invoked it early in the last parliament, things would have unfolded very differently.

It is high time the politicians, the media, and the public at large were reminded that this is not the case.

that our Constitution provides options.

Harper’s bullying tactics depend on the continuing ignorance and docility of the opposition, the media and civil society – an ignorance regularly fertilized with forkfuls of bullshit from politicians and the media.

One example - out of many - was a recent statement by CBC Radio News that Harper’s technique of declaring every Commons vote a matter of confidence forces the opposition to either “support the government, force an election, or not vote at all.” It is precisely this widespread but false belief that reduces the opposition majority to a state of helpless frustration and allows the government to walk all over us.

“One of the biggest threats to parliamentary democracy in Canada,” he wrote, “is the dogma that any government, regardless of circumstances, always has a dissolution in its pocket; that an appeal to the people is always proper.”

    CBC news writers and announcers apparently share this mistaken assumption with the various politicians who believe themselves caught on the horns of a near-impossible dilemma.

The two recent examples below are both from radio, as I seldom watch television); any slight variance from the actual text would be because I simply grabbed a pencil and took hurried notes as I listened:

1) a reference to Mr. Harper's technique of declaring every Commons vote a matter of confidence, "forcing the Opposition to either support the government, force an election, or not vote at all" (The World at Six, October 15th, 2008) and

2) a report on Mr. Dion's reaction to the Speech from the Throne, in which he "said his party won't force an election over [a Throne Speech] too vague and too bland to be offensive" (The World at Six, November 19th, 2008)

    Please understand that I am not singling out the CBC in this matter; indeed, politicians and public officials, other media, academics and the general public are being contacted as well. The matter is urgent, since the new Parliament is already sitting, and crucial decisions over the coming months will depend on whether or not this error is corrected.

“Triggering elections” - Eugene Forsey says: “Hold on – that’s not necessary!”

C. Eugene Forsey on Dissolutions, Coalitions and Minority Government

Ompah, Ontario – “If Eugene Forsey were alive today, the democratic options open to Parliamentarians in the upcoming confidence vote would be much clearer,” says Helen Forsey, daughter of the late Senator and constitutional expert.

“My father would be telling politicians and media alike that there is no need for a fresh election, and no need either for any formal coalition of opposition parties to replace the Conservative government if it is defeated in the House.”

She cites the straightforward explanation of the process given in her father’s popular reference book, “How Canadians Govern Themselves”, published by the Library of Parliament and now in its 6^th edition.

“If a Cabinet is defeated in the House of Commons on a motion of censure or want of confidence, the Cabinet must either resign (the Governor General will then ask the leader of the Opposition to form a new Cabinet) or ask for a dissolution of Parliament and a fresh election... If a minority government is defeated on a motion of want of confidence very early in the first session of a new Parliament, and there is a reasonable possibility that a government of another party can be formed and get the support of the House of Commons, then the Governor General could refuse a dissolution."  

Forsey is concerned that a lack of understanding of the constitutional options could lead to costly and undemocratic decisions that would seriously undermine Canadian democracy. “There’s a lot of confusion and misinformation in the public discussions around the expected vote on the ‘financial update’ package,” she says. “If we assume that a defeat in the House will automatically trigger an election, that gives the government a great big stick with which to beat the opposition and the electorate into submission. That’s what happened last time, and we mustn’t let it happen again.”

Even knowing that the Governor General can refuse to dissolve the new Parliament and ask the Leader of the Opposition to form a government, there is still a mistaken belief that this would require a formal coalition, she says. “Canadians must not allow this democratic opportunity for an alternative government to slip away just because no coalition emerges. Ordinary minority governments can work perfectly well if they respect the spirit of cooperation and openness Canadians want and need in these challenging times.”

-srbp-

Harper's 2004 letter to the GG: full text

Posted at Bond Papers last Friday:

"Taking power without an election."

-srbp- 

Round 2: Vote Now. Bond Papers: Best Political Blog

After the Round One run-offs, the final voting has begun.

Bond Papers is in contention for Best Political Blog in Canada up against the likes of Conservative heavyweight small dead animals, Calgarygrit, Molly's Blog, and nunc scio

This is it.  The big vote off.

To vote for Bond Papers and earn the undying appreciation of one humble e-scribbler just click the beaver.

The Gin and Tonic Biographer

Controversy helps sells books.

Janice Wells has certainly had her fair share of controversy in the first few weeks her book on former Premier Frank Moores has been in the bookstore.

First, it was her contention that Frank Moores had erred in walking away from a deal on Labrador hydro power that would have turned over 800 megawatts to the province.

In an interview with CBC radio's Jeff Gilhooley, Wells admitted she didn't know too much about the mega- or kilo-wattage involved.  On reading the brief two page account in her book it quickly becomes clear she didn't know too much else about the context of the discussion beyond perhaps what Frank himself had told her during one of her interviews with him.

She even starts out the section by referring to it as a previously unknown deal.  That despite a paper written for the Young royal commission - and cited here several times before - which includes a fairly detailed discussion of it. Wells does not make it clear whether the 800 megawatts was Churchill Falls power - which would have been deliverable immediately - or contingent on the Lower Churchill being developed.

Wells doesn't make it clear because, apparently she does not know.  yet nothing stopped her from claiming it to be a great tragedy to have scuttled the deal base on Brian Peckford's objections.  Wells even goes so far as to get Wade Locke to work up an estimated value for the power.

Lack of accurate and adequate information did not stop Wells from leaping to an unsubstantiated conclusion when it suited her purpose.

Odd then that she tries to suggest that Canadian journalists  have it wrong when they linked Frank to the Airbus scandal based on testimony and documentary evidence.  The trigger for Wells' comments is a criticism of the portions of her book on Airbus which ignore anything that does not present Moores in a favourable light. 

Wells admits she is not an investigative reporter.  That is painfully obvious.  She admits she has advanced an Airbus theory with no evidence.  That, too, is obvious.

Her job, says Wells, is to present a fair and balanced view of Moores.

That is not so obvious.

What Wells has done in her book on Moores is presented an account based primarily on her three days of interviews with Moores, bolstered by some other interviews. It is not really a biography as we might expect a bit of critical commentary based on research. Such a work need not condemn the subject;  it could be quite favourable and Moores deserves favourable treatment. However, in the arms-length attitude between subject and writer some credibility attaches to the writer's conclusions. 

What we have in Wells' book is the gin and tonic biographer at work.  It presents neither a fair nor balanced view and the research for the book appears to be extremely light.  Hers is a fawning account which raises Moores up in places by  tearing down others, or, in others,  attributing to Moores their ideas. She knows the meaning of proof and hard evidence, apparently, since she avoids both.

Frank Moores deserves a genuinely fair, accurate and well-researched account of his time as premier.

Janice Wells hasn't provided it.

The controversies, however, should help move a few books in the Christmas rush.

-srbp-

Maybe Santa will bring them...

Financial reports on a string of by-elections, the last provincial general election and annual contribution reports for the three political parties in the province haven't been posted to the Elections Newfoundland and Labrador website.

In fact, the data is almost two full years out of date.

We were promised them for the fall.

The again, we were promised lots of things by provincial politicians now safely ensconced in power - and in writing too - that never came to be.

Perhaps the financial reports are someone's list for Santa.

-srbp-

He didn't even say good bye...

but at least PAP's domain wasn't taken over by a porn site.

Lazarus Update [2130 hrs]:  And then just like that - and completely without explanation - PAP is back.

-srbp-

Taking power without an election

Okay.


So like no panic in Ottawa.


No stains on the Stanfields in the PMO.


Delaying not one but two confidence votes is a gigantic tell that the federal Conservatives badly miscalculated.


But there's another tell:  the whole set of media talking points that focus on "taking power without an election."


You know the Connies are jammed up when they slag others for using something out of their own playbook. Through the magic of the Bond Papers Time machine, we bring you, Stephen Harper attempting to take power without an election:

September 9, 2004

Her Excellency the Right Honourable Adrienne Clarkson,
C.C., C.M.M., C.O.M., C.D.
Governor General
Rideau Hall
1 Sussex Drive
Ottawa, Ontario K1A 0A1

Excellency,

As leaders of the opposition parties, we are well aware that, given the Liberal minority government, you could be asked by the Prime Minister todissolve the 38th Parliament at any time should the House of Commons fail to support some part of the government’s program.

We respectfully point out that the opposition parties, who together constitute a majority in the House, have been in close consultation. We believe that, should a request for dissolution arise this should give you cause, as constitutional practice has determined, to consult the opposition leaders and consider all of your options before exercising your constitutional authority.

Your attention to this matter is appreciated.

Sincerely,

Hon. Stephen Harper, P.C., M.P.
Leader of the Opposition
Leader of the Conservative Party of Canada

Gilles Duceppe, M.P.
Leader of the Bloc Quebecois

Jack Layton, M.P.
Leader of the New Democratic Party

-srbp-

Naughty bloggers

Some politicians don't like bloggers.  Doesn't matter what country or language or the political stripe.

Some don't like them because bloggers expose the politician's foibles.  The latest example of that is a Belgian politician in a story related by Neville Hobson.

In another thread of criticism we find the likes of  Hazel Blears, communities secretary in Gordon Brown's Labour government who warned that:

"Unless and until political blogging 'adds value' to our political culture, by allowing new and disparate voices, ideas and legitimate protest and challenge, and until the mainstream media reports politics in a calmer, more responsible manner, it will continue to fuel a culture of cynicism and pessimism."

Blears was looking to explain why the public are becoming increasingly disinterested in politics or, at the very list why participation is in decline.  She chose a couple of targets - not politicians themselves - but tore a strip from bloggers in particular.

In the process Blears merely displayed her profound ignorance.  Blogging involves new and disparate voices, ideas, legitimate protest and, most of all, a challenge to whatever is the orthodoxy of the moment. That's exactly what some politicians find distressing - the challenge to their line.  In Blears case, she singled out Guido Fawkes, a Conservative.  Conservatives detest Liberal blogs and Liberals blogs of the Conservative variety.  The only common thread is that the blog challenges their pronouncements and, as Fawkes has done, exposes misstatement, dodging hypocrisy and in some instances wrong doing.

In the spirit of these political alarums against blogs, Bond Papers joins with our Belgian blogging brethren by including a new animation in the right hand margin.

Reading Bond Papers could lead you to form opinions that differ from the pap you usually hear and read.

Don't say that you haven't been warned.

-srbp-

No one saw this coming.

Yeah, right.

From the Iron Ore  Company of Canada's news release:

IOC responding to the steel industry slowdown

(Canada) Sept-Îles, Labrador City, November 28, 2008 – Global iron ore demand has reduced as a result of the slowdown in the steel industry and the global financial crisis.

A range of measures are being introduced by Governments around the world to stimulate their economies, and we expect that iron ore demand will improve in the medium term.

With this in mind, IOC has announced to employees and its community that it is taking prudent action to respond to reduced demand for our products.

IOC is making the following decisions in the interests of our people, our communities and the Company:

• The shutdown of one of our six pellet machines for an essential maintenance rebuild and a second pellet machine rebuild will follow sequentially.
• All production, except for the Mine, some rail and shipping from the Terminal in Sept-Îles, is planned to be suspended for a four week shutdown period in July 2009, during which time most employees would take their vacation.
• A review of our expansion programs.
• No layoffs of permanent employees are being contemplated at this time.

Take note especially of the third bullet:  "A review of our expansion programs". 

Rio Tinto's entire global operation is currently reviewing operations and capital expenditure commitments.  IOCC is no exception.

-srbp-

No more midwives and a raft of busy work in front of NL legislature

Take a look below and you'll see the bills on the government order paper for the fall sitting.

Looks like a lot of stuff.

But looking more closely and you can see an unbelievably light sitting.  Now that's amazing- appalling to some - considering this is coming from a government that has been over a year in office on its second mandate and that hasn't sat in the legislature since last spring.

The current administration is planning to repeal a $4000 award for students pursuing pre-doctoral studies in history and political science.  Not replace.  Repeal. The award was established in 1968 to honour jack Pickersgill, one of the architects of Confederation and for many years the province's cabinet representative in Ottawa.

They will repeal - not replace - an act aimed at controlling venereal disease, another allowing midwifery, and two acts separately to repeal the agreement transferring the old Labrador Linerboard Mill to Abitibi.

Most of the agenda is routine and in many cases the repeal of spent statutes, like the ones related to Labrador Linerboard could have taken rolled into one omnibus bill.  In the case of the Linerboard bills, they should have been repealed when the Stephenville mill closed two years ago on Danny Williams' first watch! Likewise, The school boards association act ought to have been repealed when the school boards were abolished by the current administration in favour of the entirely unwieldy school districts.

All these repeals are only separated out into individual bills in order to make it look like more is being done than actually is.

As for the repeal of health statues, that would normally be done by replacing them with another.  A new midwifery act - long overdue in the province - would have a clause at the end getting rid of the old one. Instead, midwives are no more. At one point there was an implementation committee to oversee the introduction of new legislation but clearly that is now dead but as minutes from a 2007 meeting attest, government has been headed down the road of abolishing midwives for some time.

Repealing the statute aimed at combating venereal disease makes no sense on the face of it.  Perhaps there is good reason but there is nothing government has said so far - it has said nothing at all - which suggests that venereal disease is no longer an issue in the province.

This list of bills is a sign the current administration, after only five years in office, has run out of whatever ideas it had.

-srbp-

• An Act To Amend The Provincial Court Act, 1991 (Bill 50) [
• An Act To Remove Anomalies And Errors In The Statute Law. (Bill 53) [Routine piece of legislation that fixes misplaced punctuation among other things]
• An Act Respecting The Practice Of Dentistry. (Bill 61)
• An Act To Repeal The Venereal Disease Prevention Act. (Bill 58)
• An Act To Repeal The Private Homes For Special Care Allowances Act. (Bill 57)
• An Act To Repeal The Midwifery Act. (Bill 56)
• An Act To Repeal The Homes For Special Care Act. (Bill 55)
• An Act To Repeal The School Boards’ Association Act. (Bill 54)
• An Act To Amend The Student Financial Assistance Act No.2 (Bill 52)
• An Act To Amend The Mineral Act. (Bill 62)
• An Act To Amend The Forestry Act, No.2. (Bill 65)
• An Act To Amend The Rooms Act. (Bill 64)
• An Act To Amend The Management of Information Act. (Bill 63)
• An Act Respecting Fire Protection Services in the Province. (Bill 60)
• An Act To Provide For The Organization and Administration of Emergency Services in the Province. (Bill 59)
• An Act To Amend The Highway Traffic Act. (Bill 66)
• An Act To Amend The Securities Act. (Bill 49)
• An Act Respecting Certified Management Accountants. (Bill 51)
• An Act To Repeal The Pickersgill Fellowship Act, Bill 4
• An Act To Repeal The Memorial University Foundation Act, Bill 42
• An Act To Repeal The Labrador Linerboard Limited Agreement Act, 1979, Bill 47.
• An Act To Repeal The Labrador Linerboard Limited Agreement (Amendment Act), 1979, Bill 48.
• An Act To Repeal The Newfoundland And Labrador Computer Services Limited Amendment Act, Bill 46.
• An Act To Amend The Real Estate Trading Act, Bill 39.
• An Act To Repeal The Corporations Guarantees Act, Bill 43.
• An Act To Repeal The Certified Public Accountants Act, Bill 44.
• An Act To Repeal The Chartered Accountants And Certified Public Accountants Merger Act, Bill 45.
• An Act To Amend The Income Tax Act, 2000 And To Repeal The Financial Corporations Capital Tax Act, Bill 38.
• An Act To Amend The Arts Council Act. (Bill 40)

That's gotta hurt, privilege version

Government House leader Joan Burke raised a question of privilege in the legislature on Tuesday over comments made by opposition leader Yvonne Jones after the chair of the House management committee - Provincial Conservative member and Speaker - Roger Fitzgerald voted with the other Conservative members of the commission to vote money for the two other parties but deny the Liberals.

Fitzgerald offered no reason for his vote leaving most people to believe he was just following the lead from the government benches.

Burke was stupid to raise the petty partisan issue of the money vote again, let alone ensure the issue got dealt with on Wednesday with opposition house leader Kelvin Parsons giving a pointed one hour speech against the question of privilege.

Fitzgerald ruled against Burke on Thursday.

Maybe he saved Burke's bacon by killing the issue.  Maybe he was jammed up with the argument Parsons presented.

Either way, it must have stung both Burke and Fitzgerald when he ruled against the government.

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Reality would be nice for a change

From the House of Assembly:

PREMIER WILLIAMS: Thank you, Mr. Speaker.

In all fairness to the hon. Leader of the Opposition, she wasn’t there in the scrum yesterday when I indicated exactly what the government’s position was, but I am at a loss to understand - in a situation where CUPE have already accepted what is considered to be a very, very generous wage package of eight, four, four and four over four years, which is front-end loaded, which compounds outs to be 21.5 per cent, we have now seen that PSAC, the public service union, has accepted 6.8 per cent over four years, the Prime Minister of the country, who has referred to the present economic situation as a dangerous situation, and he has also referred, after the G-20 meetings, to it as a near-depression possible situation, and just this afternoon we heard the Opposition House Leader refer to it as a crisis – under those circumstances I am at a loss to understand why I would be considered to be threatening unions when I am indicating to them that if, in fact, the prophecies of the Prime Minister, or even the Opposition House Leader, actually come true and we end up in a depression or a near-depression situation, why they would not take a 21.5 per cent offer right now, when they can have it and when they can get it, rather than in a situation when we are forced to choose between health services or education services or drugs, and not be able to give them that offer.

That was a dose of reality, it was recognition of a very difficult world situation right now, and it was an opportunity, I think, to be frank and open and honest with the people of the Province.

Okay.  Let's have a little dose of reality.

It's not like the 21% comes in the first year of any deal, even if signed tomorrow, retroactive to the first of April.

Only 8% is retroactive.

So if all the public sector unions signed a deal today, the only thing they would be guaranteed getting is 8% more this year.

After all, by the Premier's own words:

the statement that I made very clearly said that if oil stays at the price that it is today we would have no choice than to not offer that same wage package under those circumstances because we would be facing multiple deficits of several hundred million dollars every year starting next year.

The awkward grammar of that sentence notwithstanding, it's pretty clear the Premier is saying that after this year there is no guarantee of anything since large public sector deficits would mean the provincial government wouldn't be able to honour wage increases of the kind being offered today when it supposedly has the cash.

But does it have the cash this year even though the Premier put it this way in the legislature:

We will have a good year this year. I indicated yesterday, just outside this House, that we will, in fact, exceed our surplus this year, even if the price of oil is at $50.

The answer is yes, but they will do it by running a deficit and borrowing hundreds of millions of dollars, just as the budget planned to do all along. Incidentally, at US$50 a barrel the provincial deficit would likely be more than $478 million this year.

The problem next year is that the budget deficit next would be even larger than the one likely in this year if you assumed oil at .

Remember that when the Premier talks surplus he's talking accrual accounting.  You have to subtract $360 million in imaginary money to get a sense of the real number.  What we are using here is the budget as presented in the House, which uses a modified cash basis of accounting.

Let's hold all things as they are in the current budget.  Now that's a bit artificial since even this year mineral revenues are dropping and just about every category of revenue should be taking a dip in the second half of the year.  What with the Premier threatening possible wage freezes, cuts or rollbacks or anything but the happy increases promised before, he's likely sending a huge chill across consumer confidence.  So it's artificial but let's focus on oil to illustrate the scope of the government's problem.

Given:

1.  Price = US$50 per barrel.

2.  Exchange rate = 25%.  That's actually higher than the rate I used before.

3.  Annual oil production = 105 million barrels

Therefore:

4.    Provincial oil royalty = $1.115 billion.

That's $600 million less than this year's starting point in the budget and, as you are now tired of hearing, the original budget projected a cash shortfall of $414 million plus an additional round of "off book" borrowing of $380 million.

Does anybody really think the provincial government could offer any wage increases with a deficit of $1.3 billion? 

Of course not.

Plus they know the Premier's wages versus social programs dichotomy is entirely false since the largest chunk of program spending is wages. 

All the Premier has succeeded in doing the past couple of days is further eroding public confidence in the local economy and the provincial government's ability to ride out the financial crisis the Premier likes to talk about to claim. 

Well, that is talk about when he doesn't want to forecast doom in order to frighten people as part of his brilliant negotiating strategy.

What we end up with isn't a dose of reality.

We just get someone shaking the magic eight ball again.

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Rio Tinto to release results of OPEX/CAPEX review earlier than planned

In the wake of the end of talks by BHP to take over Rio Tinto, the latter is reviewing the books to reassure the marketplace despite the company's $42 billion debt load.

The capital expenditure (capex) and operating expenditure (opex) reviews were slated for release in February 2009, but it now appears Rio will release the results earlier.

In the wake of the BHP pull-out, BHP's stock has risen while Rio has dropped about 34% in value.

Rio Tinto owns a 59% interest in the Ironore Company of Canada (IOCC).

Now word thus far on what if any impact the Rio capex review will have on IOCC's planned three phase expansion at its western Labrador operations.

The expansion was recently cited by Memorial University economist Wade Locke as evidence supporting his projection that markets will recover relatively quickly and return to pre-collapse conditions based on "the fundamentals":

In historical terms, commodity prices are still strong, he explained, and there are positive signs everywhere. He singled out the confidence shown by the Iron Ore Company of Canada in Labrador West, where a major expansion is planned.

"That should tell you everything you need to know. That company believes the future is bright for them and they're increasing their capacity now to take advantage of an improving situation in the future," he said.

Locke made his comments last weekend. News of Rio's capex review came in mid October.  BHP withdrew its offer before Locke's comments appeared in The Telegram.

In early November, Locke hinted at an unidentified major development coming in Labrador.

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Three guys and a magic eight ball

The Premier's first scrum of the new House of Assembly session yielded a huge number of interesting points.  CBC has posted it for your viewing pleasure.

1. Back to the future.  There are echoes in this scrum of the infamous January 5 massacre in which the Premier unilaterally froze public sector wages in response to a largely overblown warning of imminent financial collapse. [Update:  "Premier vows public sector wage freeze". 05 January 2004.]

Most media outlets are going to focus on the possibility that government would abandoned its own wage hikes in the public sector if things got bad enough. CBC did already.  Ditto voice of the cabinet minister and NTV.

It's right there in front of your face and there is immediate news value in the conflict.  Remember what makes news?  Money, power and conflict for three and when you get into this sort of thing - a Premier warning public sector unions actively involved in collective bargaining that he might just yank back his own offer -  you bring together a nice package.  Hence this sort of quote is pure gold:

"You know if we get into several-hundred-million-dollar deficits, then that makes the whole question of collective bargaining a big issue," he said, answering reporters' questions after the first day of the fall session of the House of Assembly.

[Update:  This is not the first time the Premier has used a message about government finances to threaten unions.  He did it in late October with the nurses.  Meanwhile, go back and check the scrums and news reports when this massive wage hike was introduced or when the nurses asked for more cash.  How many times did the Premier and the finance minister talk about being able to handle the 20% wage hike they imposed?  Did they ever mention the possibility that they might not be able to manage it?]

2.  The Big Picture stuff is done.  That's almost a direct quote and no one should miss putting that fact together with the public sector bargaining threat noted above.  By Big Picture, the Premier clearly means revenue and spending projections for next year and looking out two to three years.  The only stuff left to do is the actual departmental allocations and the traveling farce called "consultations".

By Big Picture, you have to understand that all the numbers thrown around by the Premier aren't just ones he pulled out of his ear.  These are the numbers the provincial government is working with for its projections.

3.  What's the big thing about reading?  Danny Williams likes to mention that he is reading stuff, although he is never clear what he reads.  He said "books" in the scrum - economics books to be specific - and then switched to journal articles and magazines and anything else he could lay his hands on. 

Sarah Palin talked about reading too, at least until reporters started asking her what she read.  How long before someone actually asks the Prem for some specifics on what he reads?

4.  No coincidence at all.  Remember the comment here about the overwhelming similarity between Wade Locke comments and those of the Premier and his newly minted finance minister?  Apparently no coincidence at all since the Premier admitted that economists from the university are on the Hill consulting.

At some point, reporters will have to clarify Locke's relationship with the provincial government.

5.  "No one could foresee what was happening here."   No one foresaw the drop in oil prices according to the Premier. He is evidently not reading the right things. 

6.  PIRA.  That would be the PIRA Energy Group, a consulting firm to the international stars. Their prediction in July was that oil prices would drop, but remain above US$100 a barrel based on "strong medium-term oil market supply/demand fundamentals."

7.  Production.  Count how many times the Premier mentions oil production, the possibility of increased production over projections and the importance of oil production levels  - conservative estimates according to the Premier - to the government budget. 

We know the provincial government has built its entire financial plan on oil revenues.  It's a house of cards, as the current economic crisis shows.

The budget was based on anticipated oil production in 2008 of 120 million barrels. Statistics from the Canada-Newfoundland and Labrador Offshore Petroleum Board show that oil production this year has averaged 10.3 million barrels per month and is therefore on track to deliver total annual production in this fiscal year of 123.6 million barrels. 

The highest offshore oil production level was last year when it hit 134 million.  In order to get the higher production the Premier keeps talking about - and therefore equal last year's record  - there'd have to be about oil would have to average over 12 million barrels per month in the last six months of the year.

Next year, production is expected to fall by 15% and that would give 2009 annual production of about 105 million barrels.

Remember those numbers.  We'll use them again in a minute.

8.  There's a notional surplus... The provincial budget projection was for a $544 million surplus.  That's presumably on an accrual basis. The same figures turn up in the Dominion Bond Rating Service assessment. Here's the thing:  it includes $360 million in completely fictitious money from the 2005 federal transfer deal that has already been received and spent.

9.  and a cash deficit.  Every time someone says the province is on track to meet budget targets, people in the province should worry.  We've covered this dozens of times at Bond Papers because on a cash basis, budget targets means $794 million in new borrowing.

Based on the new numbers, we can revise our calculations from October slightly.

Over the first half of the year, let's assume oil averaged about $120 a barrel.  That's a figure the Premier has tossed out and it's a little higher than the $115 Wade Locke mentioned.  That gives about $1.26 billion in oil royalties in the first half of the year.

In the second half of the year,  we can safely assume oil at an average of CDN$72 (US$60 + 20% dollar premium) and CDN$87 (US$72.5 + 20% dollar premium) for the purposes of our calculations.  We can also anticipate that other revenue sources (taxation etc) are not going to outperform original projections by any great amount. If they were looking that good, the Premier wouldn't hesitate to use them to bolster public confidence.

On that basis, the provincial budget would come up - respectively  - $478 million and $320 million short.  Compared to the projected $794 million shortfall that's not a big amount.  Spending restraint and a little extra cash here and there could balance the books on a cash basis. 

Don't count on that, at least if the last two fiscal years are anything to go by. 

10.   Then there's next year.  If we hold the budget exactly as it is this year  - anticipated spending and revenue - and vary only oil, we can get a sense of how big a financial problem the provincial government has helped create.

Oil production is expected to come in at about 105 million barrels in 2009.  Peg oil pessimistically at CDN$72 (US$60 + 20% premium) a barrel and you get oil revenues about $500 million less than this year's estimate.

That projected $794 million deficit (cash basis) this year becomes $1.294 billion in the red next year.   Unlike previous years where the trend was positive and the budget figures were low-balled, odds are much higher that the low-balls turn out to be dead-on if not downright pollyannaish optimistic.

If AbitibiBowater closes its mill in Grand Falls-Windsor, and mineral prices fall off, that deficit number would get bigger not smaller. As well, the prospect that Rio Tinto might adjust its capital expenditure plans next year could reduce some anticipated activity in Labrador west.  All of that is just a local manifestation of the recession expected in the United States and Canada, our major trading partners.

Bottom line:  we aren't protected by some magic bubble. These are rough calculations, to be sure and the figures aren't readily available to allow a more accurate and detailed assessment.  At the same time, the people who do have that information aren't sharing the accurate assessments.  The Premier's scrum on Tuesday covered such wide territory that one could easily imagine the finance department is relying on three guys and a magic eight ball for its planning.

Thankfully that isn't the case, at least based on the well-earned reputation of the finance department officials for deadly accurate forecasting and sound budget management. That's pretty close to what PriceWaterHouseCoopers said in their financial assessment in late 2003.  Then again that was before the current crowd took over. Things haven't been quite as accurate or as clear since then.

Let's just pray that the future as suggested by the calculations here doesn't turn out to be as bad as it looks.  If the current political crowd took credit for the boom delivered by things beyond their control - like oil prices - they can hardly expect people to think that a major fiscal problem in government isn't also theirs to own.

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Government spending news roundup

1.  The Canadian Centre for Policy Alternatives predicts the federal budget deficit might hit $27 billion in 2009 and nearly double that the year after.

The report re-estimates the federal fiscal picture for four economic scenarios — each more pessimistic than the last — under existing tax and spending policies.

• The first scenario, in which the economy slows but avoids a recession, yields a deficit of $7 billion in 2009-10 and $5.4 billion in 2010-11.
• The second, involving a mild recession in 2009, yields deficits of $12.6 billion in 2009-10 and $20.5 billion in 2010-11.
• The third, involving a deeper recession, yields a deficit of $19 billion in 2009-10 and $31.3 billion in 2010-11.
• The fourth, involving a major recession and slower recovery, yields a deficit of $27.9 billion in 2009-10 and $46.8 billion in 2010-11.

2.  British Columbia will post a $450 million surplus this year, down from $1.0 billion projected at the start of the current fiscal year. That news in the latest budget update from finance minister Colin Hansen.

3.  Federal finance minister Jim Flaherty is planning to rush public works spending in the coming budget as a way of stimulating the economy.

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Reality, what a concept: the global economic crisis version.

Only a few short weeks ago, some were wringing their hands over the imminent peril of the perils of inflation.  This was despite the obvious signs of a looming market "correction".

How long before they notice the scope of the problem and the current deflationary pressures?

Meanwhile the state-approved economist had another go at prognosticating in the Telegram on Saturday.  Sadly, the story isn't on line. [Afternoon update:  Courtesy of The Western Star.]

On top of his prediction last month that the the provincial government surplus will be as large or larger this year and originally forecast (and that prediction after the global meltdown started mind you) he is now saying that the economy will recover from the current crisis.

Well, of course it will. A penetrating insight into the obvious is that.

Outside of a few anarchists, everyone knows it will. Even in the 1930s after the Great Depression, the economy rebounded, eventually.

The question is not whether it will turn around but what will it look like when it does recover.

Pretty much like it did before - think 2006 with oil running at 80 or 90 bucks a barrel - apparently, since all the "fundamentals" that led to high oil prices are still there we are told in the Telegram story.

Really?

Well, at least, according to the state's favourite economist.

Like the ridiculous credit situation in the United States that fueled demand to heights never seen before. 

Yep.

That will exist after the current mess is over. 

After all, it is one of the fundamental causes of the demand spiral.

Now one of the things to bear in mind through all this is that in 2004 or 2005 you wouldn't have found an economist on the planet seriously suggesting oil at US$90 a barrel let alone US$150.  Those predictions didn't emerge until oil hit close to 150 and even then Goldman was thought a bit loopy to be tossing around 200 bucks by the end of 2008.  These days not too many are willing to buy into the current Goldman idea of oil being over $100 again next year.

That's because economic forecasts have a distressing tendency to rethink the future in terms of the here and now. As oil prices climbed above first 40 and then 50 and then 70 dollars, you started to see more and more revised forecasts for oil staying that those prices into the future.  A few months or years earlier and none of them seriously projected 50 let alone the heights it reached.

Apparently, it is taking some people a while to realise the scope of the current problem.  It isn't limited to the financial services sector and the automobile sector in North America, as if it was merely a couple of companies.  There is a broadly-based - fundamental - problem and as such it will have an impact both in time and across all sectors of the economy.  [Aside:  some analysts provide a refreshingly sober view of things, as in this video from CBC Here and Now.] 

You'd be silly to think we don't have a problem right now, but you'd be equally silly to think that a correction of this magnitude isn't going to alter some of the conditions that existed beforehand and which led to the current mess.  Fundamentally altering the fundamentals will likely produces a very different situation, and that likely doesn't mean one that will see oil shooting up to US$100 a barrel any time soon.  To be sure, let's make it plain that it isn't likely to occur again for a couple decades, much like the last time this sort of pattern  - high climb and then sudden price collapse - emerged.

Some companies will continue expansion plans.  This will especially apply to companies that are well managed or that secured their funding for expansion before the string of bank crashes.  Think IOCC in western Labrador.

That's proof of a well managed company, not any sign that the company believes in historically high prices for iron ore on into the future.  Rather the company management likely knows that by lowering costs whenever it can, the company is more likely to thrive even in lean times. That's how oil companies do it.

Smart business managers don't budget on the basis of historically  - and in some instances absurdly - high prices continuing forever just because they happened a couple of times.

Governments shouldn't do it either.

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Hebron negotiations secret video footage

Vote early! Vote Bond!

The first round of voting for the Canadian Blog Awards is underway!

Click on the big picture of Sir Robert and you'll go straight to the main page. Bond Papers is nominated under Best Blog and Best Political Blog.

You can also click this massive banner right here and wind up in the same spot.

Remember, it's only one vote per category so vote early, vote wisely and harass your friends to vote as well.

The are some great blogs to vote for, including Craig Welsh's Townie Bastard.  Craig has blazed trails in the Great North and his blog is a fine example of his considerable writing talent.

Wally Maclean's labradore is also worth your vote consideration.  He's had a huge impact locally.  Sometimes it seems his blog doesn't get the attention it deserves directly but you'd be surprised at the number of places his stuff shows up.  That's because it is solidly researched.  If you want a fact or want something straightened, check labradore.

Take your time, though and go through the categories.  You can also find links to each blog on the bottom of each category page if you need some time to make up your mind.

Just get out there and vote and to all those who vote Bond, thanks so much for your support.

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We are not alone!

No.

Not aliens.

Who needs to be an independent country when you can have a rubbish government fiscal policy just like the big boys?

All of this should sound very familiar;  only the amounts vary.

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The Gospel according to Chip Diller

Newfoundland and Labrador is usually one of the last places to catch a trend.  Doesn't matter if you are talking fashion or, in the latest version, government economic and fiscal policy, it seems to take a while for things to catch on here.

Late on Friday afternoon newly minted finance minister Jerome Kennedy issued a news release trumpeting a credit rating by Standard and Poor's as proof of the provincial government's "fiscal prudence and sound policies". 

Well, maybe catch up is the better word.

There isn't a government left in the developed world that is still pushing the sound fundamentals media line now almost two months after the start of the current global economic crisis.  No government is claiming some sort of credit for being able to weather a storm that, in many minds, is far from over.

Well, no government except the one here.

If you want to understand why everyone else's tune has changed, take a look at the five year trending in crude oil prices. You can find an example in the WTI futures box on the right hand column.  Click on the "5Y" symbol. 

Four years to get up to US$147 a barrel and a mere four months to tumble below US$50.  The steepest declines have come in just the past two months.

The speed of the price collapse should be a clue to analysts that the assumptions used before July to predict that oil would remain at unprecedentedly high prices for the rest of time were faulty.  The security premium, supply concerns and overheated speculation drove prices to the peak last summer but in addition to all that the superheating of the global economy, fueled by loose American regulations pushed things beyond anything that would be considered normal and rational.

In other words, the price of oil has been artificially high for a very long time. Given that markets have a way of correcting themselves at some point, it was really only a matter of time before a correction - a downturn - took the heat out of things.  The only thing that couldn't be foreseen, and that's about the only thing, was how steep a correction was coming and how it might last, but come it would as surely as it has come at every juncture in the past.

Fewer and fewer analysts are holding to the old projections, some of them dating back several months. Some of the more influential sources, such as the International Energy Agency, are forecasting high prices.  However, many are revising their short term projections markedly downward.  Deutsche Bank, among others, is projecting crude at US$40 per barrel by April 2009.  One analyst  - Robin Batchelor - who in May 2008 predicted high oil prices well into the future is now likening the current climate to one 30 years ago:

"On the upside it always overshoots and the same is true on the downside. What I’m looking at is the commodity supply and demand equation; long term there are still supply issues but on the demand side we’re facing downdraft," he points out. "The last time we had a fall of that magnitude was in 1979/80/81."

While Batchelor for one has not abandoned his high price forecasts, he has certainly altered his view dramatically. The reason is simple.  While he and others once assumed ever increasing demand, the current correction may alter the demand side of the price equation that can't be seen right at the moment. If the current downturn lasts well into 2009, as most expect, the IEA, among others, will likely go back and rethink their projections just as they revised their assumptions three years ago when they thought US$50 a barrel was the peak.

Closer to home, though, the hope in the old assumptions remain strong close to home. This week, economist Wade Locke told Memorial University's student newspaper The Muse that:

“The longterm [sic] price forecast is still in the $80- to $90-range for oil and that will not affect Hebron, White Rose Extension, or Hibernia South. Even if [oil] prices were to stay around $60, these projects would likely proceed,” he said.

Locke's comments are a useful segue to an interesting aspect of the local view from the provincial government and its supporters.  Locke certainly falls into that category and the similarity between his comments and those of the finance minister are striking.  With that quote from The Muse in mind, take a look at this one from the release on the credit rating:

"Our economy remains strong and the current economic downturn should not affect development of new oilfields including White Rose Expansion, Hibernia South and Hebron," said Minister Kennedy.

The phrasing is similar, much like the similarity in early October between Locke's and the Premier's references within days of each other to the government being able to meet and exceed its current budget targets even if oil falls to $10 a barrel.

But what's more interesting in these two comments is that neither is completely true and in the wider context of Locke's comments on a bright future based on oil wealth, they constitute a fixation on oil as the source of economic salvation not seen in this province since "1979/80/81."

Let's deal with the projects first.

The White Rose expansion is a relatively modest project.  With its development costs already recovered, oil would almost have to hit prices lower than the historic 1992 price of  US$8  per barrel to make it economically dodgy.

The Hibernia South extension is also not a pricey project measured in terms of the original Hibernia project or Hebron.  However, there is no development application yet and a decision to proceed would certainly be affected by oil prices significantly lower than the current ones.

In all likelihood, the project will go ahead given that the oil companies have at their doorstep a provincial government willing to invest hundreds of millions of very scarce tax dollars in the expansion since that ultimately lowers their cost.  Given they will have recovered their initial costs by the time the new fields come online, their profit position would improve immensely in such a scenario while it would be the junior partner who would see a relatively lower return on investment. Low oil prices - especially below the foolish fixed price trigger of the current government's oil super-royalty regime  - won't affect them as much as it would the new kid in the oil patch.

Hebron is the most costly of three projects and the one most likely to be affected by a long period of low prices. Analysts seem to agree that the current price climate makes investment in high cost ventures like offshore heavy oil, deep water projects and oils sands less attractive.  Hebron's reported financial tipping point  - US$35 per barrel - is well below that of an oil sands project but stop and look at current prices.

There's a reason why the companies insisted on a clause in the Hebron agreement which gave the partners  - and the partners alone - the right to take up to a decade to sanction the project.  Current Hebron timelines are merely works in progress, subject to revision is the financial climate changes.

The upside for Hebron is that the companies managed to secure several significant concessions from the provincial government as hedges against a drop in oil prices. Those concessions make it more likely the project will proceed.

First, they secured the decade to sanction with no penalty for deciding against proceeding. They have time to decide and there is no real cost for delaying if the numbers don't add up.

Second, they won the royalty concession that dropped the pre-payout royalty to a fixed 1% as opposed to the escalating scale of the old royalty regime.  The energy minister herself heralded this as a major feature of the new deal.

Third, they were able to tie the super-royalty to a fixed price below which no extra cash was paid to the provincial treasury.  By the government's own estimate, oil prices averaging US$50 a barrel over the life of the project produced less than half the royalties of a high oil price.  Drop below that magic fixed trigger and the provincial share drops accordingly on top of the front-end royalty concession but from the company standpoint they can guarantee low possible costs across the board.

Fourthly, they secured significant fabrication concessions in the agreement.  Most of the topsides work will be done outside the province anyway based on what appears to be a huge miscalculation by the provincial government's negotiating team. 

On top of that, however, the management arrangement  - including the provincial government as junior partner  - would enable the companies to ship virtually all the topsides work and associated engineering outside the province in order to lower the costs and complete the project on time. If oil prices stayed low enough long enough and construction costs stayed high enough, it may well be worth the companies' while to pay the modest penalties for changes in the work commitments to get the deal done, even if they had to pay the penalties at all.  A renegotiated contract arrangement with the provincial government's energy company and the government that changed the work commitments would likely never be made public under the revisions to the energy corporation act passed last spring.

The companies may well get their projects, but the return to the provincial treasury and the overall impact on the local economy may turn out to be far smaller than originally promised.

The fundamental problem in all this is the fixation on oil projects which has led the provincial government and its supporters to tie government finances to the price of a barrel of oil.  Despite all assurances to the contrary, the next several years may be see provincial government fiscal problems as unprecedented as the surpluses of the past two or three years. Unlike those surpluses, however, the problems won't be figments of an accountant's bookkeeping methods.

Beyond that, prosperity for the province as a whole, in Locke's view, appears to be driven entirely by a couple of oil projects which, it must be noted, have a fixed life span.  Neither Locke nor Kennedy - who echoed Locke's definition of prosperity - have not realized the folly of resting everything on the a very slippery commodity.  

Oddly enough, it fell to Donna Stone, president of the St. John's Board of Trade to sound a very small warning bell against this very situation.  Board of trade presidents are not known to buck the government line so her words stand out.  As Stone told the Rotary Club of St. John's:

“This still gives us some cause for concern, however. Given the volatility of oil prices, the province should look at a long-term plan that will diversify our economy and make us less dependent on this ever-changing commodity,” Stone said.

Stone is absolutely right.  Almost 20 years ago, the provincial government realized exactly that and implemented a broadly-based strategic economic plan to hedge against such dependence.  That plan has been tossed aside in the  past four years.

The consequences may prove to be dire and no amount of assurance that all is well will save us from the them.

Just remember what happened to Chip Diller.

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Hebron timelines according to proponents

Based on the Telegram story Thursday by the always rock solid Moira Baird:

1. Development application submitted no later than December 2009. Obviously the project sanctioning decision will come before that based on the final project design and economic analysis.

2. Construction to commence 2012. That is pretty much in keeping with the timelines projected in August when the provincial government announced the final agreement.

3. First oil: 2017. Again that's pretty much on the timelines forecast already informally which had first oil somewhere around 2018.

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How low?

West Texas Intermediate (WTI) crude for December delivery fell below US$50 in trading on the New York Mercantile Exchange Thursday on projections of continued lower demand. WTI fell as low as US$48.24 in trading, but at 1630 hours Eastern, Bloomberg was showing the price as US$49.00.

December contracts closed today, shifting attention to January delivery.  WTI for January fell to US$49.42.

WTI is the benchmark  price quoted in media reports even though 80% of the world's light sweet crude  - including the Newfoundland and Labrador offshore  - is traded based on pricing of North Sea Brent. 

Brent for January fell to US$48.08 on Thursday.

Many are wondering where the bottom will be for crude prices.  WTI has been above US$50 since September 2004 and it is likely that sustained period that led many analysts to forecast - and to continue to forecast - high oil prices into next year.  Associated Press reported Thursday that Goldman, the analysts who had earlier said oil would hit US$200 a barrel by year end, have stopped oil trading recommendations.  The company is sticking by its forecast that oil will rebound to US$107 by the end of 2009.

Those sorts of analyses are getting harder to find, however.  As Bloomberg reported:

Prices may fall as low as $40 a barrel by April, Deutsche Bank AG said in a report yesterday. The Organization of Petroleum Exporting Countries potentially needs to cut production by 2.5 million barrels a day to reduce output in an oversupplied market, the note said.

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Alberta commission recommends banking oil cash

A commission struck to advise on how the Alberta government should handle its oil revenues is recommending the provincial government devote more to the Heritage Savings Trust Fund.

The Alberta Financial Investment Planning and Advisory Commission said in its report that Alberta needs to boost the size of the fund to $100-billion by 2030, compared to just $15.8-billion now.

Bear in mind that Alberta can bank extra cash since it has already eliminated the provincial government's accumulated debt load.  It also salted some of its revenues in the Heritage Fund.

Meanwhile, the current provincial administration has opted to spend all its oil revenue and specifically rejected the idea of an savings or investment fund or indeed of actually reducing the provincial government's debt burden.

The argument about devoting some oil revenue to savings and investments is compelling:

“To preserve today's prosperity and pass on the benefits to current and future generations of Albertans, we urge [the government] to make savings the new fiscal anchor for Alberta,” the commission said.

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Aluminumania!

Oh yes, there'll be a smelter for sure in Labrador.

Aluminum prices hit a three year low.

Perfect time for a company to hit up a willing government for some Valdmania cash.

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Paying for work

The provincial government's business department is tossing $325,000 at an international, private sector information technology company so the company can create 10 new jobs over the next five years.

$325 K

10 jobs

Five years.

Do the math.

That's 32,500 per job, or $6,500 for each position for each of the five years.

That's pretty much on par with the current administration's plan to develop new jobs in the province by subsidizing with public sector cash.

Within the past two weeks, the provincial government did the same thing with more public cash for a private sector manufacturing business and its facility on the Burin Peninsula:  $500 K for an extra 30 jobs and that's on top of the subsidies to get the workforce to its current level.

This use of public cash  - including low cost power - for the private sector mirrors what was done here in the 1950s and 1960s in the disastrous Smallwood industrial development program. 

It's an idea that was rejected in the 1992 Strategic Economic Plan.  There's good reason for it. Subsidizing private sector businesses like this doesn't have the greatest record of success, at least when it comes to creating sustainable, competitive industries.

No small irony that the money for a software company  - singled out by the auditor general - comes days after another software developer that relied heavily on public sector cash closed its doors.

Another recipient of provincial cash imploded just months after getting the cheque.

Major national cable and telecom companies aren't likely to fold, but they sure loved getting a massive cash injection from the provincial government to subsidize their expansion projects.  The total cost of that one hasn't been calculated yet.

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NL crude hits $51

Brent crude for January delivery hit US$51.84 in trading on London's commodity exchange Tuesday, the lowest settlement since January 2007.

Brent is the benchmark price for Newfoundland and Labrador light sweet crude.  Such a low close for January crude, and even allowing for a 20% currency premium - virtually guarantees that crude prices in the second half of the current fiscal year will average well below the government's assumed average of US$87 a barrel for the entire year.

In Alberta, the provincial treasurer today announced his province would lose $6.5 billion in revenue this year due to the economic downturn and lower oil and gas prices.  The 2008 Alberta budget assumed an average price for crude of $78 per barrel.

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Government packs board of regents with political cronies

In a late afternoon news release, the provincial government moved to increase its political control of the Memorial University board of regents.

Bob Simmonds - Jerome Kennedy's former law partner - is the new chair. Three of the remaining five appointments, like the new chair,  all have strong ties to the ruling Provincial Conservatives.  The last is the wife of the late principal of Grenfell College and therefore a supporter of the government's costly "autonomy" scheme. 

These moves will ensure that cabinet's will is imposed the university.

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Where the NL MPs sit - the despun version

At left is a seating plan for the opposition benches in the current session of the House of Commons. 

The seating chart is laid out from the perspective of the speaker, who would be positioned at the bottom edge.  These seats are to his right.

As the largest opposition party, the Liberals sit closest to the speaker's chair.  Next come the Bloc Quebecois and at the top of this picture - farthest away from the speaker - are the New Democrats.

The orange coloured squares show the members of parliament from Newfoundland and Labrador.

1.  The Liberals are seated from front benches to rear in order of precedence, that is in the order they were elected.  Thus, Gerry Byrne sits in the second row from the front (second column from the right in the picture).  Todd Russell and Scott Simms come next and in the back are the three newbies, Judy Foote, Siobhan Coady and Scott Andrews.

2.  That lone seat way down the back, right next to the door and almost the farthest away from the speaker of any seat in the Commons is Jack Harris.  He may be in the front bench but, since the parties have largely done away with the old practice of seating shadow cabinet people on the front benches, Jack has a seat that means something only within the New Democrat caucus.

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The bits they didn't say

A youth conference discussing ways of keeping young people in the province.

A speech by the Premier, including the comment:

"It is by making sound choices in the coming years, both individually and as one team, that we will be able to remove the word 'outmigration' from our vocabularies in the same way that we removed the word 'have-not,' " Williams said during a speech.

That quote from a CBC news story includes comments from two participants, one of whom uses very familiar phrases:

"I don't think it needs to be Alberta wages," Snow said. "I'm not looking for Alberta. I love Newfoundland and Labrador and I love St. Anthony. I just want to stay — Newfoundland is home."

The old homing pigeon drive.

or these comments from the voice of the cabinet minister version:

Twenty year old St. Anthony native Kara Snow says Newfoundland and Labrador is a proud strong determined province and the people here have a lot of things to show that.

Jonathan Earle from Red Bay, Labrador says he thinks the Youth Retention and Attraction Strategy is a step in the right direction.

Proud. Strong. Determined.

Nothing like a political party slogan or, for that matter, a fellow attending the conference.

And Kara and Jonathan are, evidently just two young people attending this conference, they being typical of young people across Newfoundland and Labrador who are, quite naturally interested in these things on a go forward basis.

Typical they might be but they do have a couple of features that make them stand out, features left out of the news stories.

Like the fact that the conference or summit was by invitation only, meaning that those in attendance were selected by the provincial government and its hired consultant.  Not so much a gathering of people driven by their own interests as much as a carefully selected group.  Carefully selected according to some unknown criteria;  perhaps their ability to spout talking points or their enthusiasm for the official views.

Certainly it is not for new ideas since the original news release and the stuff just recently speaks of discovering what young people are prepared to give up.  Government is apparently less interested in creating an environment that promotes excellence and accomplishment and more one based on "an understanding of the trade-offs and choices young people are prepared to make."

The homing pigeon policy. 

We can solve outmigration, to go back to the Premier's speech, not by innovation and creativity but by figuring out how little people are prepared to settle for. Or in Kara's construction, people should expect to make less money since she does not want "Alberta", she wants something else, called Newfoundland and Labrador.

How edifying a notion.

How far the opposite of "have" could one get when by the very words they use the Premier and the people at his conference accept notions that limit everyone to accepting less than might be attained elsewhere.

This is fundamentally the opposite of the approach set by government, based on genuine consultation, in the years when most of these young people were toddlers, in diapers or not even thought of.  The 1992 strategic economic plan - Change and challenge - set as its vision "an enterprising, educated , distinctive and prosperous people working together to create a competitive economy based on innovation, creativity, productivity and quality." 

There was no need to ask young people what it would take to get them to stay here.  For the most part, people leave because elsewhere offers greater personal and financial opportunities.  The solution to ending outmigration lay in creating a province in which wealth - genuine "have" status - could be found at home.  Creating wealth - the synonym is "prosperity"  - came from unleashing talent and creativity, of daring against the best in the world. 

In 1992, staying in Newfoundland and Labrador did not have to mean compromise.  In 2008, compromising, settling, accepting less is the stated foundation of government strategy.  In 1992, compromise was rejected;  in 2008, it is embraced.

But then there is the other bit about Kara and Jonathan and likely a bunch of others at the session.  These are not just any young people but part of the group selected already by the provincial government to work with the consultants:

A Youth Advisory Panel will provide ongoing advice on the project’s research design and the development of materials such as dialogue workbooks.

This project seems less about research, of finding out what people want and more about confirming a pre-determined set of ideas, of guiding people along a path.

Certainly, if the familiar phrases used by the conference organizers and presented as ostensibly unvarnished opinion is any guide, the strategy is working.

It's always the stuff they don't tell you that is more revealing.

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Offshore land parcels net $129.8 million

From the Canada-Newfoundland and Labrador Offshore Petroleum Board [format changed from original]:

The Canada-Newfoundland and Labrador Offshore Petroleum Board today announced the results of the 2008 Calls for Bids NL08-1 and NL08-2 for exploration rights in the Newfoundland and Labrador Offshore Area. Bidding closed on November 14, 2008 and successful bids were received on all five parcels offered totaling $129,892,000. Three of the successful bid parcels are located in the Central Ridge/Flemish Pass and two are located in the Jeanne d’Arc Basin.

The bids represent the expenditures which the bidders commit to make in exploring the parcels during the initial five-year period of a nine-year term Exploration Licence. If companies discover significant quantities of petroleum resources as a result of the exploration work, they may then seek a Significant Discovery Licence from the C-NLOPB. Any Significant Discovery Licences issued in respect of lands resulting from these Exploration Licences will be subject to rentals which will escalate over time.

The following bids have been accepted:

NL08-1 Flemish Pass:

• Parcel 1 (138,200 ha)  -  Husky Oil Operations Limited 40%, Petro-Canada 40%, Repsol Exploracion S.A. 20%:  $18,600,000
• Parcel 2 (134, 227 ha) - Husky Oil Operations Limited 67%, Repsol Exploracion S.A. 33%:  $1,188,000
• Parcel 3 (55,954 ha) - StatoilHydro Canada Ltd. 65%, Husky Oil Operations Limited 35%:  $18,724,000

No. NL08-2 Jeanne d’Arc:

• Parcel 1 (19,430 ha) - Petro-Canada 50%, StatoilHydro Canada Ltd. 50%: $81,900,000
• Parcel 2 (121,348 ha)  - Husky Oil Operations Limited 67%,  Repsol Exploracion, S.A. 33%: $9,480,000

 

Subject to the bidders satisfying the requirements specified in the Call for Bids and Ministerial approval, the Board will issue an Exploration Licence for each of the five parcels in January 2009. The licences will be for a term of nine years, with an initial period of five years.

Media contact: Sean Kelly APR, Manager, Public Relations (709)778-1418//(709)689-0713// skelly@cnlopb.nl.ca

 

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Signs of the times

1.  Consilient Technology, a success story in the local information technology sector closed its doors today. The office is closed and the furniture is gone, according to CBC news.

In his report for 2006, issued early in 2008, Auditor General John Noseworthy raised concerns about the conditions attached to an infusion of provincial public money.

2.  Wabush Mines is slashing production in response to the global economic downturn.  Production forecast for 2009 is about half of what it was in 2007/2008.  Layoffs are expected.

Other factors are influencing the Wabush Mines decision in addition to the demand drop:

"We are now going through the most difficult time in the history of Wabush Mines, with, from what I perceive to be, an unfavourable work climate at the plants, the worst cost structure in North America and a plant that is aged," he said.

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A new blog

Petition to strengthen democracy in Newfoundland and Labrador, by someone named Ursula Dowler.

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The wrong candidate for sure

How very strange that Michael Ignatieff, the candidate who says the Liberal party needs to change, is the very guy looking to bar media access to a leadership candidate's debate in Mississaugua.

Red Tory's account is simple.  Your humble e-scribbler has some slightly more detailed ones but they all fit in the same space:

• Iggy doesn't want media.
• Iggy doesn't offer a reason.
• Bob and Dominic want media.

Michael Ignatieff is the wrong person to lead the Liberal Party.

Period.

Looks like you'll be hearing that simple refrain quite a bit from this corner over the next few months.

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Enough isn't quite enough, until now

This effort to link Danny Williams and Barack Obama has reached some pretty silly points already.

First there was the rip-off/homage/"inspired by" video thingy using a speech Danny Williams delivered to a Tory fund raising dinner [c'mon ad agency video guys, who paid for the speech viddying in the first place?]

Now I.P. Freely, the low-rent local cross between "V" and Benny Hill is pushing posters, based on an iconic image of Obama, left.

Now it's not like this poster hasn't inspired some knock-offs already, including some truly fine ones.

It's just that surely someone can come up with an original idea, even if it is a parody.