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.
2:15 p.m.
Partner and Financial Advisor, PFC Energy
Well, you had more competition in refining. And as I said, in the last 20 years you only had three good years of refining margin, which was the last three years. And this year it is pretty bad.
The reason is very simple. Supply and demand do work on refining in the sense that as the refining margin increased, and they increased because the product balance was very tight—the diesel and the gasoline, not the crude—suddenly we added refining capacity. And we're adding a lot of refining capacity right now in China and in India and the Middle East and in the United States, while demand has been decreasing. So the refining balance, if you want, for gasoline in particular has really gone quite negative and the refining margins have decreased. And I think they will be low for some time, going forward.
Really, the bite out of the price is coming from the crude, not from the refining. It's really the crude price that is driving the gasoline price at the pump and not the strong fundamental for product.
2:15 p.m.
Conservative
2:15 p.m.
Chief Executive Officer and Portfolio Manager, Sprott Asset Management
I would say that obviously you have the power to do whatever you want in the country. You create the Competition Bureau; you can enforce it or not, if you want to. All the data is available. The data on refining and marketing is as simple as A, B, C, right? You pay x; the price at the pump is this; the tax is that. Surely to goodness we can figure out whether we're being gouged or not. And it's well within the government's power to do that. So I'd just say, if you want to do it again, just bring it on.
2:15 p.m.
Conservative
2:15 p.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
Thank you, Mr. Chair.
And thank you, witnesses, for appearing before us again. This has certainly been an interesting day, and I think we all have a lot to ponder.
I want to reflect and I want to just carry on with the question that I think was asked by Mr. Stanton. We were talking about putting into effect what I believe our analyst called the Granger causality tests. Do we have statistical evidence? Have we used that to determine whether or not this correlation actually exists between spot price and futures in crude? Have we applied that test to this?
2:20 p.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
Go ahead and answer, Mr. Diwan, and then maybe Mr. Sprott can answer.
2:20 p.m.
Partner and Financial Advisor, PFC Energy
Yes, this is what we do. We constantly look at what's happening in the oil market. This is my profession.
And it's very clear that it's a future market driving the spot market. And if you look at oil prices—and we try constantly to understand how they are created, because this is what we try to forecast—if you look at the last 12 months, the only serious correlation you have here as to why oil prices have moved from $70 to $140 and back down, the only serious correlation that works, is the value of the dollar. As the dollar declined, oil prices went up, and as the dollar strengthened, oil prices went down. And the correlation is in the high 90% range. It's a very strong correlation. It's not supply and demand in the last 12 months; it's the supply and demand of dollars.
2:20 p.m.
Conservative
2:20 p.m.
Chief Executive Officer and Portfolio Manager, Sprott Asset Management
I'm not familiar with the causality equation, if you will, and I'm not going to say it's just the U.S. dollar. I think it's many things. For example, with tropical storm Gustav coming into the gulf, the dollar, I think, was down today, but the price of oil was up two bucks. So it didn't work today.
2:20 p.m.
Chief Executive Officer and Portfolio Manager, Sprott Asset Management
Yes, but it won't be up 2%, and it depends on whether you're using the U.S. dollar or the Canadian dollar and what you are comparing it with.
2:20 p.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
Mr. Sprott, you're convinced that we've hit our peak and are on a downward slide and that therefore the price of oil is being driven up. But you also stated that the term $80 was best defined as a greenfield. I take a greenfield as one where you just drill and get some oil, rather than than drilling into the sea bed—seven miles down, I understand. If that is true, wouldn't it stand to reason, since most of our new exploration is coming from areas such as the gulf coast, that this would be the cause of our high prices?
I want to ask this one to Mr. Diwan first. Then we'll go—
2:20 p.m.
Partner and Financial Advisor, PFC Energy
The term “greenfield” means basically a brand new field. It doesn't have to be onshore; it could be offshore. And clearly the high cost, the $80 cost, is for a deep offshore field, not an onshore field.
2:20 p.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
What would it cost to drill down seven miles in the Gulf of Mexico? Does anybody know?
2:20 p.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
According to the IMF—I'm reading this from the World Economic Outlook—
there is little evidence that the increasing investor interest in oil and other commodities as an asset class has affected price trends for oil and other commodities, although purely financial factors, including shifts in market sentiment, may have short-term price effects.
Could you comment very quickly? I'll start with Mr. Sprott, and then continue with Mr. Diwan.
2:20 p.m.
Chief Executive Officer and Portfolio Manager, Sprott Asset Management
I would totally agree with that. Obviously in the short term the paper markets have a view and move the price around based on some data point. In the long run they can't win the day, because supply and demand will win the day in the long run.
But yes, definitely in the short run, and the sentiment can last for six or eight weeks at a time.
2:20 p.m.
Partner and Financial Advisor, PFC Energy
Yes, but it has actually been lasting longer, because just the size of these players has overtaken the market.
I take you back to what Mr. Masters said earlier. These indexes have a tremendous impact, because you're investing in all commodities, so you see everything else going up at the same time.
2:20 p.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
I asked this question earlier too, and I want to ask Mr. Sprott this. Doesn't a higher price at the well encourage new development, and won't that somewhat correct the problem? Aren't there two things at play here—that, first of all; and secondly, doesn't a higher price encourage us to look for new sources? Are we moving in the right direction when we...?
2:20 p.m.
Chief Executive Officer and Portfolio Manager, Sprott Asset Management
Well, yes, higher prices cause people to expend more trying to find more oil. Yes, they do. Unfortunately, the cost of anything real today.... If you want anything real, such as a piece of steel or copper—whatever, real—we've had exponential inflation in real things, so the cost of finding these things has gone up almost exponentially. The cost probably rises 15% a year, and you haven't even drilled any more wells, because there has been a lot of inflation. Much as we all like to say there is no inflation, there is incredible inflation in real things.
So it's not easy, necessarily, to say that at 80 bucks or 100 bucks we should find lots of oil. I'm shocked myself that, as I think Mr. Diwan said, it costs 80 bucks in a greenfield site today. A year ago the price was $70. Today we're saying it costs 80 bucks to find something. Well, we know what part of the problem is; it's inflation. Things just get more expensive all the time. These developments are not inexpensive.
So that would be my answer to the question.
2:25 p.m.
Conservative
The Chair Conservative James Rajotte
Thank you.
Mr. Diwan, do you want to make a final comment on that?
2:25 p.m.
Partner and Financial Advisor, PFC Energy
Yes.
I think it's only part of the problem. I think—you're right—you have cost inflation and it costs a lot of money to discover oil. But the primary issue is access. You do not have access to the most prolific basins in the world. They are closed. Oil companies are not allowed to explore in—I can give you the list of the countries—Mexico, Russia, Saudi Arabia, Iran, Iraq, Kuwait, UAE, etc. So you do not have access to the most prolific basins. The money is going to a very few places that are open, but you don't have the most prolific basins. And it's because the money is all going into a few places that inflation is increasing on the cost side.
