Natural Resource Industry

Week 10The Case of INCO and Oil in Alberta

Mining

• Mining is the extraction of valuable minerals from the earth.

• Any non-renewable resource that needs to be extracted (like oil or petroleum) is a specialized version of mining.

• The earliest mines were flint mines. Flint was a material used to create tools and weapons in prehistoric times.

Importance of Mining

• Precious metals like copper, silver and gold have been mined since ancient times.

• The quest for precious metals helped the Roman Empire to expand. Most of the Western world has some sort of historical tie (traditions, laws, etc.) to the Romans. In a sense, mining helped drive this along.

Importance of Mining

• In the Middle Ages, copper and iron were the most sought after metals.

• The development of the mounted Knight and the nobility associated with knighthoods created an arm’s race; armour, shields weapons were all made of metal. In many cases an armoured knight would be carrying well over 100 pounds of refined metal.

Importance of Mining

• Coinage was also made of metals. • Advances in agriculture were made with the

introduction of metal tools.• More food available leads to a population

explosion.• The technological advances of the industrial

revolution were made possible through the use of metals.

• Without mining, there would be no civilization.

Mining helps build…• Batteries nickel, cadmium, lithium, cobalt• Circuitry gold, copper, aluminum, steel, lithium, titanium, silver, cobalt, tin, lead,

zinc• Computer/TV screens silicon, boron, lead, barium, strontium, phosphorus,

indium• Cosmetics and jewellery iron oxide, kaolin, zinc, titanium, dioxide, gold,

diamonds, copper• Electricity coal, uranium• Eyeglasses limestone, feldspar, soda ash• Leather clothing borax, chromium, zirconium, aluminum, titanium oxide• Musical instruments copper, silver, steel, nickel, brass, cobalt, copper, iron,

aluminum• Sports equipment graphite, aluminum, titanium, calcium carbonate, sulphur• Sun protection zinc oxide• Steel nickel, iron ore, steel-making coal, zinc for rust-proofing• Vehicles and tires steel, copper, zinc, barium, graphite, sulphur, bromine, iodine• Wind, solar, hybrids nickel, aluminum, lithium, gallium, indium, germanium

Mining Association of Canada

Mining in Canada

• Mining is one of the most important industries in Canada.

• In 2009, the industry contributed $32 billion to Canada’s gross domestic product (GDP) and employed 306,000 workers in the sectors of mineral extraction, processing and manufacturing.

• Mining accounts for 19% of Canada’s exports.Mining Association of Canada

Mining in Canada

• Canada is the world’s largest exporter of minerals and metals.

• Mining plays an important role in the cultural fabric of Canada; many mines are in remote or rural locations.

• According to Natural Resources Canada, in 2001 there were 185 towns in Canada reliant on mining in one form or another.

• 88 of these communities derive over 50% of their local economy from mining.

Mining in Canada

• In Ontario, mining is a major employer in Northern Ontario. It is also one of the most significant employers and revenue sources for First Nations people.

• Towns like Timmins, Sault Ste. Marie and Sudbury were formed in part due to mining activity.

• Hamilton is an important city in Ontario due to the steel mills present there. The refinement of metal is an important related industry to the extraction side of mining.

Sudbury

• Sudbury was founded as a small lumber town.• In 1883, while blasting to assist with the

construction of the Canadian Pacific railway, large deposits of copper-nickel ore was found in the region.

• It quickly developed into one of the most important mining centres in the world, even attracting the attention of American inventor Thomas Edison.

Sudbury

• Sudbury became the fastest growing city in Canada.• It recovered very quickly from the Great Depression

and experience periods of great prosperity.• The need for nickel during World War II helped

Sudbury continue to grow.• Most of its economic problems were due to the fact

that it was growing too fast to meet the demands of the population.

Sudbury

• The combination of stripping the landscape of timber (to assist with the smelting and refining process) along with the acid rain produced by the refining process turned Sudbury into a darkened wasteland.– Soil eroded without the trees.– New growth could not grow with out soil, exposing the

bedrock which became stained from the acid rain.– It looked so much like the moon, that there was a popular

misconception that NASA was training its astronauts in the area for the moon missions (they were actually their studying rock formations)

Sudbury

• Sudbury owes its importance as a mining community (the largest in Canada) to the Sudbury Basin.

• The Sudbury Basin is the second largest meteorite impact crater on the planet. It is also one of the oldest, having occurred over 1.8 billion years ago.

• The Basin is 62 km long, 30 km wide and 15 km deep.• Because of this, copper and nickel ores are found

relatively close to the surface.• Sudbury is one of the world’s largest providers of

copper and nickel on the planet.

Nickel

• Nickel is named after a German myth. He was a mischievous sprite that was known to cause trouble. The nickel ore was mixed heavily with the copper ore that the medieval miners were trying to extract.

• The presence of the nickel in high quantities made it next to impossible to refine the copper.

• Its uses would be discovered in 1751.

Nickel

• Nickel has many uses. We find it in many different products including stainless steel, rechargeable batteries, electric guitar strings, microphone capsules, alnico magnets, coinage, and special alloys.

• Nickel was Canada’s most valuable mined substance. In 2000, the nickel business was worth $2.4 billion dollars, ahead of gold ($2 billion)

Global Nickel Production

Petroleum

• Petroleum (crude oil) has been used by humans for thousands of years. But for most of this time its uses were relatively limited.

• With the invention of kerosene in the 1850s (produced to be a cheap alternative to whale oil, which was the main oil used in oil lamps at that time) petroleum began to play a more important role.

• The invention of the internal combustion engine sealed petroleum’s place as one of the world’s most valuable commodities.

Petroleum• The world’s first commercial oil well was sunk in Poland in 1853.• Canada’s first well was at Oil Springs, Ontario in 1858. This was the

first oil well in North America.• By 1864, Oil Springs and Petrolia were the centre of major oil

refineries. This wouldn’t last long though; by 1880 oil production in this part of Ontario was surpassed by oil production in other areas.

• The Oil Museum of Canada can be found in Oil Springs, with a replica of the first oil well as well as production wells located where the original well was, making this one of the oldest oil producing fields in the world.

• http://www.attractionsontario.ca/index.cfm?DSP=Chapter&ID=11&ACT=Video-Display&Member_ID=1701

Petroleum

• 90% of vehicular fuels are petroleum based.• The world uses 30 billion barrels (4.8 cubic

kilometres!) of oil each year.• The three top oil producers in the world are

Saudi Arabia, Russia and the United States.• The United States is also the world’s largest

consumer (21% of total global production) and importer of petroleum.

Petroleum

• Canada is the world’s 7th largest producer of oil. It is also the 7th largest consumer of oil.

• Most of the oil produced in Canada is exported, and most of that goes to the United States.

• Canada is the United States largest source for imported oil.

Petroleum Consumption

Oil Reserves

• Two types of oil reserves– Conventional – Non-conventional

• Canada has the world’s 3rd largest deposit of proven oil reserves behind Saudi Arabia and Venezuela. – Like Venezuela, Canada’s reserves are considered

mainly non-conventional, meaning that it is harder to access.

Proven Oil Reserves

Athabasca Oil Sands

• Production at the Oil Sands began in 1967.• Due to the difficulty of extraction and a declining

price for oil, development was slow until the 21st century.

• The 3rd mine began operating in 2003.• Today, 47% of all oil production in Canada comes

from the Athabasca Oil Sands.• If production continues to grow, Canada should be

the 4th largest producer of oil by 2020.

Athabasca Oil Sands

• The oil reserves at Athabasca are considered to be unproven.

• They are estimated to be between 178 billion barrels and 2 trillion barrels.– If the 2 trillion barrels estimate is correct, the

Athabasca Oil Sands will hold more than 8 times the oil reserves of Saudi Arabia, or more than the rest of the world combined.

Regional Economic Disparity

• Economic activity in Canada is localized.– 40% of economic activity in Canada occurs in

Ontario.– The majority of manufacturing occurs between

Windsor and Oshawa.– The financial services sector is headquartered in

Toronto.

Regional Economic Disparity• Remember Equalization Payments?• Equalization reduces fiscal disparities among

provinces. • Equalization payments enable less prosperous

provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation.

• Newfoundland, British Columbia, Saskatchewan and Alberta not to receive Equalization payments.

• Currently at $14.7 billion a year.

Regional Economic Disparity• This regional economic disparity is the reason

we have equalization payments.• The diversity of our country, its historical

development and the allocation of natural resources plays a major role in this disparity.

Regional Economic Disparity and Natural Resource Economics

• Obviously, natural resources occur in varying levels across the globe.– Ontario is blessed with minerals– Alberta is blessed with oil

Alberta Oil and its impact on Regional Economic Disparity

• Alberta’s growing energy-based wealth further heightened RED

• Our dollar is tied to the rise and fall of oil prices– When prices go up, our dollar falls– When prices go down, our dollar rises

• As Canada becomes more important globally as an exporter of oil, our dollar becomes increasingly tied to it.

Alberta Oil and its impact on Regional Economic Disparity

• A rising dollar hurts Ontario– Canada's economy is dependent on exports, with

about 85% of its exports going to the U.S. – Because of this, the Canadian dollar can be greatly

affected by how U.S. consumers react to changes in oil prices.

– A high dollar makes it profitable to sell oil to the US, but not manufactured goods.

Alberta Oil and its impact on Regional Economic Disparity

• Ultimately, the success of Alberta has come at the detriment of Ontario.– Ontario’s manufacturing sector had a comparative

advantage when our dollar was low relative to the US dollar.

– The increased reliance on the US to Canadian oil (it was in 2000 that we surpassed Saudi Arabia as the US’ largest importer of oil) has erased this comparative advantage.

The National Energy Program• In 1979-80, there was a 160% increase in global oil prices.• Inflation was high, as was unemployment in Eastern Canada• The federal government, in an attempt to garner more of the

economic benefits being generated by Alberta oil, introduced the National Energy Program.

• The main elements to this program were:– Oil self-sufficiency– Maintain oil supply– A greater Canadian ownership of the oil industry– Lower prices– Increase revenues by raising taxes on oil and gas– Encourage the use of alternative energy sources

The National Energy Program• Under the BNA, natural resources falls under the domain of

the provinces.• Albertans felt that this was an intrusion into provincial affairs

by the federal government.• It was seen as a benefit for the eastern provinces at the

expense of the west.– This was brought in by Pierre Elliott Trudeau and the Liberal Party, who

at that time did not hold a seat west of Manitoba.– Was this a crass political move to shore up Liberal support in the east,

or a sound public policy?

The National Energy Program• During the years of the NEP, it has been estimated that

Alberta lost between $50 billion and $100 billion.• Housing prices in Alberta dropped almost 40%• The bankruptcy rate in Alberta rose 150%• Brian Mulroney successfully campaigned on ending the NEP

and won the support of the West in the 1984 campaign– The NEP further alienated the West from the Liberal Party and was a contributor to the

rise of the Reform Party, forever altering Canadian electoral politics.

NAFTA and Oil

• NAFTA prohibits the Canadian government from imposing (under normal conditions) any restriction that causes U.S. imports of Canadian energy to fall.

• In essence, therefore, NAFTA does prevent the Canadian government from imposing a policy like the National Energy Program in the 1980s.

NAFTA and Oil• NAFTA does require that all buyers in North America have

equal rights to buy those products.• This means we cannot sell Canadian oil cheaper to Canadians

than we can to Americans.• This keeps our price of oil tied to the global price system.– In fact, most oil used in the Maritimes is imported from

overseas. Import costs are cheaper to the Maritimes via shipping than by rail from Alberta.

– So while we are predominantly an exporter of oil, due to regional differences and distances Canada still imports oil to certain areas.

Foreign Direct Investment

• When a company from one company makes a physical investment into another country, that is Foreign Direct Investment.

• FDI plays a major role in the international business community.

• It can provide a firm with new markets, new technologies and cheaper production.

• It provides the host country with new jobs, technology, capital and products.

Foreign Direct Investment

• Some of the Foreign Direct Investments we have discussed to date:– General Motors of Canada and Ford Motor

Company of Canada (Week5) – Sears, WalMart and Hudson’s Bay(Week 7)– INCO and the various oil companies (Week 8)

Foreign Ownership in Canada

• Canada has a high level of foreign ownership compared to other industrialized nations

• Manufacturing is the area with the most foreign ownership

• Foreign ownership of Canadian companies is preferable to no investment

Foreign Ownership in Canada

• Canada’s business leaders want foreign ownership rules for companies that own primary resources, like water, gas, and farmland, tightened to ensure Canadian ownership.

• For other industries, business leaders are seeking a loosening of rules and restrictions

Benefits of Foreign Ownership• Opens up Canada to the global market• Free trade also means free investment• Successive governments have crafted a tax and

regulatory system that is guaranteed to stifle home grown enterprise while, at the same time, making it essential to import the capital and talent that we fail to produce ourselves.

• Loosening the market to foreigners could result in so many positive outcomes, as long as the government authorities are able to protect the national interest.

BDO Document on Foreign Ownership http://www.bdo.ca/en/library/polls/documents/1213.pdf

Problems Created by Foreign owned Subsidiaries

• Concerns around foreign ownership of Canadian companies and interests are:– The ability of head office to establish prices for both inputs

and outputs or to transfer assets to their subsidiaries.– “The possibility of a foreign government less than fully

committed to free-market economics, law and liberalism. Such a company might attempt to tie politics and business, or might exert pressure to secure preferential treatment for a state-owned company operating in Canada.”

http://www.conferenceboard.ca/press/2005/OpEds/041201_FDI_Op-ed.asp

Problems Created by Foreign owned Subsidiaries

• Executive “brain drain” as Canadian executives are moved out of the country.

• Ancillary operations often done outside Canada: Research and Development, Marketing, etc.

• “While our free-market system sees competition and profit-maximizing behaviour as the best guarantors of economically efficient outcomes, a foreign government owning Canadian resources might choose to make an inefficient use of those resources for the sake of propping up government-controlled firms or sectors at home.”

http://www.conferenceboard.ca/press/2005/OpEds/041201_FDI_Op-ed.asp

What is the truth about FDI in Canada?

• Canada has been slipping behind as an attractive place for FDI.

• Canadian companies have branched out, and now own more foreign based business than ever before.

• Foreign investment is like trade in that it flows in two directions.– If Canada were to limit FDI here, the same could

be held against our firms.

What is the truth about FDI in Canada?

• In spite of concerns against FDI, Canada’s economy is outperforming most of the world.– Regional offices still provide many high level activities in

Canada.• In the case, “A New World at Inco” we are told that in

1972 the headquarters of Inco were in New York City! So there is no guarantee that a Canadian company will keep their head office in Canada.

• FDI introduces new capital.• Most manufacturing jobs in Canada are with multinational

firms.

Canada’s Black Gold

• The National Policy encouraged FDI– We saw that with the automobile sector

• Even in the resource industry, this was the case. However Canadian interests are protected through licensing agreements.

• Much of the oil that has been found has been so because of FDI encouraging prospecting for oil by foreign companies. They assume most of the risk, yet Canada shares in the benefits.

Canada’s Black Gold

• Foreign firms have invested in the refining process in Alberta.– Most of the petroleum that gets exported has

been refined.– In the case of mining, in many cases it is the raw

materials that are exported for refining elsewhere.– Oil and gas then lend themselves to an added

value business.