Tuesday, April 24, 2012


Lordy (as we Albertans say) what an election. Looking on from afar it would seem that little has changed: another Progressive Conservative majority while the Liberals and NDP putter along with a handful of seats each. Weren't the Wildrose supposed to make some noise? The pollsters must have screwed up.

Actually, a number of big and surprising things happened and there is nothing like the old status quo in Alberta today. The Wildrose, our new Republican party, led all election polls from wire to wire during the campaign. Many headlines this morning are pointing a finger at the pollsters and how inaccurate they were, even though this same polling information was used yesterday to make bold predictions. I think the polls were in fact accurate, including the final one done by Forum the day before the election. The Forum poll showed a sudden 4% gain for the PC and an equally sharp 3% drop for Wildrose (which still had Wildrose leading 38% to 36%). Nothing newsworthy happened in the last 48 hours, but I believe there was a lot of last-minute soul searching happening after the last poll was done. Possibly even in the voting booth itself. In fact, the polls that consistently pointed to a Wildrose government may have helped give many voters cold feet. The seed of doubt may have been planted with a couple of prominent Wildrose candidates' inappropriate comments (and possibly the fact that their leader endorsed this as freedom of speech). The PC voter was enjoying a whirlwind romance with the sexy, exciting new Wildrose. It got serious and they set a date. But when the big day arrived, PC stood her up at the altar.

We may have dodged a bullet, but it won't be the last one. Over one-third of the province voted Wildrose: for every five people who voted PC, four voted Wildrose. Wildrose is not going away anytime soon. Many of the PC-Wildrose showdowns could have gone the other way quite easily. There were 16 constituencies where the PC beat the Wildrose by under one thousand votes. The potential to form the government was defintiely there. Now they have to prove they are a credible opposition party, as opposed to a bunch of amateurish bigots who think that "commandments" and "laws" are interchangeable terms. Just sayin'.

Watching from the left, I'm not sure exactly what has been happening to the Progressive Conservative party. They seemed to benefit from a lot of strategic anyone-but-Wildrose voting last night, mainly at the expense of the Liberals. This confirms the gradual move to the centre under the leadership of Alison Redford. I think it was the defection of the far right to Wildrose that started the process a few years ago. Perhaps there is some hope for progressives in Alberta, that the PC party might move far enough to the left, or at least away from the right, that it becomes palatable.

(Although I confess I have a hard time with these right and left labels. I think of myself as progressive and on the left, but have a bit of a libertarian streak that is commonly associated with the right. Generally I'm more conservative on financial issues, but I find in practice the lefty parties actually have a better economic track record than governments from the right. Here's my definition instead. If you care only about yourself, you want everyone to be like you and everything to be the way it used to be, that's right wing. If you care about others, embrace diversity and accept change, that's left wing.)

So we find ourselves with a continuation of the PC dynasty which will become the longest ever in Canada in a couple of years, and a swath of green that is mainly confined to the rural areas in the south. The Wildrose managed only two seats out of 48 in Alberta's four largest cities, and only one win in the northern half of the province. This geography has the potential to be very polarizing.

I was surprised by Raj Sherman, who showed a lot of class and experience even though his own seat was in doubt most of the evening. He ended up winning by 118 votes. Today he is a survivor, as are the Liberals who were is legitimate danger of being shut out. Had he lost, his political career would likely be over as a failed leader. I have no doubt he was aware of this as he spoke last night, how different his life would be depending on a few dozen voters.

I was also encouraged by tone of the New Democrats. They doubled their seat count (from two to four), but there seemed to be a new spirit of cooperation and moderation as well. Maybe the Wildrose scared the crap out of everyone else so that the differences between the three traditional parties don't seem so bad all of a sudden.

We may just be at the start of a new political maturity in Alberta. But I have faith we'll find a way to drag ourselves back to the gutter somehow. Things change, but not too much.

Friday, April 20, 2012

Strategic Voting

Strategic voting is a loaded term. It has connotations of selling out and abandoning your principles. I understand this viewpoint, but it's far too idealistic in the real world of politics with real-world consequences. In my opinion it describes citizens participating in their democracy as effectively as possible. Consider this: if even 10% of the Floridians who voted for Ralph Nader in 2000 would have voted strategically instead, George Bush would not have become president. That's a real-world consequence of following your conscience instead of playing the game.

I certainly did not follow my conscience when I became a member of the Progressive Conservative Party of Alberta last year. I have never voted PC in my life, and I don't plan to start anytime soon although I do try to keep an open mind. But when the second leadership ballot looked like a close race between Gary Mar and Alison Redford, I decided it was worth it to spend five bucks and hold my nose to help choose the lesser of two evils to run our province. I'm not sure if I helped make the world a better place or not, but I don't regret doing this. I ripped up my PC membership card the next day, although I'm now on their damn mailing list forever.

Monday's provincial election is the first one in forty years that may not end up with a majority PC government. There is also a fair chance that the Wildrose party will form the government. The polls are very close right now, and there has been a lot more noise and bias than usual in the polling data so it's hard to know. In some ways I'm almost hoping for a Wildrose win just so we can officially hit rock bottom. I can only imagine the daily stream of offensive, bigoted comments that seem to be the specialty of Wildrose candidates. I doubt the Wildrose honeymoon would last very long - it would be more like waking up hung over with a naked stranger in your bed who you thought looked pretty good the night before.

So despite being Caucasian and heterosexual, I will not be voting Wildrose. Nor will I be voting PC even though the local candidate is likely to win his fifth election in a row. Which leaves me with three centre/left so-called "progressive" options: the Alberta Party, NDP and Liberal.

Unlike their national cousins, the Alberta NDP are rooted in their traditional politics and seem content to be the vocal minority. I voted NDP in the last federal election partly because I saw a new commitment to becoming a responsible, reasonable, professional party capable of governing. I don't see this in Alberta yet.

I would like to give my vote to the Alberta Party as encouragement for the future. If there is any hope of uniting the progressive side of Alberta politics, this might be the best party to make it happen. I've just been reviewing some of their platform online, and I find it a little vague in places but on the whole it represents what I believe in. I hope the AP can elect one or two MLAs next week: Sue Huff, leader Glenn Taylor and a couple of others have realistic chances.

But I will likely support my local Liberal candidate, for three reasons and despite one. The one negative is I have no confidence in Liberal leader Raj Sherman. He has one election under his belt (as a PC) and seems to be unable to articulate his party's vision. I have supported the ALP in the past mainly because of their common-sense platform under former leaders Kevin Taft and David Swann. The party is now in danger of being wiped off the map and even Sherman's own seat is not a certainty.

On the other hand, I have read through Rick Szostak's website and he strikes me as intelligent, earnest and generally a deserving candidate. Then I heard second-hand reports from last night's candidates forum that he was by far the most impressive in answering questions and addressing issues. Finally, the closest thing to a organized strategic vote, ChangeAlberta, has recommended Rick as the progressive choice in my constituency. 

Unless there are any last-minute gaffes or polling surprises, I think this is where my vote is going on Monday. It is somewhat strategic but I will still be able to sleep at night. I can only look forward to the day where my vote actually matters, instead of merely sending a message. But there are a lot of races where the Wildrose and PCs may split the conservative vote almost evenly, and here is where strategic voting might make a difference. It's worth a shot. The alternative is to split the progressive vote even more thinly, and wake up the morning after groping for the aspirin.

Thursday, April 19, 2012

It Is What It Is

One common issue with money is what it is "backed" by. I guess this way of looking at it stems from paper money's origin as a receipt for tangible gold at the local goldsmith's. This grew into convertibility of national currencies: you could convert a dollar into a prescribed amount of gold on demand. Once upon a time if you took a dollar to the bank you could actually walk out with gold in your pocket. The dollar was backed by gold.

But what is gold backed by? I'm starting to hear this question more and more - maybe that in itself is a sign of a growing awareness of fiat money and precious metals. Time-travelling back a few hundred years, I think this question would have been laughed at. Because gold is hard to find and dig up it has scarcity value. Its other properties make it the best money we have on earth, and most cultures over time have accepted gold as a store of value. Many countries still do, India being the prime example. For most of history and even now in many places, you would have no trouble exchanging gold for whatever you want.

On the other hand, people in the western world have lost that connection to gold and don't really know what it's worth. We in the advanced economy no longer "get" gold - we don't understand its value. If it's not backed by something else that has value we can understand then what good is it? Warren Buffett gets his hate on for gold as an inert metal:
Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. Picture it fitting comfortably within a baseball infield. A century from now the 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
True enough - gold doesn't produce. It's not a power plant, it's a battery that stores the power.

I believe one of the reasons gold is a near-perfect money is that it isn't productive, meaning it doesn't do anything or have any other uses besides being gold. Gold is what it is, nothing more or less. Even precious metals like platinum and silver have considerable industrial use, which makes it difficult to value it purely on scarcity. Also, as industry actually uses these other metals, they get used up, so the quantity is variable.

Maybe the right question isn't what is backed by what else, but how confident are you that your money will be worth the same when you spend it as when you earned it? How good a store of value is it? Gold generally holds its value over the long term compared to things like wheat, real estate or even oil. Unlike fiat currencies, bitcoins or seashells, you can't just create more. There is a finite endowment of gold in the ground, which can only be mined at an increasingly slower pace. Which means you have a good idea what it will be worth tomorrow (the volatility in the "price" of gold is actually the dollar). Currently you might have to temporarily turn it into dollars before exchanging gold for some other commodity or service. But somebody will always be happy to take your gold anywhere you go and give you something equally valuable in return.

Monday, April 2, 2012

Natural Gas

I've spent a fair bit of time over the past few years reading up on peak oil, and I think I have a better than average understanding of the dynamics of oil and gas. However this has not led to any spectacular investment success, and quite often just the opposite.

A quick note on peak oil: all this means is that someday, oil production will hit a maximum. This has been labelled a "theory" although it really just simple common sense. If oil is finite, eventually it will start running out. Unless you believe in abiotic oil - a truly unproven theory where oil is spontaneously created somehow deep underground, and seeps into the crust so new supplies of oil are constantly available. As with all things, we tend to go after the biggest, easiest rewards first; this is simply being efficient. So what's left is generally in smaller fields and increasingly more difficult to get at. The real peak oil debate is not so much whether the concept is valid, but when do we hit the peak? It could be centuries from now, or just a few years away, or months, or it may have already happened.

Oil is a global market, since the commodity has recognized standards such as Brent and WTI, and is relatively easily transported across land and sea. Relatively with respect to natural gas, which does not really operate on a global market. The main reason is it is hard to transport natural gas across an ocean. It can be liquefied, but this is expensive, technically challenging, and if I recall about 20% of the energy content is used up in the process. Although liquefied natural gas use is growing quickly, it only accounts for about 11% of worldwide natural gas. Japan is a big LNG importer, especially since they had to shut down their nuclear system - right now they pay close to ten times the North American spot price for Russian LNG.

Gas is really a continental market since you can really only supply markets connected to the wells by pipeline. In North America the recent news is all about shale gas, and how new breakthroughs in fracturing are able to unlock huge amounts of natural gas. Double current reserves, according to the International Energy Agency. I don't know if there has been a frenzy of shale gas production or if it's more based on expectations, but natural gas prices have plummeted: $1.98 per million BTUs Henry Hub spot at the moment. This benchmark spent most of the last decade over $5 including a couple of spikes in 2005 and 2008 over $12.

Unlike many commodities, energy has hard numbers to work with. Specifically, you can determine the amount of energy in oil, gas, coal, etc., and figure out which are more or less expensive as fuels. Granted the substitution can be a little sticky. You don't switch from unleaded gasoline to natural gas in your tank based on daily prices. But if trends continue long enough, a natural gas vehicle could become an option. There are about 5.8 million BTUs of energy in a barrel of oil. So you would expect a barrel of oil to cost about 6 times the price of a million BTUs of natural gas (the standard unit of measure). So why is oil over $100/bbl and gas is two bucks? This is 50:1 in price compared to 6:1 energy, so you could say natural gas should be over $16 and at current prices is a screaming bargain.

What caught my attention was the production cost of these shale gas wells - the breakeven price is over $8 per MMBtu. So you have North American natural gas that is worth $16 in energy, requires $8 to produce, and is selling for $2. This challenges everything I think I know about economics.

Maybe when you see a twenty-dollar bill on the sidewalk you shouldn't think it over too much, just pick it up and put it in your pocket. But I've played gas ETFs a couple of times before, thankfully with very small stakes, and never won. Experience tells me I don't know what I'm doing. Fundamentals say this gas price is unsustainably low and must go up. The real question with all investing is not what but when? I think I'm talking myself into another small-money gamble here, all the while knowing it will probably break my heart once again.