Evidence of meeting #70 for Finance in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was prices.
A recording is available from Parliament.
11:25 a.m.
Senior Economist and Business Strategist, Packers Plus Energy Services
Incredible technology is in play to access oil today.
11:25 a.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
I would suspect that with these low oil prices a lot of the development is not taking place. Are we in danger of possibly.... We know what our needs are globally per barrel. We know what we're producing and we know what we're going to need to produce, aside from what the Saudis have. Most countries know where they're positioned.
Are we in danger that when this all happens—because there hasn't been any new development taking place and when it starts to ramp up again—that they won't be able to supply the demand that's going to take place?
Do either one of you want to jump in?
11:25 a.m.
Senior Economist and Business Strategist, Packers Plus Energy Services
As I addressed earlier there are about 1.5 million barrels a day of oversupply. Global demand is growing by about one million barrels a day.
Remember there are declines in oil fields all around the world. The oil sands have a unique profile.
In shale oil, as Andrew rightly pointed out, production can be brought on very quickly and taken off-line. Shale producers have become the swing producers in the world. As demand compensates or grows to take over the excess supply, and then continues its growth, shale oil out of North America is going to be able to meet that demand for a number of years.
I deal internationally with a number of other countries that have their own shale oil resources and are looking at how they can develop and how they can recreate the North American shale miracle.
We're not going to be in danger of any shortages, barring a major supply disruption out of the Middle East, Russia, Venezuela, or some of the more unstable areas. There is going to be lots there, but you're right in that it's going to be more expensive.
But then efficiencies.... Remember Moore's law with transistors? We're experiencing that in the oil and gas sector to some degree. The advances we're making in individual well productivity are increasing rapidly. How fast we can drill wells, put them on production, and how productive those wells can be is a magnitude better than it was as recently as 2005, and it's going to continue to increase. Companies like ours spend half our time figuring out what the next step is and how we can stay ahead of our competition.
11:30 a.m.
Conservative
11:30 a.m.
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
I think what we've seen in the transition is that we used to think of the global oil supply curve as being—and I don't know how you'll get this in the transcript, but I'm an economist drawing with my hands—a vertical inelastic supply. No matter how much prices went up there wasn't that much extra oil.
What we see now is not just due to shale oil, but also with technologies like we see in the oil sands with deep water, etc. The supply curve globally has flattened out. If you get into synthetics it's even flatter than that. We have much more oil available at a variety of prices than we would have thought possible in the past. It's just a change in the market.
11:30 a.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
Nobody likes a recession, but I think you happily describe what happens when these sorts of things happen. We clean house and we get a whole lot better at what we're doing, so that's encouraging. I think we're going to emerge and be that much more competitive.
Can you possibly point us to.... Obviously the oil industry is going to have revenues. As our chair pointed out there will be less revenues for the government as a result of that.
In my neck of the woods we have a lot of greenhouses, and the low gas price has resulted in a boon for these people to be able to export their products to the United States. Can we see the same thing in Canada as a result of low oil prices? Can you direct us to some areas that are going to benefit and that would ultimately result in more revenue for the government?
11:30 a.m.
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
I think the best summary of this is the Bank of Canada's recent statement that, yes, there are industries, consumers, etc., that benefit from low oil prices in the way you describe, but on the whole Canada is a net oil exporter. We are a resource economy to some degree, although not to the degree often painted. On a net basis this is going to be a negative, but that doesn't mean that it's a huge negative and that doesn't mean there aren't positives buried within. Transportation is the easy one.
11:30 a.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
Ms. Kent, what is the maximum mix that you can have for ethanol and gas? I see 5%, and 5% is the government's mandate, but at what point will the manufacturer say that it's getting a little too high?
11:30 a.m.
President, Canadian Renewable Fuels Association
It really does depend, but mid-level blends like E15 are widely used in vehicles nowadays. Of course flex-fuel vehicles can take a high-level blend. When you have a flex-fuel vehicle it needs the cleaner fuel to derive the environmental benefits, and that's where market access becomes important.
11:30 a.m.
Conservative
11:30 a.m.
Conservative
The Chair Conservative James Rajotte
Thank you, Mr. Van Kesteren.
I'm going to take the next round.
Mr. McLellan, you describe very well your company. It's very innovative. I certainly applaud you for that. But your company and others like you have transformed the energy market in the world, right? You have successfully done that. As you said, you ushered in a new era.
If you look at production—I hope these figures are correct—U.S. production of crude was, in 2008, five million barrels a day. In 2014, I think it was 7.4; 2015 is projected to be 8.5; and 2016 is 9.3. I hope those figures are correct, but it shows obviously a trend in terms of supply. As you mentioned, demand is going down, so you have transformed the market.
Mr. Leach indicated that the Saudis are perhaps being less aggressive than they could be, but the sense is that, and many observers are saying this in fact, what they are doing is trying to preserve market share. If you look at it from a very cynical point of view, they are almost trying to either halt your progress or even drive you out of business, such that they preserve their market share where it is today.
Given that—and that may be the reality, I'm not saying it isn't—how will your company and others respond to that situation?
11:30 a.m.
Senior Economist and Business Strategist, Packers Plus Energy Services
First, slowing the growth of the shale oils is one of their imperatives. They have already lost tremendous market share in the United States. They used to be the number one supplier. Canada's now the number one supplier. Saudi's exporting less than a million barrels a day into the United States, so defending market share is a big part of their goal.
Another part of their goal would be to slow the growth of competitive fuels. Lower prices are going to reduce demand there...to hurt some of their strategic enemies if you will, Iran and Russia. There are a lot of things that play into their rationale, but they are taking a very rational approach from an economic perspective. They are the lowest cost producer in the world.
In terms of our business, yes, it's going to slow down our North American business considerably, but we do deal with Saudi Arabia. We have some systems in the ground in Saudi and in all parts of the world. We have offices everywhere. As long as there is shale oil tight gas resources, our company is there. It's a double-edged sword.
The more hydrocarbons we bring on and the faster and cheaper we bring them on, the less likely the price is to recover to say $100 a barrel, but then on the macro picture, the more that benefits consumers. It's about productivity and we are making the industry more productive.
11:35 a.m.
Conservative
The Chair Conservative James Rajotte
But if their goal is to in fact preserve market share and in fact do harm to companies like yours so that your production actually goes down and not up, as the numbers I quoted at the beginning.... My understanding of companies like yours in the industry is that, if in fact you do take it down, you can ramp it up very quickly. So the Saudis cannot have the strategy over a five-year or 10-year period.
I'll get Mr. Leach to comment on this.
I'm not really sure. This is why I guess I'm so uncertain as to where we're actually going on oil prices if their goal is to do this. Suppose your production did ramp down instead of go up, and they fulfill that goal in the short term. The fact is, once they stop that policy, which they will have to do at some point, you will just ramp up again, and they are in the same spot.
11:35 a.m.
Senior Economist and Business Strategist, Packers Plus Energy Services
That's the role they are conferring upon us as the swing producer. That was a role they historically played, and now they are saying you know what? U.S. shale can do it. We're just going to defend.
They are at approximately 9.7 million barrels a day of production. Russia's number one. Saudi is number two. They don't have the capacity to go probably beyond 11 million barrels a day.
11:35 a.m.
Conservative
11:35 a.m.
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
It comes back to what I had said earlier, that really what we're seeing from the Saudis is non-action. It is continuing to produce much as you would expect a competitive producer to act.
What they have seen is an erosion of their market power from the factors that Mr. McLellan mentioned. The Saudis used to have the ability to create a low price environment that would shut out high-cost producers, and then to step back their own production, see prices rise, and take advantage of those rents. Now they don't have that second part.
They could cut production now. Prices would bounce up, but who would fill that gap? It would be more light oil production in the U.S., etc. They wouldn't have the ability to then profit from those high prices in the same way.
When you hear people talking about competing on market share, that's kind of the story. They know somebody else is going to flood in on them, be it alternative fuels or other producers. I think you're really seeing a non-active response. I wouldn't quite characterize it as actively as conferring a hat on the U.S. swing producers as Mr. McLellan did. It's just the reality of the new market.
11:35 a.m.
Conservative
The Chair Conservative James Rajotte
Are they caught in almost a catch-22 then in the sense that they don't really have an option here?
11:35 a.m.
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
I think they are just more of a competitor. They just don't have as much market power as they used to, so they don't have as big a stick to wield.
11:35 a.m.
Conservative
The Chair Conservative James Rajotte
I love the two-handed economist comment. I think Harry Truman famously said, “Give me a one-handed economist” so he could actually have one option.
You did say not all our eggs are in one basket. One of the criticisms of the Canadian government, certainly not by me but by other people, is that the current government has put all its eggs in one basket in terms of the energy sector. You said that is clearly not the case. I just wanted you to expand on that.
11:35 a.m.
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
If you look at Canada, whether with regard to our energy and resources or whatever Statistics Canada basket you use, most of our resource dependency is decreasing over time. It hasn't increased under the term of your government or even in the last couple of governments. What we have probably seen is more rhetoric around that. If you went out and asked Canadians how dependent they are on the oil industry, I think they've been told over and over again that it's the engine of our economy. So it's natural for them to think and buy into this idea that this is the only thing. The other part is our focus on deficits versus total government expenditures. If you look at Alberta as an example of this, we just saw Alberta government revenues shift by a projection of $900 million, but that took them from a deficit to a surplus. That's a $900 million shift on a $46 billion annual revenue, or whatever their total number is. It's a relatively small shift, but it seems large because we are focused on deficit versus surplus.
The same thing is true at the federal level. We are really interested in whether we are going to be in deficit or in surplus. Saying the price of oil is going to drive that makes it seem as though it's a much larger share of the overall economy than it actually is.
11:40 a.m.
Conservative
The Chair Conservative James Rajotte
Can I ask you one final question? The governor of the Bank of Canada seemed to indicate that there is a negative effect on the Canadian economy but that negative effects are largely short term, whereas the positive effects one might see, especially from the depreciating dollar, are more medium term. Would you agree with that analysis?
11:40 a.m.
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
I didn't see that particular comment. I saw him saying it was maybe a front-loaded oil shock.
11:40 a.m.
Associate Professor, Alberta School of Business, University of Alberta, As an Individual
I didn't see that particular comment. I think we do see that it is going to take a while for the demand side to adjust and take advantage of low prices here, but that's not a uniquely Canadian thing. That's everywhere. It's in the U.S. economy. It's in the global economy.
I think we also need to realize that the effects, like the effects of the boom, are unequally distributed, so whereas Alberta took the lion's share of the benefits in the upswing, it is also going to take the lion's share of the costs—Alberta, Newfoundland and Labrador, and Saskatchewan to some degree.
I think there will be a net positive, as the governor said, but bear in mind that there's a lot of story underneath that regionally, provincially, etc.