Crude Observations

1, 2, 3, 4 I declare a tariff war

It’s been an interesting and momentous week hasn’t it? Where to start? G7 debacle? North Korea? OPEC? I mean there is so much going on, only some of which seem to affect us as Canadians, but of course that is hopelessly naïve since it all impacts us in some way, especially as to how we interact with the United States. Which of course means that this is totally about that surreal G7 meeting, the fallout and trade. OPEC can wait until next week.


As everyone knows, Canada of has a unique relationship with the US. We are America’s hat, an afterthought to the beast south of the border, relevant only when Drake gets owned on social media.


We are a rules-based society, unfailingly polite, insufferably smug, slow to anger and the ultimate homers. We have trouble when things don’t go our way, or don’t follow the rules of order. Chaos and confusion are not in our national DNA. Given a choice, we would prefer to just merrily go on our way, process our resources, selling them mostly to the United States, argue about pipelines, pay our carbon tax, crack a cold one and enjoy the weekend.


However, as the last few days, weeks and years  have shown us of course, with President Donald Trump in the White House, the quiet weekend at the lake ain’t gonna happen.


So, where to begin? It’s a hard one as what I really want to talk about is the G7 debacle (one-sided to people on either side), but it’s hard to discuss that without first addressing what may or may not have been a momentous meeting in Singapore.


But first a story called Death of a Timeshare Salesman


Some years ago, in a moment of weakness I got hoodwinked into one of those free vacation scams – you know the one – a “free” trip, with a catch. Anyway, after my wife told me what a moron I was for being scammed, we ended up going anyway.


As part of the scam, we got to stay in a fabulous resort, complete with beautifully appointed apartment style rooms and all my wife and I (it’s always 2 right?) had to do was sit through a “short presentation”. Defeated, at the appointed hour we were loaded onto a bus filled with fellow suckers, transported offsite, were fed some bagels and stale coffee and soon found ourselves plunked in front of Mr. Slick himself, the preposterously named Johnny Pinto who proceeded to extol the virtues of time share ownership via every trick in the sales book.


Fortunately, having already decided we weren’t going to be suckered, we made it through with the bank account intact, but it was close. The Pinto was that good.


I couldn’t help but think of Johnny Pinto as I watched the show in Singapore play out earlier this week.


I mean here we have the mark – Kim Jong Un – dictator, genocidal lunatic, enslaver of people, murderer of family, general psycho – being hosted in a free hotel room in a luxury resort, watching a poorly made promotional video showing how awesome life would be if he just bought in – all delivered in the soft, sing song dulcet tones of the closer in chief – none other than President Donald J. Trump.


And of course he bought in – you can’t help it. This is Donald’s wheelhouse. A true real estate professional is able to deliver the right amount of charm and unrelenting pressure – enough to crush the spirit and drain the pocket books of the most obstinate buyers.


So I understand how Kim Jong Un felt – his resolve quickly turned to mush and in exchange for agreeing to all the things he had agreed to 4 weeks ago, he signed on the dotted line for his stake in a time-share condo project that may never get built. In exchange of course he got a bunch of stuff he wanted from  –  throwaways like American recognition, legitimacy, a hand shake, a photo op and, as luck would have it, a token of appreciation for his Chinese overlords – an indication that the US, well Trump, was willing to stand down from more than 60 years of partnership with South Korea and stop “provocative war games”. But those beaches! Just imagine.


Anyway, I digress. This was not the point of my blog. The point was to contrast the North Korea spectacle and lovefest with the G7 debacle (otherwise known as “what the F just happened” day) and maybe talk about a few ideas that might help us dig out of this hole.


So, to recap and set the scene.


Last week the G7 meeting was held in Charlesvoix, Quebec, hosted by none other than Canada and Justin Trudeau. US President Donald Trump, perhaps pre-occupied by the meeting with his new pal from North Korea arrived late and left early, but not before breaking the family china and basically doing his best to leave yet another vestige of the great Western liberal democratic alliance in tatters.


President Trump arrival came fresh off imposing new tariffs on steel and aluminum, disproportionately affecting his host, threatened more tariffs, agreed then disagreed to a formal communique, asked for Russia to be reinstated to the G, didn’t flush the toilet or put the seat down and before leaving warned the elected leaders of his most valued allies that they better not retaliate on his tariffs or else. All in less than 24 hours. And that’s apparently how it went down. Or at least so we’re told.


After Trump left and in his closing press conference, Justin Trudeau was asked about tariffs and repeated his criticism of the recently imposed ones, said we would have to retaliate in kind and then stated we wouldn’t be pushed around, no matter how polite we may be.


Quite bold by Canadian standards but in the global context a puff pastry.


But by the reaction, you’d think we just set off a stinkbomb in the Air Force One biffy.


President Trump proceeded to launch a Twitter broadside calling Trudeau weak and dishonest, sending his gasbag sycophants out to the Sunday news shows to say Trudeau stabbed him in the back and that there was a special place in hell reserved for JT for standing up to “President Donald J. Trump”. In fact, the President was so incensed that he continued to dump on Canada and Trudeau a full two days later during his post North Korea press conference.


Wow, right?


So what, exactly, did we do so wrong? I mean we’re Canada right? We’re supposed to be the good guys.


From the Canadian perspective and as near as I can gather, when Trump announced his tariffs were actually going to be imposed a couple of weeks ago, we said we were disappointed and would have to retaliate. Then he came to the meeting and said the tariffs stood so we said the same thing. After Trump left early (again, without flushing and leaving the seat up) Trudeau was asked about the tariffs and he said the same thing. Pretty consistent, no? Not a surprise at all.


From the American (Trump) perspective, I guess they thought they had made progress, the shiny new tariffs were in place so suck on that allies, he may or may not have made a NAFTA concession but he was on his way to deal with North Korean and he’d be damned if some uppity Canadian tried to make him look weak before meeting with the Little Rocket Man/New BFF. Plus those dairy tariffs are super high! Weak! Dishonest! Gonna cost Canada a lot of money!


Two diametrically opposed interpretations of the same event.


Anyway here we are. Technically, we’ve called out the bully or poked the bear or whatever you want to call it. Tariffs on major markets are there and we will soon be imposing our own. We await an arbitrary escalating decision on whether imports of automobiles from Canada constitute a national security risk to the United States or just part of the largest and most sophistically integrated cross-border supply chain in the world. It’s the first skirmish in an unwinnable trade war.


I have to wonder, Donald, Justin – where were your inner Johnny Pintos?  Can’t you guys sell to each other? I mean it worked in Singapore with a psychopath.


It’s hard to say what Johnny might have done differently, but I think in his own icky salesma shmarmy way he would have weaseled through, gone back to his selling 101 handbook and let us all know that he just wanted to make sure we got the deal of our lifetimes.


Most of all, he wouldn’t give up, he would reengage and try to close the deal. Gotta feed the fake kids.


Let me just state for the record, this isn’t simple and this is no typical negotiation. I negotiate for a living and my impression is that Donald Trump approaches every negotiation as a discrete winner take-all moment where he always has all the leverage and losing doesn’t exist. This is what makes him a bully and it’s also what makes him effective. We run into these types all the time – they are generally the ones with the most money – you want my money, these are the terms. What? No. What? No. What? No. Most counterparties back down to this pressure, unless…


Unless what? Well in these situations, it is incumbent on the weaker party to find, define and use whatever leverage they can find no matter how small. Sometimes it’s quantitative, sometimes it’s qualitative. But it’s always there. And the point is it’s a lever – it doesn’t have to be big to work


So what’s a Trudeau to do when the backs of Canadians are up, your largest trading partner hates you, you have a space reserved in hell, the economy is going to take it on the chin and options appear limited. Where is the leverage with a guy who apparently can’t be levered?


Well, there are three options in the Johnny Pinto handbook, the Fuddle Duddle, the Just Watch Me and the Open Book Compromise.


Fuddle Duddle


This is the classic elder Trudeau move, obfuscating what was actually said by saying something else. I am reminded of this strategy because of the reporting now coming out that President Trump may have offered to waive the contentious sunset clause provision in NAFTA or extend it or something in private discussions with Trudeau.


If this is indeed the case, then the Trump Tirade is in some ways justified in message if not delivery. After all, if one side thinks they have a deal and the other side plays the media as if they are all tough, then sure, I’d be mad.


But surely it’s not as simple as that. The comment happened in private discussion. And in the context of steel and aluminum tariffs that are already costing the economy, is some vague statement enough to go on? I don’t think so.


My own personal belief is that with a committed counterparty desirous of finding a solution, Trump and Trudeau could have sat down in a room for an hour and solved the few contentious issues remaining on NAFTA and moved on. That they didn’t is telling. That Trump did not mention the sunset clause in any tweet critical of Trudeau is even more so.


I think no one is telling the truth because there are different motivations at play.


Trudeau didn’t say “F you” to the Americans in his press conference, he said Fuddle Duddle. Which is halfway between the former and “Let’s Make a Deal”.


The fuddle duddle works because you’ve said/not said something and engendered a massive over-reaction. Then everyone gradually calms down and cooler heads prevail. The problem here is that you need a middle-man to come in and clean up the miscommunication and act as the honest broker. I’m not sure where that person comes from, but it’s the kissing and making up that gets the deal done.


Just Watch Me


Another classic Trudeau move – how far are you prepared to go Mr. Trudeau? Just watch me!


If the sunset clause was never really on the table, or might have been but all the other tariffs were there, or it really is all about the 10,000 some-odd votes that go with supply management, then this is a strategy that might work.


While Trudeau may be wrong about a lot of things, he is not wrong about this – Canadians will not be pushed around. We will gladly sacrifice ourselves on points of principle.


The tariffs introduced and the justification for them are so transparently protectionist and shallow that we should have every right to be offended. We have the longest undefended border in the world and the largest and most integrated trading relationship in history – why are we messing with it? It’s a great question.


And when pushed, Canadians push back. It’s not an aberration that fighting is still allowed in hockey. We are bad asses when we need to be.


Look, supply management is dumb. Pretty much everyone in Canada wants it gone. There. I’ve said it. But if it goes, it goes when we say so. Not you.


So, rant at us that it has to go? Say only half the story about our dairy tariffs, deny your own subsidies? Make our farmers out to be bad guys? Insult our “captain” and by extension our country? Do all these and I’m going to pull the jersey over your head and start wailing away until the ref separates us. It doesn’t matter if it’s right or wrong, we’re defending our team.


So how far should Trudeau be willing to go under the Just Watch Me scenario? It’s ALL on the table. And to get the leverage, he needs to put President Trump on the defensive. The six month opt out for NAFTA isn’t just there for the Americans, it’s our clause too. Take it to parliament. Invoke it. Seize the momentum. Send a wake-up call to Congress and the 30 some odd states whose largest export market is Canada.


All this blather about “hitting Trump where it hurts” only works if you can actually execute it. Boycotting a hotel in Azerbaijan that you were never going to go to anyway isn’t going to move the needle.


How to call the bluff of a guy who doesn’t really care and is bigger than big? Go bigger, get in front of him. He’s not strategic, he’s tactical. It can work. But it will require nerves of steel.


The Open Book Compromise


The final way to get leverage is to put all the cards on the table for all to see. Actually negotiate in public. Be open about it.


If there are sticking points in the NAFTA negotiations, do the Canadian thing. Offer up the compromise on those things. Make it reasonable, show both sides but most importantly, show it. Don’t let the other side hide behind a pack of lies and be willing to trade.


Sunset Clause – we don’t like it, you want it. Five years is too short, infinity is too long? Fine. 10 years. Done. Next!

Supply management – acknowledge the tariffs and the US subsidies. Talk about how both distort a market. Propose to implement the same structure as agreed to under the TPP. A gradual phase out. In return for reduced subsidies. Deflate.


And so on.


Will this solve things? Unlikely. But what it does is get the problem and solutions out in the open. And your counterparty can’t hide behind BS anymore. In essence, if you’re existing tactic of negotiation isn’t working, change the dynamic.


How do we get started on this? Simple.


Trump likes to implement and discuss policy by tweet, so try it out. Here’s how it might read:


@realdonaldtrump – sorry for all the confusion at G7, no harm no foul. How about a reset, we meet halfway on NAFTA stuff and bury all this tariff nonsense. Good 4 USA and good for us. #makenorthamericagreatagain #fortressnorthamerica – I’ll have my people reach out. JT


See how simple that was?


Pretty sure that’s how Johnny Pinto would have done it. If he had actually taken just a bit more time to study me, I might be the proud owner of a prospective time share property in North Korea right about now.

Prices as at June 15, 2018 (Jun 8, 2018)

  • The price of oil lost ground during the week on expectations of an OPEC supply increase
    • Storage posted an decrease
    • Production was up marginally
    • The rig count in the US was mixed
  • After a larger than expected injection, natural gas gave up some ground then rallied thru the end of the week…


  • WTI Crude: $65.06 ($65.74)
  • Nymex Gas: $3.022 ($2.890)
  • US/Canadian Dollar: $0.75870 ($ 0.7733)


  • As at June 8, 2018, US crude oil supplies were at 432.4 million barrels, a decrease of 4.1 million barrels from the previous week and 8.7 million barrels below last year.
    • The number of days oil supply in storage was 25.2 behind last year’s 29.5.
    • Production was up for the week by 100,000 barrels a day at 10.900 million barrels per day. Production last year at the same time was 9.330 million barrels per day. The change in production this week came from a fall in Alaska deliveries and a increase in Lower 48 production.
    • Imports fell from 8.346 million barrels a day to 8.1 compared to 7.631 million barrels per day last year.
    • Exports from the US rose to 2.030 million barrels a day from 1.714 last week and 0.722 a year ago
    • Canadian exports to the US were 3.711 million barrels a day, up from 3.645
    • Refinery inputs were up during the week at 17.5 million barrels a day
  • As at June 8, 2018, US natural gas in storage was 1.913 billion cubic feet (Bcf), which is 21% lower than the 5-year average and about 29% less than last year’s level, following an implied net injection of 96 Bcf during the report week
    • Overall U.S. natural gas consumption was down 1% during the report week
    • Production for the week was up 0.2%. Imports from Canada were down 2% compared to the week before. Exports to Mexico stayed the same.
    • LNG exports totalled 21.8 Bcf.
  • Slowly but surely… As of June 15 the Canadian rig count was 139 . Rig count for the same period last year was actually higher.
  • US Onshore Oil rig count at June 8, 2018 was at 863, up 1 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was down 4 at 194.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was up 1 at 20
    • Offshore rig count at January 1, 2015 was 55
  • US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 62%/38%



  • Tariffs
  • Retaliatory tariffs
  • Trump Watch: G7. See above. North Korea. See above.
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