This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Construction Industry Forecasts

Notes from Alex Carrick - Oct 06, 2011

Alex Carrick
Transportation issues help reveal current concerns and long-term trends

Some of the most interesting and revealing economic news these days has to do with transportation in one form or another – oil pipelines, shipping ports and airlines. The issues encapsulate not only current concerns about the economy, but also long-term trends.

Keystone XL Pipeline Project - Jobs vs. Environment?

For example, the proposed Keystone XL pipeline project highlights one key point of conflict – that which exists between the need for more jobs and the threat of damage to the environment. U.S. regulatory agencies have already given approval to the project. The final say rests with President Obama. He is facing quite a dilemma. The 2012 presidential election race is clearly going to be fought on the issue of job creation. That provides a strong argument for proceeding with Keystone construction – as, of course, does lining up a friendly source of supply, but that’s a different matter.

In Canada, each one-billion-dollars-worth of construction leads to 5,000 man-years of direct employment – a figure derived by simply dividing the total value of construction by the total number of jobs in the industry, both figures supplied by Statistics Canada. The multiplier effect is at least two- and maybe closer to three-times as much. Included would be professionals whose practices are closely tied to construction – engineers and architects, realtors, property lawyers and some accountants – plus line workers who make building products. Further indirect employment results from what all of the foregoing individuals spend on other goods and services, such as restaurant meals, haircuts, home furnishings and so on.

The figures in the U.S. are surely similar. But there are also hard-core Democrats who believe one of the Party’s main platforms would be watered down by a too-easy approval for TransCanada’s pipeline to the Gulf Coast – the promise to protect the environment. That’s wherein the debate rages.

What needs to be examined is the validity of the argument that there is a conflict. Where are tomorrow’s needed jobs going to come from? Where are the best opportunities to take a lead on the world stage? It’s not in simply saying “no” to industrial development. It’s in striving our hardest to ensure capital projects take place in a manner that’s as environmentally responsible as possible. Among a host of other opportunities, that means good scientific jobs in remediation research and administrative jobs in compliance monitoring.

Some unions in Canada are opposed to the Keystone project due to a different take on the employment question. It’s their contention that too many jobs will end up being located in the U.S. Value-added upgrading work will mostly take place south of the border. But that’s the reality when a market of 34 million lives next to one of 311 million. There are economies of scale.

The opposition of Canadian unions overlooks the difference between theoretical jobs and actual work firmly committed due to expansion of extraction sites and relatively modest (while still “mega”) plans for upgrading facilities. Oil Sands capacity additions, which knowingly account for so much employment, are under threat from more jurisdictions than just the U.S. They are also coming under fire in Europe. A proposal there would see our extracted oil labeled as “dirty”. Attaching a higher carbon-content rating versus what is simply pumped out of the ground will potentially add to its cost. It would mean extra charges under European cap and trade provisions.

This seems to be a gratuitous slap in the face. No Alberta oil is actually sold in Europe. Europe does buy “dirty” oil from Russia and Nigeria. What’s the “beef” with Canadian oil? Is this an effort to make Europeans feel better about the fact they are paying more for oil than in North America?

The Polictics of Energy

To no-one’s surprise, it appears politics is again playing a role in energy pricing.

Production from North Sea oil fields is in long-term decline and Europe has felt most of the brunt of supply disruptions arising from the Arab Spring. Italy was particularly “inconvenienced” by disruptions in supply from Libya. The discrepancy between higher-priced Brent crude and West Texas Intermediate has widened considerably.

Beleaguered on a couple of fronts, Canada needs to facilitate shipments of oil to Asian customers. Such a delivery system would probably move crude by pipeline or rail tanker car to Prince Rupert, B.C. This segues into discussion of another trade issue that has cropped up.

Port Pressure

Prince Rupert and the port of Vancouver are coming under attack for reasons that turn on both the jobs issue and increasing U.S. protectionism. Under pressure from mainly Californian port authorities, the U.S. Federal Maritime Commission is investigating whether some Canadian harbors are luring away ship traffic. Significant upgrades to the port of Prince Rupert over the past several years, involving some government subsidies, have presented an excuse to take retaliatory action, supposedly on the grounds of unfair advantage. However, those expenditures have only helped Prince Rupert realize more of its potential. Both Prince Rupert and Vancouver have natural advantages that are increasingly coming to the fore.

This dispute is reminiscent of similar cases in the past, most notably the ongoing softwood lumber “brouhaha” that has been in and out of the courts for more than 100 years. Over the years, the matter of who’s right – and Canadian lumber producers have won more than their fair share of court battles – has meant little versus the economic clout of the opposition. Possible denial of access to the vast U.S. market is a trump card that often wins concessions from Canadian producers, regardless of the merit of the cause. In its most recent incarnation (i.e., the “softwood lumber agreement”) Canadian producers have been glad to secure at least some assured sales to U.S. buyers, based on historical patterns, while having to pay a penalty to raise their share.

The fact is that investments to expand capacity and increase efficiency at Prince Rupert have made that port an attractive destination for Asian shipping. The favored East-West route to cross the Pacific leads vessels to berths at sites along B.C.’s northern coast a day or two faster than if they proceed further south to Los Angeles. Goods shipped from China can therefore reach Chicago by rail faster from B.C. than from shoreline U.S. states, cutting down on delays and reducing overall transportation costs.

Adding to the cost of the U.S. anchorage is the Harbor Maintenance Tax. Revenues collected are used to pay for dredging. Some U.S. legislators would like to see a levy charged on Asian rail cargo shipped by train through Canada to the United States.

For the construction industry, these trade disputes aren’t just matters of academic interest. How they are resolved directly impacts where investment dollars are spent.

Airline Industry Vulnerable

This article began in Part 1 with a statement that various transportation issues are highlighting current economic concerns and long-term trends. Having already featured energy pipelines and port facilities, that leaves airlines. Their problems are emblematic of the world economic slowdown. More cautious tourism and business travel is expected to knock the stuffing out of earnings in the airline industry. We’ve seen this scenario before. Over the course of the next 12 to 18 months, a couple of major aerospace passenger and cargo carriers are likely to need bankruptcy protection. The lucky one(s) will be saved by a white knight that offers a friendly takeover.

Airline stocks have been pummeled of late. AMR Corp., the parent of American Airlines has been judged especially vulnerable.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.



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