Let’s play “Jeopardy” Category – Oil shock

First Published in Telegraph Journal  August 5,2006

This country is warm all year long. 

This country has been called a third world country with first world people.

The language you hear is not English.

The President of this country has been in power for 47 years. The United States government tried to assassinate him.

In 1992 the cost of oil here rose such that the government had to dramatically reduce oil imports.

If you answered “What is Cuba?” you win.  Many Canadians visit Cuba for the lovely beaches, warm sun and its friendly people but few realize the tremendous shock it received in the early 1990’s when its preferential trade agreements with Russia stopped. Oil, food imports, spare part, and agro-chemicals from the Soviet Union stopped arriving. Cuba’s sugar was no longer required. Trade had instantly dropped by 85% and they could no longer pay for oil. Usage of oil dropped from 13 Million tons to 1.8 Million tons in 1992. In contrast, Canada uses roughly 89 Million tons per year. Looking at their experience shows us the results of large reduction of oil on any economy.

Within a short time, electricity rationing took place by rotating blackouts; no refrigeration meant spoiled food. Cuba’s farming had always been oriented towards export of sugar cane, citrus, and tabacco. These exports paid for importation of other food. Agriculture machinery and buses stopped running with reduced planting or harvests rotting in the fields. The Cuban GDP dropped by 50% over the 1989-93 period. The prime activity became the search for food to sustain life. The average Cuban lost 30 pounds. Life was grim for many years. Imagine a country with a year round growing climate and excellent arable lands, yet being unable to feed its citizens.

Dramatic change became necessary with oxen taking the place of tractors. Food for cities was planted on vacant lots and rooftops. The government bought 3 million bicycles from China. Horse-driven carts are still seen today on major highways. The recovery of the economy has taken many years and Cuba still has difficulties paying for oil.

Around the world, farming has become an industrial activity with export of food as a primary objective. Standard economic theory suggests that each country produce the goods that correspond to its natural advantages and everyone gains with this trade. This works as long as oil is available to run the machinery of industry and transportation.

However, there are significant differences between Canada and Cuba:

  • Canada is self sufficient in oil overall, although we import almost a million barrels a day in the east. Perhaps some vulnerability issues here.
  • Canada uses considerably more oil than Cuba – for winter heating requirements, large industrial production and huge transportation requirements due to the great distances in Canada. Our wealth permits us to use energy on what most of the world would consider unattainable luxuries or non-essentials (SUV’s, huge homes, vacations around the world, etc.)
  • Our export economy is totally linked to the world. Cuba’s is the exact opposite being somewhat isolated by the United States and internal government policy.
  • One major similarity Canada and pre-shock Cuba shared is the export oriented agriculture model. (Canada sells large quantities of beef, wheat, and potatoes to other countries) We also import a great deal of our food products, as the climate does not permit year round production in present farming modes. Most of the farming is done on industrialized farms with fertilizer and oil being a substantial input.

    Some thoughts on their experience:

  • The good news is that the Cuba experience is unique and shouldn’t affect us in Canada. Canada has not been affected by $75 oil. The Cuba experience was “extreme rationing by price” felt by an impoverished economy. Other poor semi-industrialized countries without the wealth to purchase high priced oil could be at risk in the next 15 years but not to the same extent as Cuba.
  • The bad news is that extremely high oil prices are expected sometime in the next 15 years when oil production declines. This will deliver substantial loss of jobs and inflation followed by depression to the Canadian economy when oil goes to unexpected highs. GM, Ford and Chrysler may be out of business if they fail to adapt their car models with poor mileage. Ontario has 330,000 jobs in the auto sector. Quebec has significant jobs in the aerospace sector. When the airlines are negatively affected by oil, they don’t buy planes, which affects part suppliers and jobs in Quebec. Atlantic Canada has an export economy that will catch pneumonia when the US economy loses strength.
  • When we examine our personal budgets, most of us have very little money left over after the essentials like food, rent or mortgage car payments and gas. As oil prices skyrocket, the cost of living for the majority of Canadians will be greatly affected. The impoverished majority will have to make serious choices.

    Something about this situation makes me think about Aesops fable of the industrious ant who prepared for the coming winter and the lazy grasshopper who danced the summer away having fun. Certainly, life should include lots of fun, but can we also prepare for the day when oil will not be cheap and plentiful? It would be intelligent and thoughtful of us to reduce our oil usage now so that our children and grandchildren will have a decent life. Can we ask our political parties what they propose when the next election is called?

    The next series of articles will examine the choices that governments and individuals can make to ease our transition into the post oil era. Some of these will include conservation, various power production methods and costs, housing and transportation alternatives and many other subjects.

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