Tar sands test Obama’s green credentials

New pipeline is another indication that the US has failed to curb its oil addiction.

After a week in which WikiLeaks revealed in forensic detail how rich countries set about nixing a meaningful climate agreement at Copenhagen last year, climate-change hypocrisy looks increasingly like a fact of life. In the context of all the duplicity laid out by the leaked embassy cables, official doubletalk on emissions reductions is no more of a revelation than Russian corruption, or America's cosy relationship with the Saudis.

But as another round of climate talks limps to its conclusion with the usual cry of "a proper deal next year", Barack Obama has an opportunity to do something substantial about climate change. He could reject a proposal for an oil pipeline that would pump 900,000 barrels of the world's most polluting fuel – the oil squeezed out of Alberta's oil sands – to the oil refineries on America's Gulf Coast every day.

If the project – which would extend an existing pipeline running from Alberta to the midwest – goes ahead, America's dependence on a resource which has been described as "the dirtiest source of transportation fuel currently available" will be locked in for decades. You don't construct a 2,000-mile pipeline at the cost of $7bn if you plan to stop using it in a couple of years. US demand for Canadian tar sands will soar. Canada's oil companies will set about their task of converting Alberta's wilderness into greenhouse gases with ever greater feverishness.

It's hard to exaggerate how bad oil sands are. Turning this gritty mix of bitumen, sand and heavy metals into fuel is three times as energy-intensive as extracting conventional crude. The extraction process has poisoned Canada's surface water with mercury, arsenic and lead. Only yesterday it emerged that Canada's environment department has never tested the nearby Athabasca River for the presence of pollutants from the mining operation. This is despite the existence of a permanent laboratory downstream from the oil sands, which checks the Athabasca for the presence of all kinds of chemicals – but not oil sands pollutants. Huge tracts of Alberta now resemble Mordor.

The extension to the pipeline has already stalled twice. In July the US state department extended its review period for assessing the environmental consequences of the pipeline by 90 days. Then, in mid-October, with the Deepwater Horizon disaster still fresh in voters' minds just a fortnight ahead of the midterm elections, the government delayed once more. Crunch time is now approaching.

Hillary Clinton was criticised in October for letting slip that the government was "inclined to approve" the pipeline – before the end of the review period. As for Obama himself, he went quiet after admitting early last year that the oil sands' carbon footprint was a concern. A WikiLeaks cable from not long after gives the likely reason: he was urged to shut up on the subject, for fear of offending Canada's "sensitive" government.

Yesterday the No Tar Sands Oil Campaign, a group sponsored by most of America's environmental lobby groups, launched a $500,000 ad campaign calling for Obama to block the pipeline by calling for another audit of its environmental impacts. They claim doing so could prevent the next oil spill disaster, since a leak could endanger Nebraska's Ogallala Aquifer – the source of nearly 80 per cent of Nebraska's drinking water

Inevitably, Big Oil is fighting back. The American Petroleum Institute (API), Washington's biggest oil lobby, is launching its own campaign, saying that the pipeline's environmental impacts have been exaggerated and that Canadian oil will reduce America's dependence on the Opec cartel. It would, of course – but so would investing in clean energy.

But if Obama chooses to oppose the pipeline he might find he has the public's backing, despite the inevitable scrap in Washington. As Cindy Schild of the API conceded: "We've been promoting the economic benefits and jobs this resource can bring and we don't think it has been fully registering with the public."

Back in 2006, Obama said: "Our continued use of fossil fuels is pushing us to a point of no return. And unless we free ourselves from a dependence on these fossil fuels and chart a new course on energy in this country, we are condemning future generations to global catastrophe."

Obama must be acutely aware that, so far, his government hasn't been able to do much for those future generations. Allowing this pipeline to go through would be a sign that they don't really figure in the arithmetic of US politics at all. As long as oil is pumped through the pipe every green sentiment mouthed by Barack Obama or his successors will be a platitude. A government trying to reduce its dependence on fossil fuels doesn't prolong its dependence on the worst kind of fossil fuels.

The battle lines have been drawn – but do Obama and his government have the bottle to take the right side?

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The global shipping slowdown hints at a recession around the corner

Instability in China and tumbling commodity prices have devastated the world’s freight providers – a strong indicator of trouble to come.

This is beginning to have the feel of 2008 all over again. Policy makers around the world are in denial once again as global stock markets dive. In 2008, the slowing of the world's biggest economy – the US – sent the global economy into a tailspin. The concern now is that the slowing of the second-largest economy, China, may well have similar global effects. Chinese growth, which averaged 10 per cent for three decades through to 2010, has decelerated for five straight years and in 2015 slowed to 6.9 per cent, its lowest rate in a quarter of a century. The IMF is forecasting that Chinese growth will slow further to 6.3 per cent in 2016 and 6 per cent in 2017, which may well be overly optimistic. There is already speculation that China’s banking system may see losses even larger than those suffered by US banks during the last crisis.

The bad news from China appears to have already spread to the US, which has seen GDP growth slowing sharply in the last quarter of 2015. US industrial production and core retail sales are both falling, and there have been marked contractions in core capital goods shipments and private non-residential construction. Business fixed investment declined nearly 2 per cent last quarter. Despite the bad news, last week Federal Reserve chair Janet Yellen astonishingly claimed that “the US economy is in many ways close to normal”. By contrast, Ruslan Bikbov from Bank of America Merrill Lynch calculates that there is a 64 per cent probability the US is already in recession. My expectation is the next move by the Fed will be to cut rates.

Company profits are tumbling as commodity and oil prices decline. BP reported a $3.3bn fourth-quarter loss last year while Exxon Mobil reported a 58 per cent fall in its quarterly profit. It isn’t just oil companies. Last week, Rio Tinto – the world's second biggest mining company – reported profits down 51 per cent after commodity prices collapsed amid slowing growth from China. Company profits are also suffering due to a big decline in the amount of freight being moved, especially to and from China. Moeller-Maersk, the Danish conglomerate and the world’s biggest container-ship operator by capacity, last week reported a fourth-quarter net loss of $2.51bn.  

DP World, one of the world’s biggest port operators, also says that global volume has slowed sharply. It reported that volumes at its ports rose by 2.4 per cent last year, compared with 8 per cent growth in 2014. Data provider Container Trades Statistics said this week that Asia-to-Europe trade fell nearly 4 per cent last year. Freight rates in 2015 averaged $620 per container on the Asia-to-Europe trade route. Typically, ship operators need more than $1,000 to break even. In February, the cost of moving a container from Shanghai to Rotterdam fell to $431, barely covering fuel costs. Figures released by the Shanghai Shipping Exchange show that the country’s 20 largest container ports grew by 3.7 per cent over 2014, compared to 5.5 per cent the previous year. The Hong Kong Port Development Council reported that throughput at the port of Hong Kong fell by 9.5 per cent in 2015.  

The Baltic Dry Index (BDIY) – an index of the price for shipping dry goods such as iron ore and coal (oil is wet) as shown in the chart below – is at a record low of 290. It is down 75 per cent since its recent peak in 2015 and down 98 per cent from its peak of 11,793 points in May 2008. The collapse to 772 by 5 September 2008 (a week before Lehman Brothers failed) presaged the global recession and it is falling again. Capesize vessels, which are too big to get through the Suez or Panama canals, had an average daily hire last week of $1,484, compared with a peak of $233,988 in June 2008. Even though there is an oversupply of ships, global demand is collapsing.

The International Air Transport Association (IATA) released figures for global air freight, showing cargo volumes expanded 2.2 per cent in 2015 compared to 2014. This was a slower pace of growth than the 5 per cent recorded in 2014. This weakness apparently reflects sluggish trade growth in Europe and Asia-Pacific. “2015 was another very difficult year for air cargo,” said Tony Tyler, IATA’s Director General and CEO. “Growth has slowed and revenue is falling. In 2011 air cargo revenue peaked at $67bn. In 2016 we are not expecting revenue to exceed $51bn.”

The current contraction in rail freight is apparently reminiscent of the drop that started at the end of 2008 and carried on into 2009. China's rail freight volumes fell by a significant amount last year. According to the National Development and Reform Commission (NDRC), volumes fell by 11.9 per cent, a further increase on the 2014 slowdown, when traffic declined by 3.9 per cent.

In the western US farm belt, grain trains are so abundant you can’t give one away. Since the middle of last March, carloads of agricultural products, chemicals, coal, metals, autos and other goods have declined every week. Shipments of US coal, the biggest commodity moved by rail, declined 12 per cent in 2015, according to the Association of American Railroads. The cost of carrying spring wheat from North Dakota to the Pacific coast has dropped by a third in the past two years. In early 2014, grain companies with a train to spare could command $6,000 per car above the official railway tariff, traders say. Today, to avoid hefty contract cancellation fees, they are paying others to use their unwanted trains.

Manufacturing output in the UK fell for each of the last three months and is down 1.7 per cent over the year. The overly optimistic Monetary Policy Committee is forecasting GDP growth of 2.2 per cent (2.4 per cent) in 2016; 2.4 per cent (2.5 per cent) in 2017 and 2.5 per cent (2.4 per cent) in 2018 (the latest, broadly similar, OBR forecasts in parentheses).

So all is well then? Probably not. Mark Carney has run out of ammunition with the Bank Rate at 0.5 per cent, compared with 5.5 per cent in 2008, and has little room to manoeuvre. Negative rates and more quantitative easing, here we come. George Osborne has never explained what he would have done differently in 2008 – his plans for a budget surplus are already in disarray as the economy slows. I am not saying a recession is going to happen any time soon, but it well might.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire