JordonCooper Rotating Header Image

Jeff Rubin

Jeff Rubin: Why shale oil won’t save you at the pumps

Great column in the Globe and Mail

It doesn’t really matter whether the U.S. drills for its own oil, gets it from Canada, or ships it in from Venezuela or the Middle East. Hostile or friendly, no foreign supplier has turned off the spigot since the last OPEC oil shock three decades ago. There’s plenty of oil. The problem isn’t the availability of the fuel but the price needed to get it out of the ground.

Which means this.

Just like the forecasts the IEA made a decade ago about the much-anticipated increase in deep-water production from the Gulf of Mexico, the agency’s hopes for another game changer are unlikely to pan out.

Good old-fashioned North American engineering know-how like horizontal drilling, fracking or steam-assisted gravity drainage (SAGD) isn’t why we’re now tapping supply from problematic sources like the oil sands or the Bakken formation. Neither of these are new discoveries. The real reason that once-marginal sources of supply have been catapulted to prominence is soaring global oil prices.

Without higher prices, no one would be chasing tight oil from shale formations or trying to pull tar-like bitumen out of the oil sands.

It’s no mystery how rising prices work. The higher the price of oil, the more will be produced. This is a fundamental economic tenet that continually confounds the geologists of the peak oil movement.

In a world of $200-a-barrel oil, the IEA is probably right in believing that U.S. production might reach 11 million barrels a day or that Canada could deliver six million barrels into the global market.

The problem with such a bullish outlook for supply is explained by another economic axiom – the dampening effect of a slump in demand. The higher the price of oil, the less of it our economies can afford to burn. If global economic growth is already grinding to a halt when oil prices are around $100 a barrel, what do you think would happen to economic growth – and hence global oil demand – if prices reached the even higher levels needed to make the IEA’s supply dreams come true?

Column: Oil prices will force changes

The StarPhoenixToday’s column in The StarPhoenix

Former CIBC economist Jeff Rubin was one of the first to say that oil would hit $100 a barrel, back when it was around $20. Now he is suggesting it could go to $200 in the next short while unless there’s another global recession.

While many call for more drilling and oil exploration, the world simply doesn’t have the capacity to keep up with demand.

Despite requests from U.S. presidents, OPEC has not been able to meet the supply demands. High oil prices don’t just impact us at the pump, but the previous price of $147 a barrel brought global economic growth to a halt and contributed to a banking collapse felt worldwide.

As prices climb, Barack Obama has authorized a 60-million barrel drawdown from the U.S. Strategic Petroleum Reserve.

He blames Libya, but it’s much more than that. If it were that simple, releasing oil from the reserve would make sense, just as it did after hurricanes Katrina and Ike.

This time the problem is that oil prices were higher than $100 before the fighting started in Libya, and global demand was already in excess of a record 87 million barrels a day. The fact is the world is running low on oil and we haven’t been able to find the capacity to meet the demand. The U.S. military recently expressed concerns that we could see a precipitous decline in worldwide production by 2015. England is looking at gas rationing as soon as 2020.

Despite what some write, the planet isn’t out of oil; we have just taken all the easy-to-get-at oil.

From now on, we will be spending more to reach harder-to-get oil while depleting reserves elsewhere.

A perfect example is the Alberta oilsands, which were not feasible at $20 but now are attracting billions in investments. Yes, we have reserves, but they are expensive to extract.

The good news is that Canada is a global exporter of crude oil. Like many other Canadian provinces throughout history, Alberta’s willingness to scar its natural landscape in the pursuit of resources will ensure there is significant oil for us for years to come. The bad news is that we both sell crude at world market prices, and 60 per cent goes to the United States.

Under NAFTA rules we can increase production; we just can’t stop shipping to the U.S. what’s already agreed upon. In other words, we export the bitumen, give the profits to foreign investors and then get to purchase the refined products. I am not sure that was thought out particularly well.

Saskatchewan has oil reserves – not enough to get invited to OPEC, but more than a billion barrels in the ground in active wells. But the proceeds are sold at market rates, so the scarcity in the world supply will mean tougher times for Saskatchewan residents even if it’s our own oil we are buying.

How much tougher? It affects different demographics differently. For some it will mean no more cheap golf weekends in Las Vegas. For others it means that they can’t put food on their plate or drive to work.

In 2008 Saskatoon saw rents skyrocket and food prices increase significantly. The shelter where I work has a food program largely paid for by the provincial government. It was designed to help families who had more month than they had pay check. In 2007, it served around 40,000 meals a year. In 2008, that number doubled. In 2009 and since then, it has served more than 100,000 meals a year.

A lot of the problem was high rent, but much of it was rising food prices. People kept saying apologetically, "I just can’t make it anymore." That was at $140 a barrel. What’s it going to be like at $200 a barrel?

Every city in North America is in this situation. Designed and conceptualized when fuel was cheap, we built this city to drive in. Circle Drive surrounds us (kind of); Idylwyld, 22nd Street and Eighth Street cut through us.

We have several functioning bridges at any given time. In some ways, at the moment when it feels like we got the answers right, oil and energy prices could change the picture fundamentally.

The good news is that we aren’t the first city that has had to face a reinvention moment. The bad news is not many handled it correctly.

Some more reading if you are interested

The bumpy road to the future goes through Saskatoon

Barack Obama is said to be thinking about tapping the United States Strategic Petroleum Reserve.  For those of you who have have never heard of the Strategic Petroleum Reserve, here is Wikipedia

Strategic Petroleum ReserveThe US SPR is the largest emergency supply in the world with the current capacity to hold up to 727 million barrels (115,600,000 m3). The second largest emergency supply of oil is Japan’s with a 2010 reported capacity of 583 million barrels (92,700,000 m3). Also, China has begun construction and planning for an expansion of a SPR that will place their SPR at 685,000,000 barrels (108,900,000 m3) by 2020, surpassing Japan.

The United States started the petroleum reserve in 1975 after oil supplies were cut off during the 1973-74 oil embargo, to mitigate future temporary supply disruptions. According to the World Factbook, the United States imports a net 12 million barrels (1,900,000 m3) of oil a day (MMbd), so the SPR holds about a 58-day supply. However, the maximum total withdrawal capability from the SPR is only 4.4 million barrels (700,000 m3) per day, making it a 160 + day supply.

Back to Obama

Administration officials have sent mixed signals in the last several days about the possibility of opening the reserve, which is a rare step. Energy Secretary Stephen Chu said on Friday that the administration was monitoring prices, but he seemed reluctant. “We don’t want to be totally reactive so that when the price goes up everybody panics and when it goes back down everybody goes back to sleep,” he said. A few days earlier, Mr. Chu said that the administration was watching closely, but expected oil production that had been lost in Libya because of unrest there would be made up by production elsewhere.

Not question Energy Secretary Chu but who is going to pick up the slack?  OPEC is planning on raising their output by one million barrels a day but that has as much to do with Saudi oilfields coming back online after maintenance than it does about an ability to raise production.  According to Wikileaks and other sources, Saudi Arabia can’t and neither can anyone else.  As Jeff Rubin blogs, only a recession is going to stand in the way of $200/barrel oil and as we found out last time, when oil gets to be higher than $100/barrel, the price is more than global markets can afford and oil dependent economies enter into a recession.  Previous record high prices of $147 per barrel prices brought global economic growth to a halt.  According to Rubin, gas is about to hit six pounds a gallon (£1.32 pounds/liter) and the British government is already considering rationing systems which could be needed by 2020.

This isn’t about rising prices rising because of Libya or Egypt.  If it was that simple, releasing oil from the Strategic Petroleum Reserve would make sense, just as it did after Hurricane Katrina.  The problem is that oil prices were higher than $100 per barrel before the protests started in Egypt.  Global demand was already in excess of a record 87 million barrels per day. It was yet not about potential supply problems from Libya or anywhere else in the Middle East, it is just that the world is running low on oil and we haven’t been able to find the oil stocks to meet demand.

If the President of the United States admitting that the world is running low on oil in a press conference, this would cause a lot of damage to consumer confidence, create even higher price spikes and inspire Tea Party supporters to chant “Drill, Baby Drill” at Sarah Palin campaign stops, and perhaps start the painful transition to the future.  Or you can just pretend it’s a temporary problem and tap the Strategic Petroleum Reserve.  Leadership and getting re-elected are often two qualities that are often in tension with each other.

Closer to home energy independence isn’t an issue, Canada is an oil exporter but we do sell our oil on the open market which means as oil goes to $200/barrel on the open market, we pay $200/barrel oil.  A couple of years ago when we bought the cabin, it was almost $70 to fill the tank on the Honda Accord which had an impact on how we shopped, vacationed, and lived.  It was part of the reason why I drive a 1993 Ford Festiva today.   At one time you have a mini-van or a SUV for long trips, the time might be coming that we have smart car’s for the same reason.

As a province, $200/barrel does wonders for the balance sheet of the Saskatchewan budget.  It makes any finance minister look like a genius.  Look at what Alberta oil revenues did for Stockwell Day (before he put on a wet suit).  It also will generate higher food prices as more and more of the continent’s arable land is converted from wheat and corn we eat and is earmarked for ethanol production.  That’s great if you are an oilman or if you are a grain farmer.  Well actually since 99% of Alberta’s oil reserves are in the oil sands, it’s only great if you are a huge multinational oilman in Fort McMurray.

It’s not so great if you are a consumer, someone in England looking at $2.09/litre for gas or someone that is looking at another summer of skyrocketing food prices here in Canada.  With elections on the horizon in Ontario, Saskatchewan and perhaps across the country, you don’t hear a lot about energy and food prices or creative policy solutions that are going to provide any relief to us in the future with oil or natural gas prices long term.

In fact, Canada doesn’t really have an energy policy at all, unless you consider pump it out as fast as we can as an energy policy and that’s not a sustainable policy.  To break down the problem, I’ll look at it by sector.  Let’s take a look at natural gas first.

According to the BP Statistical Review of World Energy, Canada is the third largest producer of natural gas but ranks only 21st in the amount of proved reserves.  In Alberta, which produces 80% of Canadian gas, the average initial productivity of a gas well has declined by 72% since 1995, meaning we have to drill nearly four wells today to equal one average well in 1995.

As Stats Canada points out, Canada’s between December 2006 and December 2007, gas production is declined 8.7% with the Alberta Energy and Resources Conservation Board feels that we will see a further overall decline in Alberta natural gas production of 35% from 2009 levels by 2019.

Even the industry magazine, Oil Week says Alberta has “squandered” a lot of their natural gas.

It is not commonly known that 80 to 90 per cent of Alberta has had declining natural gas production for a number of years. In the extreme case, northeastern Alberta has seen production drop to 35 per cent of its peak 10 years ago. Even the Alberta Deep Basin, where production grew by over one billion cubic feet (bcf) per day between 2003 and 2007, has struggled to maintain production levels in the last couple of years.

Unfortunately, even the most optimistic predictions of unconventional gas drilling and production cannot mask the terminal decline that is afflicting the Alberta gas industry as a whole.

AJM Petroleum Consultants geologists estimate that raw gas production in Alberta has already dropped from peak by nearly 3 bcf per day, but at 11 bcf per day of sales gas, Alberta is still currently in third place behind Russia and the United States in worldwide daily gas production.
Alberta will not run out of gas anytime soon. But the fact is we have squandered our easily produced, low-cost natural gas resources and have very little to show for it. Without the government ensuring that Alberta is the most attractive place in the world to explore and develop natural gas, the significance of Alberta´s gas industry to the Albertan and North American economy will wane quite rapidly.

Of the major gas producers in the world, only Canada has a lower reserve to production ratio than the US.  In Saskatchewan, SaskEnergy practices a policy of hedging and has done a pretty good job of protecting Saskatchewan consumers from price spikes.  Despite as supplies dwindle the price will keep getting higher and higher.  Because SaskPower uses natural gas for it’s peaking stations, this not only affects us keeping our houses warm in the winter but also just keeping our air conditioning and energy efficient lights on in the summer.

While I enjoy taking a drive out to the Gardiner Dam on a lazy summer afternoon every year, it only generates less than half of what the Queen Elizabeth II peaking station does, which relies on natural gas.  Saskatchewan just opened the Lily Wind Farm near Moosomin which contributes 26.4 MW of energy to our grid and is only one of three wind farms in Saskatchewan (generating about 200 mw) that generates 5% of SaskPower’s needsAccording to SaskPower, they have gotten almost everything they can get from wind general as it can only generate 8% of our province’s electricity needs.  This is a problem because as the province grows, the need keeps increasing and according to SaskPower, they are generating as much power as they can.  Saskatchewan currently consumes 3,600 megawatts on average.  We are going to need to generate another 1,200 to 1,750 megawatts by 2020 because of mixture of growth and the fact that some of our coal fire plants are being decommissioned.

An even more severe problem is our oil supply.  As Ralph Klein loved to point out, Alberta has the second largest supply of oil in the world, right behind Saudi Arabia (or even more than them as you never really can trust their stated oil reserves) with 174 billion barrels of recoverable oil in the oil sands.  Now that part we agree with but comparing it to Saudi light crude oil isn’t a fair comparison.  Oil sands recover is very energy, capital, and time-intensive to produce compared to easier conventional light oil.  As Jeff Rubin wrote in his book, Your World is About to Get Smaller, the fact that we have to go after that hard to get oil proves we are running out of oil.  While the Alberta economy has benefitted from the massive investment of capital and resources to extract oil from the oil sands, there is still not a lot of oil being produced.  Estimates of five million barrels per day by 2025 have been toned down to three and a third, which is still nearly triple current production.  This would take Canada’s total production of oil to 4.1 million barrels of oil a day which would allow us to remain energy sufficient but since oil in Canada is sold at market prices, still pay the same amount as the rest of the world in terms of price and believe me, we will need to purchase a lot of it.

Globally, finding the numbers of how much oil is left is hard to determine.

According to the Oil and Gas Journal (2009), proven reserves of oil worldwide at the end of 2009 amounted to 1,354 billion barrels — a marginally higher volume than estimated a year earlier and the highest level ever attained. Reserves have more than doubled since 1980 and have increased by one-third over the last decade. Half of the increase since 2000 is due to Canadian oil sands reserves; most of the remainder is due to revisions in OPEC countries, particularly in Iran, Venezuela and Qatar. There are continuing question-marks over the estimates for some OPEC countries and their comparability with the figures for other countries. Notwithstanding these uncertainties, OPEC countries account for about 70 per cent of the world total reserves, with Saudi Arabia holding the largest volume.”

At 2009 rates of oil demand (84 mb/d), 1,354 billion barrels is enough for a little over 44 years.

Future World Oil Production

Which means that we will see rising prices from now until the oil runs out… or gets to expensive to go after.  This is what will make it a rough transition for Canadians.

Canadian lifestyle isn’t the most energy efficient.  Canadians are among the highest per capita consumers of energy in the world, exceeding even Americans and most nations that don’t have subsidized energy policies.  We consume about five times the world average and more than 80% of this consumption is fossil fuels.   Why so much?  Part of it is geography based.  It’s cold up here which means that we spend a lot heating our homes in the winter and a lot of energy cooling them down in the summers.  The other geographical feature is we are spread out.  In the last two weeks I did four trips of 827 kms from Saskatoon to Winnipeg and there isn’t a lot between them (no offense to Regina or Brandon).  We have electoral districts the size of some countries that are so vast that candidates need to fly around them to campaign effectively.  With much of our economic power in relatively few cities, we rely on cheap ground or air transportation to move goods throughout the country.  Agriculturally many of our inputs are petroleum based and of course high fuel costs mean higher costs for farmers and producers in terms of machinery and transportation.  With the elimination of the Crow Rate in the 1995, much of Saskatchewan’s train and grain handling infrastructure was eliminated or changed making it even more expensive and fuel intensive to get grain to market and then to bring that grain back to us.  I can give you a hundred other examples but however you look at it, Canada is dependent on cheap energy and we love to exploit it for our own use and to drive our economic growth.

So what happens when oil hits $200/barrel?  While we like to blame the banks for the current economic chaos and they have a lot of explaining to do, it was oil that hit $140/barrel that pushed the world into recession and oil prices are headed on up again.  Even at today’s $118/barrel, that is enough to push us back into a global recession, even if it is not as severe as the previous one.  These recessions may be a way of life.  Oil prices go up, we head into recession which drives demand and oil prices back down.  The cycle continues itself when there is an economic recovery as demand goes up and so does oil prices starting the cycle all over again.

Yet no government at any level seems to have any idea about what to do about this.  Stephane Dion might have been correct with his Green Shift in the long haul but a carbon tax was a hard sell as any tax that encourages changed behaviour is going to be attacked.  We saw this with Jack Layton wanting taxes lifted on home heating fuel.  While we should be encouraging people to shift away from expensive and carbon emitting heating sources, there is a tax on home heating fuel which means that someone is going to rail against it.   Every time gas taxes, opposition parties across the country call for gas taxes to be cut, as if repealing taxes will solve the problem of diminishing oil reserves.

What are the solutions?

For some there is always the assumption that technology will bail us out.  Years ago we heard about Ballard Fuel Cells and how they were going to change anything.  Then they gave up because you can’t make it work at a price point that makes sense.  Then it was electric cars.  In Saskatchewan’s winter, a Chevrolet Volt will only drive about 25 miles before it has to switch to the motor.  There is ethanol which has made a big difference in Brazil with their flex fuels but in North America, the same crops we use for food are being switched to ethanol production.  This lead to some of the large increases in food prices we saw over the last couple of years.  To meet his 2030 targets of 60 billion gallons of ethanol being produced, almost 400% more corn will need to be used which means even more price increases.  For those of you who think that someone should challenge these goals, let me remind that the state of Iowa grows a lot of corn and has this thing called the Iowa caucuses.  Iowa voters love high corn prices and high paying refinery jobs.  My point is that the best technology or common sense doesn’t always win out.

The good news is that north of the border in Saskatchewan, SaskPower seems to be taking some of the steps needed.  Revitalizing and expanding our electrical grids, diversifying into wind, and even offering incentives for people to produce their own power and sell the electricity back to them (an idea that doesn’t make a lot of sense right now because of the time it would take to recover your investment but it’s a step in the right direction).  Saskatoon has made some noise about using the weir to generate a limited about of hydro power as well as building a test wind turbine at the landfill site.  Some municipalities are taking advantage of solar power to keep the lights on in schools and places like Harry Bailey Aquatic Centre.    These make a difference but in the end don’t generate/save enough megawatts to make up for the loss of coal burning plants and increased electrical needs of the province.  While the decision to bring nuclear power to Saskatchewan was controversial and rejected, I can’t help but wonder if 20 years from now when Saskatchewan and much of North America is struggling with an overwhelmed grid, we will regret not forging ahead with clean energy.

With natural gas, SaskEnergy tries to make it as inexpensive as possible to upgrade to a super high efficient furnace.  At the same time I can’t help but get a sick feeling in my stomach every time I hear that an energy company has been acquired whose specialty is extracting hard to get to natural gas deposits.  The viability of these technologies means that we can look forward to more and more price increases in the days ahead.

What do we do about an increase of oil prices.  This is going to impact Saskatchewan in many ways.  Since the elimination of the Crow Rate, Saskatchewan’s rail infrastructure is diminished which is going to cause us grief in the transition into a world of scarcity.  In case you forgot, Warren Buffett just bought Burlington Northern Santa Fe Railway for $34 billion because he sees the importance of rail travel in moving freight to market at a fraction of cost of ground transportation.  There does seem to be some understanding of this on a federal level.  In Saskatoon we are familiar with the Asia-Pacific Gateway and Corridor Initiative as it contributed $20 million to complete Circle Drive  The federal rationale is that these projects will improve access to the Canadian National Railway’s rail yards south of Montgomery in Saskatoon.  The other big project in Saskatchewan is $27 million to the new CPR intermodal facility west
of Regina and upgrading the road connecting highways 1 and 11.  It’s a start in making it easier and cheaper for freight, fuel, and food to move to us and to our export markets.

Locally, it changes the way that tourism happens.  When we go out to the lake, we tend to go out for two three day weekends a month in the summer.  It costs us $30 if I take the Festiva, $70 if we take the van an of course $100 if we are taking about both vehicles.  While we are out there, Wendy will run out of something or make a menu change and Mark and I will drive into Strasbourg for what we need.  Other times we head down to Regina for a Rider game or because I ran out of things to read and we need to visit Chapters.  It often costs us another tank of gas by the time things are all said and done.  That’s fine at $30/tank or $50/tank for the Accord.  It’s not fine when it is $100 tank.  That will change our consumption patterns dramatically.  Instead of 10 quick trips out, we may instead move to three extended trips.  There won’t be any gravel road photography or quick trips into town.

Getting out to enjoy Saskatchewan or see friends may not be as easier or inexpensive as we have grown accustomed to it being.  STC has been an institution in Saskatchewan for decades, even if it isn’t your preferred way to travel.  I’ll be honest, bus travel is not my favourite.  Body odour, drunk passengers, and stopping at every small down between hear and Edmonton has added hours to what should be a pretty quick trip.  Will STC or Greyhound offer a first class bus  between Saskatoon and Regina or between Saskatoon and Calgary that features free wifi, movies, and a steward?  As the economics of travel change, there is going to be new opportunities.  The dream is always going to be high speed rail but as the Acela’s average speed of 120/kph is only slightly higher than that would be of a bus (or my Festiva for that manner) between Saskatoon and Regina.

Oil isn’t just connected to transportation, it’s connected to the food we eat and rising costs of oil lead to higher fuel costs.  Higher costs of fuel mean that input and transportation costs are higher, both from the producer to the mill and from the mill to the store.  Since fuel costs are higher, we have more acreage being dedicated to ethanol production, making food crops even scarcer.  Also you have China buying up vast tracts of land around the world so that their farm workers have jobs and their people have food.  Food grown in Africa and is shipped to China only adds to the world food price pressures and drives up global prices.

Much of what we purchase is not local but is shipped across the country.  The watermelon on the shelf at Safeway or Superstore today was not grown locally, it may not have even been grown on this continent yet at the same we don’t have the infrastructure to eat locally.  While the Saskatoon Farmer’s Market is a great venue and a fun place to spend a Saturday morning, it doesn’t provide the volume, variety or the frequency to make it easy or cost effective to eat local.  Oddly enough Wal-Mart is leading the charge in this area as they foresee a future where fuel costs are going to alter the way we eat.  Who know if Safeway, Supertore, and Sobeys will follow Walmart’s lead or be forced to drastically alter how they get food to our tables.

The Canadian Wheat Board is an export agency but it is going to need to change to allow for more locally grown and produced wheat products or it’s going to have to create a local infrastructure to allow for cheaper food production in local markets.  Years ago some Manitoba farmers wanted to set up a pasta plant and sell it their own wheat.  This is against the law in Canada (which still boggles my mind) as you can only only sell to the Canadian Wheat Board at a price they set so the plant idea died.  In some ways it means that as consumers we are caught in the same cycle with food as we are with eat.  Food shortages in China drive up international prices and we pay more in Saskatchewan for crops that we produce here.

While I don’t think we are going to run out of food, it is going to cost us more and will pay much more for the variety that we want.  This is going to alter the landscape for Saskatoon’s lower class.  The Bridge on 20th does almost 70,000 meals a year, the Salvation Army does 100,000 meals a year, the Saskatoon Food Bank has 15,000 visitors a month or 180,000 a year and while I can’t speak for The Bridge and the Food Bank, the Salvation Army’s increase is partially linked to rising fuel costs.  These are going to be people who are least likely to have a Chevy Volt or a Toyota Prius and don’t have easy access to a neighbourhood grocery store.

The interesting thing is that it may cause a reordering of our civic lives.  High fuel and food prices have hit cities before.  Jeff Rubin looks at Sarajevo during the U.N. sanctions and fighting drove fuel to $6/litre.  To go back even further, England spend years with fuel and food rationing from the start of WWII until 1954.   Even today in some islands in the Caribbean, food and fuel prices are extremely expensive.

What happens?  Cars get parked, bicycles come out an life becomes local again.  Local grocery stores, corner stores, and coffee shops start to become the centre of culture rather than the malls and the big box stores.  Food becomes seasonal again.  We may even start to grow gardens.  The city of Saskatoon is redesigning and rebuilding Mayfair Pool.  Since I moved to Mayfair has been irrelevant because I can go to any pool I want in the city.  Why do I need to go to my local pool when I can drive to Lawson Heights Civic Centre and enjoy the wave pool?  Gas prices or as in England, gas rationing will make us think twice.  In the future local spaces like Mayfair Pool will become important again, as will my local church, my local pub, and my neighbourhood coffee shop, even if it doesn’t sell Starbucks.  The world will get smaller but I don’t know if it is going to be worse.  It’s just going to be different.

The losers in all of this are bedroom communities or exurbs that don’t have a sustainable local economy.  A friend told me that she spends $500/month in gasoline to commute into the city for work.   What happens when that doubles?  You either find work in your community or you do what thousands of others do, you move a lot closer to work.  Some will discover that local economy but other towns will slowly go away.

We are left with two choices as a city.  As Rubin puts it, fundamentally change how we live or get caught in a cycle of recession after recession.  Neither choice is going to be solved by a little more oil being put on the markets by the Strategic Petroleum Reserve, Saudi Arabia, or the Alberta Oil Sands.  It’s too big of a problem.

Tomorrow I’ll spend some more time looking at Saskatoon’s future in terms of peak oil.

Peak Oil is here

Jeff Rubin in the Globe and Mail

…Mr. Husseini acknowledged Saudi production is never likely to get to Aramco’s 12.5 million barrel per day target. Instead, the country is struggling to produce even 10 million barrels a day and it may soon encounter a production peak after which flow rates will inevitably decline. Yet the International Energy Agency is counting on Saudi Arabia to produce no less than 14.6 million barrels a day by 2035.

Mr. Husseini’s revealing assessment of the Saudi oil industry goes a long way to explaining why President George W. Bush’s personal pilgrimage there in 2008 during the height of the last oil crisis was only able to elicit a token 300,000 barrel a day production increase. Other than a limited amount of heavy oil that many of the world’ s refineries can’t process, the kingdom has little more to offer today.

Chronic delays in new development and over-reporting of reserves by Aramco paint an illuminating picture of an oil industry that has struggled merely to keep up with depletion. Production is still below the levels reached in the 1970s. And thanks to the Saudi economy’s voracious appetite for its own massively subsidized oil, less of its near-peak production is available for export every year.

While the U.S. embassy cables acknowledge Saudi Arabia still has the capacity to raise prices should it withhold supply, it no longer has the capacity to prevent prices from rising because it can’t boost production sufficiently to meet world demand.

If Saudi Arabia no longer has an ability to raise production, who does?

Still, one way or another the global oil industry will have to produce six million barrels per day more oil than last year to offset the four million barrels per day that is lost to depletion each year, and the nearly two million barrels per day of new crude demand that another year of global economic growth will generate. (Last year, Chinese oil demand alone increased by almost one million barrels a day.)

Looks like the Ford Festiva was a good investment after all.

The Grind of Poverty

"Like slavery and apartheid, poverty is not natural. It is man-made and it can be overcome and eradicated by the actions of human beings." Nelson Mandela

This is the third in a series on poverty, homelessness, and a concentration of services in Saskatoon’s inner city.  You can find part 1 and part 2 in the archives. 

Poverty in Saskatoon

Poverty looks different in different cities.  In North American where food costs are more or less similar, you have five factors that influence where you are in relation to the the poverty line that I am going to look at.

  1. Income
  2. Housing costs
  3. Transportation costs
  4. Utility costs (especially heating costs)
  5. Cost of living, particularly food costs.

Saskatoon has relatively stable heating costs due to SaskEnergy hedging natural gas purchases (see this article for explanation and political controversy) and the medium, we all use natural gas which can be a lot cheaper than home heating fuel.  Take a look at this article from 2008 on what happens when oil prices spike and what that can do to home heating bills and the family that live there.

Saskatoon does have high rent.  A one bedroom apartment on the east side of the city will run you $1000/month.  While there are cheaper apartments, most of those are located in the city’s core neighbourhoods.  As housing prices have doubled and tripled, rents have done the same.  A quick survey of friends who are renting often described at least a $100/month rental increase last January 1st with a notice of another one coming this January 1st.  $200/month increase over one year is very difficult for any family no matter where you are in the economic spectrum.

While Saskatoon Transit does a good job (unless we have had snow or you want to get to the airport), Saskatoon is a city based on freeways and driving.  While some American cities like Boston have been shaped by their subways, Saskatoon has been shaped by our cars which means that city attractions and commercial districts are shaped by parking, not ease of access for public access.  The Ministry of Social Services has made it easier for it’s clients to get around by making available bus passes for $20/month.  A regular adult bus pass is $71.00 and a single trip ticket is $2.75 which seems high but when compared to rates in New York, Boston, or Toronto, it’s about the same.

So Saskatoon has reasonably priced transportation, SaskEnergy does a decent job of hedging natural gas prices to keep our natural gas rates stable rather than fluctuating and food prices are what they are.  While we may not like the idea of Wal-Mart dominating the world, their entrance into Saskatoon does keep food prices lower (and makes it even harder for downtown grocery stores to compete).  One factor with food prices that gets overlooked is accessibility to reasonably priced food.  While Wal-Mart may have the best price on a block of cheese in town, if it costs you a lot to get there, it doesn’t help.  I’ll talk some more about this in a moment.

Life Below the Poverty Line

All cities have residents below the poverty line (or as we call it here, the Low Income Cut Off or LICO).  A 2009 CUISR research paper described the LICO as this

While family income trends tell us about how many people in Saskatchewan are doing in absolute terms, it is important to examine the ability of the income to provide a reasonable quality of life. Statistics Canada’s Low Income Cut-Offs (LICOs) are widely used to measure poverty in Canada (Statistics Canada, 2006b; Canadian Council on Social Development, n.d.). Statistics Canada (2006c) defines the LICO as the income level at which a family spends 20% more of their income on food, shelter, and clothing than the average family of a comparable size. In 2005, the after-tax LICO was $22,069 per year for a family of three living in a community of 100,000 to 499,999 people and $27,532 per year for a family of four (Statistics Canada, 2006c). In the same year, the poverty line for families in rural areas was $17,071 for a three-person family and $21,296 for a four-person family (Statistics Canada, 2006c). At incomes at or below LICO levels, Saskatchewan residents are using substantially more of their available income to acquire the basics of life compared to their fellow citizens.

CUISR went out and created a snapshot of what low income families in Saskatchewan look like.

what low income families in Saskatchewan look like Saskatchewan’s Aboriginal citizens and families are consistently overrepresented in low income indicators. Although Aboriginal people have made significant gains in the last 20 years compared to other provincial groups, Statistics Canada’s 2006 Census data indicate that 37% of Saskatchewan’s Aboriginal population was living at or below the LICO (Statistics Canada, 2008a) and Canadian Council on Social Development, n.d.). While this represented a large improvement of 16 percentage points relative to the 1996 Census, Aboriginal peoples continue to experience a much higher poverty level when compared to all persons in Saskatchewan.

When looking at the income levels for people on Social Services CUISR found this

When examining Saskatchewan’s social assistance incomes, an overall decrease in the last decade is evident. Between 1996 and 2005, social assistance incomes eroded in real terms among all recipient groups, by more than 7%; the welfare incomes of people with disabilities on social assistance experienced the greatest drop (by 15.5%).

image It should be noted that Saskatchewan raised its social assistance rates in 2008; currently, a single employable person in Saskatoon or Regina would qualify for a benefit of about $8,000 (See Appendix II).

At the end of the day the average Canadian single mother who is below the poverty line is below it by about $7500.  When people talk about people living below the poverty line, they are not missing it by a dollar or two.

In my last post, I showed income breakdowns for Saskatoon’s core neighbourhoods.  To recap there are 1726 households trying to love on under $15,000 a year and another 1567 households trying to get by under $30,000 a year?  Of those families, a staggering 780 of them are trying to get by on under $10,000 per year. How do they live?

Many of the household’s living under $15,000 a year are either on Social Services, struggling by on part time employment or on Social Services (either SAP or TEA).  If you are living on Social Services, your income is going to be a lot less than $15,000/year.  Check out the current Social Services rate card and do the math on how little money that is.

As the Social Services Rate Card shows, you see that there is around $459 for rent (more on that later) and $255 to cover food, toiletries, clothes, bills, and others.  That isn’t a lot of money but it wasn’t until I had it broken down for me by a budget management worker that I realized how little it was.

 

Months ago I had some staff break down the Social Services rate card.  With the new women’s shelter coming online soon, I wanted them to come up with a move out formula that would actually work.  Since many of the men and women we deal with are defined as “unemployable” by Social Services, we needed to help them find a way to live within that financial framework.  We couldn’t find a way of making it in the slightest without using services provided by the Saskatoon Food Bank, the Friendship Inn, and the Salvation Army.  As I reviewed our notes the other day, I saw that we didn’t take into consideration tobacco consumption which makes a really tough financial situation even worse.  Here is what we learned…

Impact of Housing Costs

If you are single you have $255 a month after your rent (or most of it) is paid.  If you have health concerns like diabetes or a disease like HIV, you get more to cover proper nutrition.  That doesn’t sound that bad.  I have had three different budget management workers/trustees from different agencies have told me that one can live on that amount as long as the person doesn’t make a single mistake.  That amount includes a discounted bus pass and free Leisure Card and your rent is paid… that is if you can somewhere to rent for your allocated amount.  Now now problems start.

You can technically live anywhere in town (and therefore leave the inner city behind) but you have some problems.  First of all there is the Rental Supplement which you have to qualify for and in today’s rental market you need the Rental Supplement.  To qualify for the Rental Supplement, your location in the city (in part) determines whether or not you get it and how much you get.   The reality is that if you are living in Riversdale, Pleasant Hill, and areas closer to St. Paul’s or another hospital, increases your chances to get the supplement.  Now if you don’t qualify, you need have pay the difference from your personal allowance.  This is going to increase your need on services like the Saskatoon Food Bank, The Salvation Army Community Services, Friendship Inn, and other agencies which actually encourages you to live in walking distance to them.  Of course even if you do find a place that rents to you, the Ministry of Social Services letter of guarantee is only for the amount of money that you are allowed for housing, which means that you have to come up with the rest in cash to cover your damage deposit.  The current system actually encourages a concentration of services and poverty.

Even if you can afford to move into a different part of town, the landlords may not want you there.  A client I helped find an apartment for was charged a $50 “viewing fee” to see an apartment.  I haven’t met anyone yet who didn’t see that as an attempt to keep people receiving Social Service benefits from seeing the building.  Over a period of three or four months, this client, myself, and another social worker was stood up numerous times by landlords on viewings, largely because the client was on Social Services.  I was there when the client was told to his face that they “probably won’t rent to someone on welfare”.  We had some staff from AIDS Saskatoon in a while ago talking to our staff and we also learned that some landlords are doing a kind of credit check on clients to decide if the client can “afford” the apartment.  I was shocked but it’s a story we have heard lots since then.  Are any of us surprised that their formula disqualifies low income/Social Services clients?  Of course not all landlords are like that.  I have met some wonderful ones who are all over the city.   In fact the client who I was talking about was helped by a landlord who went out of their way to get this client and family into their apartment because they saw it as the right thing to do.  Yet on the other hand we are kidding ourselves if we don’t think that there are some Donald Sterlingesqe landlords out there who are making it very tough on people because of race or class in the city.  (if you got the Donald Sterling reference without clicking on the link, I am impressed).

Of course moving in only part of the journey.  I was also shocked to find out there are no more move in grants.  No money for beds, mop, broom, cleaning supplies, SHOWER CURTAIN, pots and pans.  I have access to the donations given to the Salvation Army Community Services (we have a dock for a reason) and all of that was free but even after all of that was said and done, Wendy and I dropped $100 of our own money for essentials and believe me, there was nothing on that list that all of us would not consider an essential. 

To be fair there is another alternative to move in grants, if you are on Social Services, you can apply for a twice a year advance of $240 and that would help them set up an apartment but that money comes off their check $40 a month over six months (which takes down the $255/month to $215/month).  If for some reason you don’t qualify for the Rental Supplement, you have to pay the difference in rent out of your personal living allowance.  Your $255 can quickly become $100.  One budget management worker I talked to told me that she practically begs her clients not to take this $240 “windfall” because of the financial problems it can cause later on for them.

Eating Right on Social Services

So you have $255 (or $215 or $100) each month (now there are extra resources if you have selected medical issues) which is anywhere from $53 to $65 (or $25) per week for groceries, hygiene products, and clothes.   That causes it’s own problems because where do you get that stuff in Riversdale/Pleasant Hill?  There are no low priced grocery stores in easy walking distance (although there is now one downtown and a small Asian food store on 20h) which makes it difficult to get ahead because you don’t have the resources to buy anything in bulk or take advantage of savings at Costco, Real Canadian Wholesale Club or even Co-op’s big case lot sale?   Again you have a lack of financial margin and you have a lack of accessibility to do purchases like this.  While Saskatoon has a whole has more vehicles than residents, according to 2006 census data the core neighborhoods have 0.4 cars per person. When I worked at 33rd Street Safeway, once a month we saw a steady stream of cabs pulling up as people on Social Services bought groceries.  You have two problems with that happening.  A small grocery amount is made a lot smaller by having to take a cab to Safeway (or Supertore/Walmart/Extra Foods/Sobeys) for groceries and you have that money leaving the area (and area that is in need of that money).  An even worse decision is those who do their grocery stopping at a convenience store.  A couple of times when I worked the 4-12 shift at the Salvation Army, I would run low on change which makes it hard for the front desk to make change for clients who come in and buy breakfast (best $3 breakfast in the city).  Once I stopped by a convenience store on the day checks were handed out.  I honestly thought a riot had gone through the store.  It wasn’t, it was people purchasing groceries.  I can’t think of a quicker way to make an already small check, even smaller.  Thankfully this has changed somewhat since Giant Tiger came to town but you still have no fresh fruit and vegetables.  While I probably could have lived on Giant Tiger’s selection when I was single (Kraft Dinner, Ichiban noodles, Pizza Pops… repeat), it is lacking a lot of stuff that families need and there isn’t the money left over to even purchase a Good Food Box from CHEP.

The other part of the equation that food is a commodity and therefore subject to price fluctuations and is really sensitive to other commodity prices, such as oil.  All of this is explained in detail in Why Your World Is About to Get a Whole Lot Smaller by Jeff Rubin and The Long Emergency by James Kunstler who point out the impact that higher oil prices have on farm input costs.  As oil goes up, so does fuel for machineries, cost of fertilizers, and more crops get moved from being a food crop and become a fuel crop for ethanol (unlike Brazil which had the foresight not to use a food crop for ethanol, we decided to use corn and maize here, largely in deference to the importance that Iowa places in Presidential primaries).  The basic math is higher energy prices equals higher food prices.

Three years ago when gas prices spiked to abnormally high prices we saw the impact on our clientele at work.  We went from about 60,000 served meals a year to close to 100,000 meals served a year.  Not only were people hit hard by rising energy prices, they were hit hard by the increase in food prices.  All around the city you saw charts in restaurants explaining why their prices were going up and why they had to charge more to bring in some more revenue to pay for it.  The same thing happened here but the people who used our services didn’t have the option of increasing revenue.  We just did an in house survey of why people come to the Salvation Army meal program and the dominant answer given was, “no food at home” and this is a program designed for people who are not receiving benefits from the Ministry of Social Services (and therefore hopefully have more resources).  I wish we had done one a couple of years ago.  I assume the numbers would have been much, much, higher.

The Lack of Discretionary Income

So even if you have money for food and rent, there are still other expenses… like laundry is another big issue.  You get $10 if you are single for laundry and soap and $20 if you are a family.  The problem is that a lot of apartments charge $3 for a load and in case you haven’t noticed, there are not a lot of laundromats in town.  When we were looking at countless duplexes and fourplexes while trying to find a place for the Mumford House, many houses had a bed room filled five or six feet high full of clothes.  That same summer I joined a co-worker to check out a house that had been set on fire (she didn’t want to get punched in the face by the landlord so she brought me along to get punched in the face – luckily for my face, he was pretty cool and not prone to violence).  Again in the basement there was clothes piled high enough that neither one us could walk upright down there.  Later it finally clicked in that it was cheaper to come to the Salvation Army or the Food Bank every couple of weeks and just get different clothes rather than doing laundry.  Anything to save some money.

My point is that, you can make it as long as you don’t make a mistake which in the end, is the Government of Saskatchewan’s goal.  Coming up with Social Services rates is tricky business.  If you set the amount too low, people just can’t live but if you have too high of an amount, it discourages people from working and you can really upset voters.  In the end you get stuck with the number that we have now.  Just barely enough for someone to live and definitely not comfortably. 

This takes a toll not only on individuals but also on a community if in high enough concentration.

As for the family, I understand a bit of that.  My mom raised a family of four of us on $1350 a month plus what we got for Family Allowance.  $700 of that was mortgage and the rest was just paying for life.  From 1988-89, we kind of totally disengaged from society because we had no money at all. We didn’t go out, we didn’t take weekend trips, we didn’t do anything. There was just no money.  We were involved in the church but even things like youth group took money and so I didn’t attend those weeks.  Our summer vacation consisted of a trip to a used bookstore on Primrose Drive.  They sold a two cubic foot box of books for $1.  There was a bunch of Harlequin Books but there was other cool stuff as well… university textbooks, Instant Replay by Jerry Kramer, The Game by Ken Dryden and The Winds of War by Herman Wouk.  We went three times and our expenditures outside of bills that summer was a total of $3.  That was it.  That was all of the extra money we had.  I find myself looking back it with some nostalgia but it was a horrible summer and a part of a grind that went on and on and on.

NeuragenIt isn’t just one single thing that poverty does, it just grinds you down day by day by day.  My  mother was diabetic and living under that kind of financial stress does not lend itself to eating well.  She started a downward spiral that took her leg and later contributed to her inability to fight the cancer.  Diabetes is called a “disease of poverty” and as a Type II diabetic I understand that now more than I ever did then.  On top of the food that is diabetic friendly (which isn’t cheap), I now spend $100/month to control the nerve pain.  Neuragen and Alpha Lipolic acid aren’t covered by the Saskatchewan Drug Plan (while highly addictive Oxycontin which does nothing for the pain was covered).  Poor quality food, inadequate diabetic care, and enormous stress. I didn’t realize it at the time but in a lot of ways, those years changed all of us for the worse.  We withdrew from our community, our friends, and an edge developed that has probably stuck with me for far too long.  There wasn’t one thing that did it, we just got ground down and that was only a couple of years of it.

We have seen the impact on poverty on an entire region.  One of the most enjoyable things I had the opportunity to do while as the pastor of Lakeland Church in Spiritwood was listening to some of the older members of the church tell their stories of the Great Depression.  Those stories all started light hearted and funny and then turned serious and sombre as the years took their tool and the stories got darker.  Don’t take my word for it, read Pierre Berton’s book, The Great Depression and read the stories yourself.  If you are looking for a current version of it, read this eye opening series called The New Poor in the New York Times.

Frequent contributor to The Star Phoenix, Doug Cuthand wrote this back in 2008 about intergenerational poverty.

Intergenerational poverty leads to despair and this is the root of much of the gang violence and social dysfunction in today’s aboriginal communities.

I would argue that Cuthand is too specific and intergenerational poverty is the cause of social dysfunction in any community but his point is right on.  He goes on to link poverty to the rise of gangs in aboriginal neighbourhoods but he could be speaking of any community.

Gang activity is commonplace among disadvantaged minority groups including Afro-American, Hispanic and aboriginal groups. They are drawn together by a sense of race, protection and shared experience. When the economic and social doors are closed or hard to open, people tend to turn to illegal activity as a quick fix. Couple this with drug and alcohol addiction and you have the recipe for young people to group together in gangs.

Gang life is hard with few real rewards. Recruiters let the uninitiated think that in a gang they will get the iPod, the fancy car and other status symbols. Gang activities include violence, robbery, prostitution and drug dealing. In the end the reality is nothing compared to the dream presented by the gang recruiters.

When gang members reach their late 20s they have no education or work experience, they have rap sheets as long as their arms and they most likely have a drug problem. They are burned out and unemployable.

And those are the lucky ones. Some will be killed and still others will do life for murder or other long stretches for their crimes. The dream of the 15-year-old for power and wealth is gone and it never existed.

All of this starts to explain a bit of what happened to 20th Street and the city core neighbourhoods in general.  I used to enjoy 20th Street.  It was home of to Joe’s Cycle and Walter’s Cycle.  Along with the Mayfair Sporting Goods, they took most of my discretionary income.  It was home to some great restaurants.  For many years The Golden Dragon was the finest restaurant in town (visited by Bill Cosby, Bing Crosby, Dean Martin, John Diefenbaker, Wayne and Shuster, Pierre Trudeau, Gordie Howe and many others).  Many hockey/softball/rugby/football seasons finished up in a banquet room at the Wah Qua restaurant.  20th Street used to have it’s own particular vibe in the same way Broadway does now but things changed.

One of the things that have bothered me as I read The Life and Death of the American City by urban theorist Jane Jacobs is that she speaks of a strong neighbourhood bond is needed to maintain safety and prosperity in a community.  I kept wondered what happened to it in parts of Saskatoon.  The answer is found in bits and pieces in a variety of books I read this summer (at the end of this series I’ll post a reading list if you want to read more) but the short answer is that poverty grinds away those ties that keep a community together, especially when poverty is concentrated. (which I think is at the core of what Pat Lorje is saying and something I’ll spend some time exploring when I post the next post in this series Monday night).

A decade ago there wasn’t the need for the concentration of poverty in Saskatoon.  In 1997, a great apartment I had in a fun part of City Park went for $250 a month.  I was making a little over minimum wage working at Burron Lumber.  The combination of low rent, great location, and a simple lifestyle (bills were food, phone, and $268 car payment) meant that despite making minimum wage, I had money to spend.  I watched every Rider game at Seafood Sam’s with a pacing, anxious, chain smoking Sam himself living and dying with every Saskatchewan Roughriders win and loss, and we used to walk down to a downtown coffee shop named Nervous Harold’s many nights for a iced coffee and a late supper.  By choice I didn’t have a television but I had money to spend to enjoy life around Saskatoon.  I don’t have any vices but I think I could have even afforded to smoke a bit.  Today that very small one room apartment is going for almost $800/month, which is more than my mortgage.  To find an affordable apartment on minimum wage, I can’t live in City Park unless I want to pick up a second job which grinds one down in a different way.  Over the years both Wendy and I have worked two jobs when we have needed to.  What seems sustainable at first slowly grinds you down in different ways and you have that same kind of withdrawal from your community, often from fatigue and exhaustion.  Again back to Doug Cuthand’s comments.

When the economic and social doors are closed or hard to open, people tend to turn to illegal activity as a quick fix.

This was best articulated to me when I was at a Correctional Services of Canada seminar on women’s corrections.  One of the things that was mentioned throughout the day was what many women in poverty will have to do to survive.  It ranges from robbery, prostitution, drug dealing… the illegal activities that we all see in Saskatoon but never really get to what is really causing them.  When caught in poverty, you have to turn somewhere.  I have heard the police talk about prostitutes starting working the street and losing their virginity to johns at 13.  The girls often recruit each other as they see it as a good source of easy money without ever having the chance to realize the cost they are about to pay.  Again, its the pursuit of the iPods, cars, or as I wrote about a couple of years ago, even food.  There is what Cuthand said, an easy turn to the riches that gangs offer up (read the first chapter of Freakonomics to see that most gangs pay very poorly at the bottom of the pyramid).  Or there is a turn to substance abuse… beer, hard liquor, crack, meth, modelling glue, solvents, paint, Lysol, Listerine, methadone, hand sanitizer, you name it, I have seen it abused.  It starts out as an escape and turns into a prison and later a personal version of hell.

This kind of aligns itself with a conversation  I had a with a local politician who said to me that they were surprised at the level of racial anger they have heard lately.  Being married to someone of mixed Guyanese descent (Amerindian, Bihari, British, and Black according to her DNA tests), racism has always both interested and concerns me.  Racism (which is going both ways) seems to be coming out the micro economic future that people are looking at.  It’s their personal economy that doesn’t work.  Income doesn’t cover rent or food which creates a lack of hope.  Soon the the despair sets in, especially when you realize that hard work won’t deliver you out of this and it gives to anger and a need to blame someone else.  You see this in American political and race rhetoric.  How many times did Lou Dobbs say,   “These Mexican illegal’s are taking good American jobs” which ignores the fact that American’s don’t want them and the jobs aren’t very good in the first place.  Is it a coincidence that Roma’s in France are being persecuted during a time of difficult economic times?

During the times that my family was at our poorest and things looked extremely bleak, I never had any doubt that eventually life would turn around and things were going to be better one day if I worked hard.  To use Doug Cuthand’s language, the door was pretty easy to open.  My first apartment was in a prime downtown neighbourhood for $250 and affordable with a minimum wage job.   Your options are limited today if you do not have what many would define as a high paying job or are a one wage earning household.

I have spent hours this week trying to articulate the change in the residents of the shelter over the last four years.  It clicked in today that the difference was that there has been a loss of hope.  The wages haven’t changed but everything else has gotten more expensive and less accessible.  While I have only lived in Saskatoon since 1984, I have been here long enough to see some bad times before the good times hit.  While a large majority of Saskatoon has benefitted from the economic prosperity that has come to Saskatoon.  Not all have.  Of course the question that all cities have is, “what’s the best way to address this?”  I’ll start looking at solutions on Tuesday.

Related: The United States Council of Catholic Bishops put together this video to demonstrate what life is like below the poverty line.