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

[Eric Sprott]

I have a comment on both questions.

I do have some answers about Canadian participation. I've already mentioned that Amaranth was involved in the natural gas market to a very large extent. I've mentioned that a major Canadian bank was involved in natural gas derivatives to a very major extent. If one bank is, maybe lots of banks are. Sometimes they're long, sometimes they're short, and I think that's one of the things this committee should be aware of, because every time there's a futures transaction there's a buyer and a seller.

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

On that point, Mr. Sprott, perhaps I could ask Mr. Masters the following question: the level of institutional investors that you've referred to who are entering the futures commodities markets, is it greater than and outstrips the demand of the Chinas, the Brazils, and the Indias who are usually used as an excuse to drive these prices up?

[Michael Masters]

I think right now you have demand that's certainly equivalent to China's, based on the data that we've seen.

One other point that I'd make really quickly, going to Mr. Sprott's point that there's a buyer for every seller, is that it's correct, there absolutely is a buyer and a seller. Our really important point—and this is how markets allocate around the world—is at what price? There's been a buyer or seller for every transaction in history, so clearly that's not the only issue with regard to price movement. It's a question of the demand at a certain price.

So as far as I'm concerned, I think there are very positive supply and demand fundamentals that have contributed somewhat to the increased price of crude oil and other commodities. But just as important, I think, what is lesser known is the amplification, as Mr. Diwan has said, or the financialization of commodities that has taken place. And I think that's had a very, very significant effect on price—as well as the typical supply and demand fundamentals that people quote .

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. McTeague.

We'll now go to our second member, Monsieur Bouchard.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chair.

Thank you for coming to testify this afternoon.

I am the member for the constituency of Chicoutimi—Le Fjord in the Saguenay—Lac-Saint-Jean region. We get a tax rebate. The Quebec government levies a tax of about 15 cents per litre. In my region, the tax is 10 cents per litre. Until 2003, we were never able to see this reduction because the fluctuations in the price of oil meant that the price was the same in Saguenay—Lac-Saint-Jean as it was everywhere else. However, a movement started in our region called the coalition on gas prices. Companies were boycotted in turn with the result that the 5-cent reduction can now be seen. In other words, there is a difference of 5 cents per litre in the price of gas in Saguenay—Lac-Saint-Jean and the price in Montreal or in Quebec City.

Here is how we explain that difference. When people put pressure on a company, things start to happen. The pressure in our region gave us back the 5 cents per litre reduction granted to outlying areas to recognize transportation costs. When consumers put pressure on a company and object to price increases, it has an effect.

So, do you see it the same way?

[The Chair, Conservative, James Rajotte]

Who would like this?

[Eric Sprott]

Maybe I'll try to answer the question about Chicoutimi.

As I reflected when coming down here, in my life I was the CEO of a company called Canadian Turbo, which was in the business of refining oil and had 300 gasoline stations in western Canada. I thought it was the worst business in the world. I still think it's the worst business in the world. I noticed that Conoco today announced it's getting out of the business and is selling 900 stations in the United States.

I have not been a great believer in integrated oil companies making much money at the pump. We know they make lots of money, but I think, quite frankly, they make it upstream.

I can't answer the specifics of whether a group raising concerns about a thing will have any natural impact. I don't think the margins in the refining business are particularly high. I know they're very low in the U.S. right now.

[The Chair, Conservative, James Rajotte]

Mr. Diwan.

[Roger Diwan]

I agree. I think the refining business has been terrible for the last 25 years, except for the last three or four years. You had excess capacity, and the problem in the refining business is that once you build it, it's there forever. It doesn't waste...as you do for the upstream. So oil companies have little interest in the downstream, with tight margins. However, in certain regions you have positions of monopoly and certain companies do benefit much more than others, depending on their regional implementation and how much competition exists. So you have big regional price differences. It depends a lot on concentration and the distribution networks.

I don't know the situation in Chicoutimi, but in the U.S. you can see that different markets have different fundamentals, with different prices. In California, we pay a dollar more than does the rest of the country. In the midwest, some regions are difficult to access by pipeline, so some of the local refiners make a lot more money.

We need to make sure--and that's the role of the regulators--that we have a level of competition, that we have access to the logistics and are able to monitor prices to compare them to the main prices, or the exchange prices, to see if there are big differentials and whether or not certain companies are really pushing the envelope a little bit.

[The Chair, Conservative, James Rajotte]

Ms. Russell, did you want to respond?

[Dr. Ellen Russell]

Yes, I'd like to speak to that question.

I don't know about this particular example in your riding, but what I think is interesting as an illustration is that it would appear, from your story, that people got together and started questioning whether the price was reasonable and whether they could do anything about it. They said, this price perhaps doesn't arrive as a force of nature; there may be some room to question it.

That may be the case in terms of the price at the pump, but for me, the larger question is the many steps before that fuel hits the pumps. There are questions to be asked. As a group, we could ask questions to see if we think these various steps along the way are being conducted appropriately.

[The Chair, Conservative, James Rajotte]

Mr. Bouchard, you can ask a quick question.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

In Canada, does the Competition Bureau have the necessary power to check if there is real competition at all levels, whether crude oil producers, refiners or retailers, so that gas prices are fair?

[The Chair, Conservative, James Rajotte]

Who would like to take that one?

Mr. Sprott.

[Eric Sprott]

I'm no authority on the Competition Bureau. I hope you don't think I'm sticking my head in the sand, but I've been around almost as long as all of you people, and I keep hearing about reviews of gasoline pricing in committees in the U.S. and in Canada year after year. Every time the price goes up, some committee reviews it, and every time there seems to be no evidence. Now, why there's no evidence, I don't know.

I think it's been overdone. As Mr. Diwan and I have both said, people in the refining business or the marketing business make very little money. It's not a great business to be in, unfortunately. I think it's something we chase all the time. But I always go back to saying we have a fundamental, major problem in this country and in the world. The biggest problem in the world is the declining sources of energy, and the International Energy Agency is going to go there. You will see that in November they're going to come out with a whole new study of world supply and they're going to change your assumptions. It's a very big issue.

[The Chair, Conservative, James Rajotte]

Thank you.

Merci, monsieur Bouchard.

We'll go to Bruce Stanton, please.

[Bruce Stanton, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

Welcome to our panellists here today. This is a very important topic that is certainly on the minds of many people in our home constituencies and right across the country.

Ms. Russell, it's good to see you again. I want to direct my first question to you.

In preparation for today's meeting, we read fairly extensively from the report of the interagency task force, a U.S.-based organization, as I understand it, that looked at this issue of speculation over the last five years and the degree to which it's in fact causing oil prices to increase and at what the cause and effect circumstances are.

In their interim report, which just came out at the end of July, they indicate that they really can't see any evidence of that; that when they employ what's called the Granger causality test to that transaction, it would in fact indicate that the price of oil comes after the fact, not the other way. In other words, the positions that are taken by the so-called speculators or investors are taken after price changes. One might conclude from this that the price changes are affected by supply and demand factors and that the investment positions that are taken follow.

This seemed to be fairly consistent through the course of their conclusions—and I will point out that thus far It is an interim report.

Do you have any comment on that? Certainly what you discussed earlier painted a different picture.

[Dr. Ellen Russell]

Yes, we get to play the game of whose study is the right study.

[Bruce Stanton, Conservative, Simcoe North, ON]

To be honest, that's what we end up doing.

[Dr. Ellen Russell]

That's the game you're all playing, right ?

[Bruce Stanton, Conservative, Simcoe North, ON]

Exactly.

[Dr. Ellen Russell]

It's not a fun game to play, because they're highly technical, and to excavate the technical methodology to figure out whether you think a study was done the right way with the right data, or whether something has changed since the.... It is laborious, to say nothing of the other adjectives in this process, to try to figure out whether you believe these studies or not. It defies reason, to me, that all of this money can be coming into the market with no effect, that this is all after the fact—you know, moving around and not doing something to the underlying price of the thing that's being examined. I think probably you could line a bunch of studies up on one side and a bunch of studies on the other and debate their technical merits for a long time, and ultimately you'd come to your own position on it.

My position is that there is some impact. It's not an all-or-nothing thing, it's not just speculation, it's not just these underlying fundamentals; it's a blend.

[The Chair, Conservative, James Rajotte]

Mr. Masters, did you want to comment?

[Michael Masters]

Yes. I was going to say that the CFTC has had a lot of issues concerning this. There has been a lot of criticism of the agency.

During my testimony in May, one of the senators, Carl Levin, called the CFTC a sort of “see no evil, hear no evil” kind of agency, in the sense that they tend not to see what's going on sometimes. There are some questions about staffing, and so forth. I have nothing against the CFTC, but I find it interesting that until testimony in May from me and others, the CFTC denied that they needed to do a study or anything else.

The Republican administration has had views on this that have been one way, and because the CFTC chairman and the treasury and so forth—that working committee—all derive from the same administration, it's clear to me that it's unlikely that they would—

[Bruce Stanton, Conservative, Simcoe North, ON]

Are you saying it's because of political bias?