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Kinder Morgan’s attempt to build a pipeline reflects badly on Canada

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ALMOST all Canada’s oil and gas is landlocked, so getting it to market requires pipelines—lots of them. But building them requires skills more suited to circus artists than engineers. They must walk the financial high wire, jump through ever-changing regulatory hoops and juggle conflicting demands from environmental groups and numerous governments. The list of failures is long. It includes Northern Gateway, meant to bring Alberta crude to a port in northwestern British Columbia; Energy East, which would have linked Alberta to the Atlantic coast; Pacific Northwest, to bring gas to the west coast; and the legendary Mackenzie Valley gas pipeline, first proposed in 1974 and dropped in 2017 by its last, exhausted promoter.

Another flop is likely following the announcement this week by Kinder Morgan, one of North America’s biggest pipeline firms, that it would freeze spending on the Trans Mountain Expansion, a C$7.4bn ($5.9bn) plan to triple the capacity of an existing pipeline carrying fuel from Alberta to a port near Vancouver (see map). Steve Kean, head of Kinder Morgan, complained on April 8th that the newish government in British Columbia (BC) continued to put obstacles in the way of the project, even though it had won approvals from the previous provincial government and the federal government. Unless the governments in Vancouver and Ottawa sort out who has jurisdiction, and provide clarity by May 31st, the company will abandon the plan.

The chaos could be far-reaching. The failure of the Trans Mountain Expansion could provoke a constitutional crisis. It would exacerbate a tit-for-tat trade war between BC and neighbouring Alberta. It threatens to undo a carefully constructed national climate-change plan. And it may alienate foreign investors who are already pulling back from Canada.

The tussle over who has jurisdiction between the federal government and the powerful provinces goes back to Canada’s creation in 1867 and frequently ends up in court. Justin Trudeau, the prime minister, insists the pipeline is in the national interest. The constitution gives parliament the power to override provincial laws and regulations in certain instances. But governments use this power sparingly. In the 1960s, when Quebec refused to allow neighbouring Newfoundland and Labrador to send electricity through Quebec and onwards to American customers, the federal government simply stood by.

Alberta’s New Democratic government badly needs a pipeline to carry the province’s oil to the ocean to reduce its dependence on America, which buys 99% of Canada’s oil exports. Oil firms believe access to new markets would increase the price of Western Canadian Select, the country’s heavy crude, which trades at a discount to America’s lighter West Texas Intermediate benchmark because of higher transport and refining costs.

But BC’s minority New Democratic government is equally determined to placate the Greens who prop it up by honouring a pledge to block the pipeline. As a result of the tiff, Alberta temporarily suspended the import of BC wines earlier this year and is now threatening to restrict exports of petrol to the province, which the existing Trans Mountain pipeline carries in addition to light and heavy crude.

Alberta’s agreement to a national climate-change plan that includes a carbon tax was conditional on getting at least one pipeline built. The Trans Mountain Expansion was its best hope. The future of the partially built Keystone Pipeline System, which links Alberta with America, is still uncertain. Should the Trans Mountain Expansion fail, the national climate deal may too. Canada is already struggling to meet its targets. Losing Alberta could loosen constraints on greenhouse-gas emissions from the oil sands, which make up almost 10% of the national total.

Perhaps the biggest source of concern is the message to foreign investors. Last week David McKay, head of RBC, Canada’s largest bank, fretted that investment was flowing out of the energy and clean-technology sectors “in real time” because Canada was not competitive. Tax and regulatory changes are making America more attractive in comparison, says Philip Cross, an economist. Kinder Morgan wants Mr Trudeau to sort out the mess. The company is looking for “some kind of pre-emptive action” that stops BC from frustrating and opposing the project, Mr Kean told analysts. In short, he wants a ringmaster.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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