Subcommittee on Oil and Gas and Other Energy Prices Committee on Aug. 27th, 2008

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Maybe I could put this question. Do all of you here believe that we spend too much time, as representatives and perhaps in the media, looking at crude as opposed to looking at the cost, day in and day out, of the market?

I think Jane Savage, from the Canadian Independent Petroleum Marketers Association, pointed out that we're not spending enough time talking about the other market—that is, unleaded gasoline.

I know, Ms. Russell, you had a point to make there, and I don't want to interrupt you on that. But are we missing the point here in terms of overemphasis on one particular commodity while other commodity prices seem to be going through the roof?

[Dr. Ellen Russell]

May I answer the previous question?

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Yes, sure.

[Dr. Ellen Russell]

I think you spoke to a question about distribution. Who wins and who loses is not just a question of adding up big numbers and seeing which is the biggest. Canadians are divided into all kinds of different groups, including consumers and people who work at workplaces that are affected by the cost of oil, and all kinds of economic activities that are affected by the level of the dollar, which is in turn affected by the price of oil. All these tertiary effects and effects that spin on out affect people in different ways, so we can't be cavalier by saying that Canadians win or lose, without doing a lot of work to see that there are some people who are winning and some people who are losing, and they're not always the same people.

[The Chair, Conservative, James Rajotte]

Is there anyone else who wants to speak?

Mr. Sprott.

[Eric Sprott]

I would love to answer one of Mr. McTeague's other questions: what we can do about it.

All that went through my mind was the Glass-Steagall Act. The Glass-Steagall Act came out in the 1930s, because the banks and the brokers used to work together and then they realized, boy, we can't work together any more because this is going to kill people. That got canned about eight years ago, and now we have the same situation, where the banks and the brokers work together and we end up with A, B, C. We end up with this piece of paper that's worth nothing. We don't learn by our mistakes.

That is the answer to your question, in my mind.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Sprott, you pointed out that these are paper deliveries, and I'm just wondering again, are we talking about physical inventory? When you're actually buying a crude future, are you not buying with a deliberate date on which you have to lift or take that delivery within 23 days?

I'm concerned about seeing guys from the banks and the pension funds—the Ontario Teachers' Pension Plan—driving around with barrels of crude in the back of their BMWs. And this is the sort of parity we have. But the reality is that for many, this is a serious market. It deals with supply, it deals with product, and yes, it's done with a paper transaction, but sooner or later someone is going to have to buy that product down the road.

And if Mr. Masters and Mr. Diwan are correct, as long as you have a larger presence of people from the financial industry looking for a way to hedge their bets and to make up where they've lost in places like sub-prime, are you not going to wind up with an eternal self-fulfilling prophesy of higher prices that will continue to undermine the economy and deny other industries the ability to invest in new technology?

[The Chair, Conservative, James Rajotte]

Mr. Sprott.

[Eric Sprott]

It's complicated.

First of all, 99.9% of all contracts are never delivered. They're settled off, so there is no delivery taking place. That's why there is a paper market and there is a real market.

And at different times there can be different forces in the paper market. I've already pointed out that some guys.... There is a belief that the price went to $147 because a guy was covering a short and he got nailed. That's what is in the common lexicon these days, that this same group got caught short and bid the price out.

But to your point, we shouldn't be talking about the price of crude oil. I think you people are really talking about the price of gasoline, and that's a whole different thing.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. McTeague.

I'm going to take the final spot here, as the chair.

We start with the price of gasoline, but the primary determinant of the price of gasoline is the price of crude. It's interesting. Last year the focus was all on the wholesale margins, but the wholesale margins have dropped quite dramatically over the last year; the focus seems to be much more on the price of crude.

Mr. Sprott, you very eloquently described the decline of world conventional crude oil production. You've also described how a lot of the crude oil reserves we have now, like the oil sands, are actually much harder to get at. We have a decrease of supply for the conventional side and a challenge in supply in terms of the oil sands and other reserves. Even those reserves we're discovering in Venezuela are similar to the oil sands in terms of getting it out of the ground, separating it from other natural resources, and then refining it. It costs much more in terms of refining.

We also have an increase in demand. We have some figures on countries like China, going back to 1980. They were consuming about two million barrels a day and now they're above seven million barrels a day. Clearly there's a demand and supply issue. How can we, as legislators, have any idea how much is due to the natural intersection of supply and demand and how much is due to speculation?

It is a funny word, right? Mr. Diwan said we shouldn't say “speculators”, we should say “investors”.

But how much is due to the natural intersection of conventional supplies going down and demand going up, and how much is due to the entrance of what we could call “newer investors” since, say, the 2000 period? Can anyone here accurately predict it? It went up to $137 and came down to about $117. Should it be at $100? Should it be $98? Should it be at $70?

[Eric Sprott]

I'd love to take a shot at that.

Under the peak oil thesis, which is not my thesis but a thesis of petrophysicists who study these things, if you go out 20 years, they would suggest we'll be producing 65 million barrels in the world, not 85 million barrels.

Well, where do we all think the price is going to be? It's not going to be at $120 a barrel. I mean, it's a major thing to think about. If you believe in the peak oil thesis, we haven't even begun to see the problems. That's not just problems with the price of oil, but the whole of living. You don't have fuel products now; how do you get to work?

I suggest that people study it. We have this choice. Do you believe in the theory or don't you? If you believe in the theory, we have a big problem coming our way. I've been a believer in the theory for a number of years, and every day that the price of oil goes up I'm the least surprised guy in the world.

[The Chair, Conservative, James Rajotte]

Mr. Diwan, do you want to comment?

[Roger Diwan]

Sure.

We had $140 dollar oil, and demand in the United States was down 800,000 barrels per day for the first six months of the year. People react. Obviously it creates pain, but you also get more efficient.

The notion that we are using 85 million barrels per day efficiently in the world is a joke. I live in the United States. I'm not American, but I look at how people live here, and the waste is tremendous. Why do we need cars that weigh five tonnes and you can put twelve people in them when you commute to work by yourself? You can be more efficient. There's plenty of creativity. High prices will destroy oil prices. This is what we're seeing. Clearly we can be more efficient. After all, when you use your car, in general you're using only 15% of the gasoline to move the car; the rest is for the heating, cooling, CDs, DVDs, and everything else you have in your car. So technology can improve a lot, but you need price signals. These extreme prices have pushed signals, and they are forcing new technologies, which is a good thing.

On your question regarding whether we know what the real price should be, if I knew, I would be a rich man today. I would advise all my clients, and they would make a lot of money. It's a million-piece puzzle. You can't remove one piece and ask what happened. Everything shifts. It's a very dynamic market.

[The Chair, Conservative, James Rajotte]

With respect to my final question, Mr. Diwan, you mentioned earlier that this is a discussion that should happen at the G8. I want to get Mr. Masters in on this as well.

The article in The Washington Post that our colleague Dan McTeague passed out talks about regulations being changed in terms of commodity exchanges. Also, they're allowing trading of energy commodities on private electronic platforms. Are those two specific items that the G8, or Canada and the U.S., have to look at? Are there other things specifically that the U.S., Canada, and other countries in the G8 have to look at?

[Roger Diwan]

There's the whole notion of commodity regulation, but you're right, it's these two exchanges. Who do you allow, how do you put position limits, how do you track and classify the money? How many investors do you want, and how much speculation do you want? These questions are important, and right now we have basically deregulated the market. We have weakened our ability to understand these markets because we have fewer people watching them. We have less data. It's very muddled. We don't have good data to give you straight responses here. We're always blaming OPEC for not giving us data and we don't know what's happening, but here we're in the most sophisticated market and we don't get data. The data released every week is a joke.

So it's a G8 issue. The United States needs to take a leadership role, and so far they have refused. That's something that needs to be brought up.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Masters, do you want to complete this briefly?

[Michael Masters]

I agree with Roger. Along with that is having strong position limits reinstated. This is something that worked well for 70 years in the United States. There are no unperceived consequences. You have strong position limits on excessive speculation. That allows the market to work more in balance with some speculation and some folks in there who are producers and consumers of crude. They make a better market. They make better price discovery. So any solution needs to have position limits involved.

[The Chair, Conservative, James Rajotte]

I want to thank all of you for coming in today. I want to thank Ms. Russell and Mr. Sprott for being with us here in studio, as they say.

Mr. Diwan, thank you for being here via video conference from New York.

Mr. Master, I understand you're in the U.S. Virgin Islands. Thank you for being with us by teleconference.

We appreciate your testimony today. If you have anything further for the committee on this topic, please feel free to submit it. As for your presentations that have not been translated, we will translate them for members.

Members, thank you for being here and for your good questions.

The meeting is now adjourned.