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THE ENERGY CRUNCH: New winners, losers, from power pricing

Each sector has quirks that can temper effects of cost jumps, Bruce Little says By BRUCE LITTLE

Published Feb. 13, 2001

It's easy enough to sketch out the immediate winners and losers from high energy prices with a broad brush - producers win and consumers lose.

The winners are industries and provinces that produce plenty of higher-priced oil, gas and electricity. The losers include industries and provinces that consume lots of energy and - no matter where they live - every Canadian who faces a fatter bill for gasoline, heat and light.

But on each list, there are some surprising entries.

Canada's fertilizer industry is a massive consumer of natural gas, a key ingredient for nitrogen, perhaps the most essential of all farm fertilizers.

But last week Calgary-based Agrium Inc. reported that fourth-quarter profit quadrupled from a year earlier, in spite of skyrocketing natural gas prices.

While soaring gas prices have pushed up the price of fertilizer, they have also forced many of Agrium's competitors to shut down production. Agrium, however, is so strongly hedged that it still buys two-thirds of its gas for less than one-third of the market price.

It has a major plant in Alaska, for example, that is assured of natural gas at around $1.25 (U.S.) per million British thermal units for the next nine years. Agrium's plant and the city of Anchorage are the only customers for Alaska gas that has nowhere else to go for want of long-distance pipelines.

That's not unusual, said John Van Brunt, Agrium's chief executive officer. Globally, some one-third of nitrogen production is located in such regions, where "captive" gas is still cheap. Plants that were exposed to the full force of soaring gas prices had only two choices: pass on the cost increases to their customers, or shut down.

Many couldn't do the former, so they did the latter, leaving the field clear to low-cost producers. That advantage is likely to persist.

The lesson from Agrium's experience is simple: Picking winners and losers from higher energy prices is not just a matter of identifying producers and consumers.

Every industry has quirks that will temper - perhaps even reverse - the anticipated effects.

Even so, some industries have no place to hide from oil that now costs about $28 a barrel (compared with about $10 two years ago) and natural gas that is now trading at about $6 per million Btu (compared with about $2 a year ago).

The transportation industry - truckers, airlines and railways - needs the fuel that comes from oil just to keep rolling.

But energy economist André Plourde, who teaches at the University of Alberta's business school in Edmonton, said the traditional public focus on oil prices as an indicator of energy costs is increasingly misplaced.

"Higher electricity and natural gas prices are much more detrimental to the health of a lot of companies than higher oil prices," he said. Oil matters most to the transportation industry, but natural gas is a key ingredient in many petrochemical products and is increasingly being used as a source of heat and light.

"There has been a shift to natural gas to heat water and space, so grocery stores and manufacturers take more of a hit," he said. "We rely more on electricity and natural gas than we did 20 years ago" when the previous energy crisis was confined to oil-based products.

Earl Sweet, assistant chief economist at Bank of Montreal, singled out petrochemicals and metals producers - such as steel and aluminum - as industries that can expect to feel the pinch of higher energy costs. But even in industries that are huge consumers of energy, companies have managed to shield themselves from the full force of the energy price storm, according to economist Patricia Mohr of Bank of Nova Scotia.

Pulp mills generate much of their own energy by burning the bark of trees they are turning into pulp, some aluminum plants have their own sources of hydro power, and other heavy industries increasingly recycle their own steam to reduce their dependence on outside sources of energy.

Picking the big industrial winner - the natural gas industry itself - is easy. "Some of them are embarrassed by their earnings," said Judith Dwarkin, vice-president of the Canadian Energy Research Institute in Calgary.

Because much of that profit is being plowed back into what is becoming a boom in exploration and development, other industries can be added to the list, according to economist Anahid Mamourian of Canadian Imperial Bank of Commerce. About half of Canada's engineering-construction industry - the part that does not build houses, offices or malls - gets its business from the resource sector, mainly oil and gas.

Regionally, there's no question who has come out ahead the most. "The province that has the $7.3-billion [Canadian] surplus tops the list of winners," Alister Smith, CIBC's deputy chief economist, said dryly.

Indeed, Alberta's provincial government surplus would have been even larger had Premier Ralph Klein (in preparation for yesterday's election call) not converted $2.3-billion in revenues into energy rebates for Albertans, who were facing some of the steepest price increases in the country.

But there are other winners too. Some are newcomers to the ranks of energy producers - such as Newfoundland and Nova Scotia, with offshore oil and gas respectively.

Some have their own oil and gas industries - such as Saskatchewan and British Columbia. And some are reaping windfall gains by selling electricity at soaring spots to the United States. British Columbia's provincially owned hydro utility is rolling in profit from supplying the energy-hungry California market. Manitoba also exports electricity to the United States.

Provincially, the big losers are Ontario, which consumes 6.6 times as much energy as it produces, and New Brunswick, where consumption is five times production.

Quebec is also a major net importer of energy.

As consumers, all face higher costs that will put a damper on growth this year. But their biggest immediate concern is not so much energy prices as the rapid slowdown in the U.S. economy, the biggest destination for their exports.

The changing economics of energy points to new winners and losers ahead - and new battles. In recent years, thermal generators fired with natural gas have become the preferred source for new electricity production. Cheap, clean and safe, gas paved the way for a shift away from coal- and nuclear-fired plants.

With electricity demand rising fast - partly to meet the growing hunger of the Internet, whose servers gobble up electrons - Mr. Plourde said higher natural gas prices raise a host of new issues, both economic and environmental.

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