Evidence of meeting #2 for Subcommittee on Oil and Gas and Other Energy Prices in the 39th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was oil.
A recording is available from Parliament.
2:35 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Thank you, Mr. Chair. And thank you, Mr. Eyking.
I have a very short question for now. You've all pointed out about the paper market. My concern is what happens when you have investor demand outstripping consumer demand.
Can any of you give us a real reason why futures commodities markets in the past have prevented non-commercial players from playing? What were the real reasons for saying we should not have speculators in this particular market? We understand the dynamics of how it will hurt, but I'd like to hear from any one of you as to why these prohibitions were put in place.
Ms. Russell, I can begin with you, if you wish.
August 27th, 2008 / 2:35 p.m.
Professor, School of Public Policy and Administration, Carleton University
Sure. I know the story in the States the best. Back in the thirties, there was concern.... Certain individuals were seen to have taken positions in wheat and things like that, which was suspected of driving the price out of whack. It's not just that the price went high; it's the volatility, that they can push it up and push it down.
When they pushed it down, the wheat farmers were angry and so on. That created demands for limits to entities that don't have a commercial reason for being in that market; i.e., they're not growing the wheat or using the wheat to make other products, so they should have limits in terms of how much they can participate in the market. It doesn't eliminate speculation, but it does keep it in reasonable bounds.
2:35 p.m.
Partner and Financial Advisor, PFC Energy
There's still position limit, by the way.
The problem, as Mr. Masters has identified very well, is that you can go on the market and have a position limit, but if you can go through the back door, if you will, and take an index fund, you don't have a position limit. We have opened a loophole for companies. We closed the door, but we left the window open. We've been arguing for some time that they should close the window too. We opened the window in regard to the changes in the regulations in 2000, which has allowed a lot of these players to burst the position limits that the regulators have set. That's a real issue.
Also, we should remember there's a reason that the non-commercial are in the market. They create liquidity. I remember the oil market in the early and mid-nineties. There was a very small liquid market, where you had very large commercial players who actually used cargoes and their physical positions to manipulate prices. We often had manipulation on the brand price, what we used to call the “brand squeeze”, etc. The commercial has rote liquidity, and liquid markets are good. The question is whether they are too good sometimes.
2:40 p.m.
President, Masters Capital Management
I think the difference is that you want sufficient speculation but you don't want unlimited speculation. You need sufficient speculation to grease the wheels to allow for the liquidity that Roger was talking about, but you don't need too much speculation because you then destroy the price discovery process. And if you destroy the price discovery process, there is no reason for a futures market.
2:40 p.m.
Conservative
2:40 p.m.
Independent
André Arthur Independent Portneuf—Jacques-Cartier, QC
Thank you.
What an absolutely fascinating day! We have learned a great deal and we have defined concepts because of our guests who have been excellent teachers and wonderful coaches.
What we have just heard about speculators could be very effective. There is something morally repugnant about the idea that speculators can fix the prices of essential commodities. We would not permit speculators to control or influence the price of vaccines or antibiotics. Things like that appall us.
But Mr. Sprott hit us over the head with a concept a few moments ago when he told us that Canada is richer because of current oil prices which are kept up by speculation on international markets. I now realize that there are two sides to the story. You can look at things from the point of view of the consumer, who will always say that things cost too much, or from the point of view of the producer, who will say that they do not cost enough.
If we believe that Canada can become an energy giant, we must include oil, but also electricity. In Quebec, there is a deeply held view that electricity must be as cheap as possible so that the people get the maximum benefit. As a result, there is less and less to export because we waste more and more.
If we tell ourselves that oil is always too expensive, it also means that the provinces of Canada that have oil will take in less and less revenue because the price is not allowed to rise. The collective wealth will be affected, with fatal results.
Madame Russell, you told us that those regulations against those scalpers have been made easier for them. Could you estimate what would be the price of oil if those regulations had not been modified?
2:40 p.m.
Professor, School of Public Policy and Administration, Carleton University
I read a quote that I think said $80 to $90.
2:40 p.m.
Independent
André Arthur Independent Portneuf—Jacques-Cartier, QC
Okay. Would the oil sands be in operation at that price?
2:40 p.m.
Professor, School of Public Policy and Administration, Carleton University
2:40 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Mr. Sprott, I have a couple of questions.
You've raised some very interesting points here. I notice on page 11 of your presentation that you say 60 of 98 producing countries have peaked. I note here that it doesn't include Saudi Arabia. I think it's a fairly significant omission. I know that you will know that is not possible, given that they don't provide information.
I wonder if you have any comments for this committee about the fact that Canada doesn't either. In fact, Canada provides it sporadically, every month or every year.
This market functions on a day-by-day basis. I know you know that, because you're in the business of working and placing money for clients. How is it that you can make the statement you've made about Canada being a great place, having all this kind of oil, when you have no idea how much oil we have on any given day?
2:40 p.m.
Chief Executive Officer and Portfolio Manager, Sprott Asset Management
How much we have or how much we produce?
2:40 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
How much we produce, how much we have, how much we have in storage, how much we have in inventory, on a given day or on a--
2:40 p.m.
Chief Executive Officer and Portfolio Manager, Sprott Asset Management
I don't know each day, but I'm pretty certain that we know exactly what the country produces every month, and the data is available.
2:40 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Yes, but the data would be irrelevant if trades are taking place on a daily basis. In fact, as we speak, there are probably trades taking place right now, over the counter, in Winnipeg, in London, around the world. I find it a little fascinating that you've made a declaration, which I think is important, that Canada does in fact have plenty of oil and we should be celebrating this.
Tell me, what celebration is there for Canadian consumers when the price of oil rises and the Canadian dollar doesn't rise correspondingly, as it did two years ago? We've seen it stall.
2:45 p.m.
Chief Executive Officer and Portfolio Manager, Sprott Asset Management
There is no doubt that the consumer, if the price goes up—and personally I think the price is just fine--on a world-wide analysis, then everyone suffers. Everyone who is a consumer suffers. If you want to ask me if, as a country, we benefit, yes, I think we benefit more than almost anybody. I really do. The government revenues go up, the provincial revenues go up. It's a huge source of revenue.
I'm only trying to give you my.... There are both losers and winners in any price going up.
2:45 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
I've just heard the peak used before, and I've heard the arguments about supply and the availability around the world, and about more difficult places in order to get new supply. And I've heard that we can't poke in the hole and have conventional oil coming out, and that we have all sorts of alternatives.
But it was interesting that the testimony by the American oil industry, when it came before Congress, was pretty straightforward about where they thought the price ought to be. In their wildest dreams, I doubt they could have imagined $147, let alone $117 or $118 a barrel.
What I think we're trying to get at around here is whether or not you believe that beyond the issue of scarcity, the market has already factored that into the $90 a barrel as opposed to the $115 or $117. And that difference of 27¢ or 28¢ a litre for every consumer out there is having a devastating impact on the bottom line of the country, not to mention government revenues when they add GST to the increased price of gasoline, which netted the government $1.7 billion this year alone on gas and diesel.
2:45 p.m.
Chief Executive Officer and Portfolio Manager, Sprott Asset Management
Right. Well, let's just imagine that it does cost $80—and I mean cost $80. Now, the federal government has to get something, the provincial government has to get something—there are taxes and royalties. So what are you going to sell it for if it actually cost you $80 to produce it, if it really did? And I'm not saying for sure.... I think the tar sands oil costs $80. But there are all sorts of levels of taxation. When you're finally finished with it all, what does it really cost to have it refined and delivered to the gas pumps?
