From 1936 to 1945, Alberta was in default on its provincial debt, managing only partial coupon payments and no principal repayments. Out of cash and out of options, Alberta did what every bankrupt EU country wishes it could do again - Alberta started printing its own currency. Of course Alberta didn’t call it that, this fiat currency came with the nifty moniker of Alberta Prosperity Certificates (“APCs”).

1. Agcapita Update
June 20, 2012

2. Agcapita Update
CAN THE MARGINAL COST OF PRODUCTION TELL US
ANYTHING ABOUT FUTURE OIL PRICES?
Oil prices have recently dropped on concerns relating to
both growth and supply. Falling back on first principles, can
we make any predictions about prices over the medium
term? Obviously, it is the cost of the marginal barrel of oil
that sets prices at any given level of demand. According to
recent analysis by Bernstein and the Wall Street Journal,
in 2011 the production cost of the incremental barrel of
production was “$92.26 for the 50 largest listed oil and gas
companies and will reach $100 a barrel” in 2012.
RISING COSTS
Marginal cost of oil production Europe Brent crude-oil, weekly
for the 50 largest energy spot price per barrel
companies, price per barrel
$150
$100 100
75
50 50
25
0 0
2001 ‘03 ‘05 ‘07 ‘09 ‘11 2001 ‘03 ‘05 ‘07 ‘09 ‘11
Sources: Bernstein Research; U.S. Energy Information
Administration (oil price), The Wall Street Journal
Unsurprisingly, the WSJ stated that incremental barrel
costs are “rising because much of the extra oil added to
world supply has come from more technically challenging
areas such as deep water or the Arctic” which results
in “a combination of higher material costs and reduced
productivity per well.”
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3. Agcapita Update (continued)
Viewed another way, how much would demand have and out of options, Alberta did what every bankrupt
to fall to create sustained $80 prices? Looking at EU country wishes it could do again - Alberta started
the chart produced by Cambridge Energy Research printing its own currency. Of course Alberta didn’t call
Associates (“CERA”) below, it is on the order of 10 it that, this fiat currency came with the nifty moniker
million bopd or around 10% of daily demand i.e. of Alberta Prosperity Certificates (“APCs”):
if demand were to fall to around 80 million bopd
the last 10 million bopd on the right side of the
chart would be unprofitable production and would
eventually be shut-in.
ALBERTA’S FORGOTTEN DEBT DEFAULT -
PROSPERITY CERTIFICATES WITH NEGATIVE
NOMINAL INTEREST RATES TO BOOT!
From 1936 to 1945, Alberta was in default on
its provincial debt, managing only partial coupon
payments and no principal repayments. Out of cash
100 Other South and North America
90 Canada Oil Sands
Nigeria Deep Water
Cost of Production (2007) dollars)
80 Angola Deep Water
US Gulf of Mexico Deep Water
70 Brazil Deep Water
60 UK North Sea
50 Mexico
Other South Other
40 Libya America, Europe, North
China Eurasia, and Africa America
30
20 Russian
Saudi Other Middle
Arabia Federation
10 East
0
0 10 20 30 40 50 60 70 80
Cumulative Oil Production (mbpd)
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4. Agcapita Update (continued)
Name notwithstanding, fiat currency was effectively Canadian Farm Receipts Increase, Farm
what it was. The APCs were introduced in August Consolidation Trend Continues - The 2011 Census of
1936 and were used to pay government bills. Most Agriculture revealed higher Canadian farm revenues
interesting, under the plan, the recipient of the APC and an increase in farm size reflecting a continuation
was required to purchase a stamp equal to 1% of of the land consolidation trend in the industry...
the face value each week. The stamps had to be
placed on the back of the APCs for them to be valid. Oil Price Per Barrel For Biofuel Break-Even - From
For bearers of the APC, the result was that they Goldman Sachs research into biofuel efficiency - the
experienced a 50% loss of purchasing power during following table outlines the cost per barrel equivalent
the course of a year if they failed to spend them. of a range of biofuels - or in other words the prevailing
Voila, negative nominal interest rates! Talk about oil price at which they are competitive substitutes...
increasing the fabled “velocity of money”. Surely a
scheme like this is the consummation of the secret Some Quotable Quotes - Ben Bernanke - “The
dreams of every consumption obsessed, Keynesian always entertaining if not particularly prescient Ben
central banker on the planet. Let’s not tell them shall Bernanke, Chairman of the Federal Reserve: “We’ve
we? never had a decline in house prices on a nationwide
basis. So, what I think what is more likely is that
SOME LINKS TO OTHER ARTICLES YOU MIGHT house prices will slow, maybe stabilize, might slow
FIND INTERESTING: consumption spending a bit...”
Austrian True Money Supply - According to the True
How Green are Biofuels? - Some interesting
Money Supply (“TMS”) measure as defined by the
questions arise from the increasing use of food
Austrian School of Economics, US money supply has
commodities as an input into an industrial process to
grown at a rate of over 12% in the last year...
create energy - are biofuels as “green” as suggested
and are they competitive against conventional
Discounts Hiding in Plain Sight - Natural Gas - “A few
petrochemical energy sources?...
weeks ago I wrote about the investment prospects
of two asset classes in the energy space. One is a
BIS - Unsustainable Public Sector Fiscal Path - Some
less-focused on part of the Canadian oil sector -
interesting quotes from a recent study by the Bank of
conventional heavy oil in the Lloydminster area - and
International Settlements (“BIS”)...
the other is the much beaten down North American
natural gas sector...”
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