Finance Committee on March 11th, 2015

[Scott Brison, Liberal, Kings—Hants, NS]

In terms of the impact of the drop in WTI on GDP, and then on government revenue, recognizing it's not a linear formula, there's been some analysis that a dollar drop in WTI would lead to about a billion-dollar drop in GDP, depending on where it is in the curve. But certainly for each dollar, there would be a drop commensurately in terms of federal government revenue.

The federal economic update in the fall was based on $81-a-barrel oil. What do you think the impact is going to be on federal revenue, based on current levels?

[The Chair, Conservative, James Rajotte]

And who is that to...?

[Scott Brison, Liberal, Kings—Hants, NS]

It's to Craig.

[Craig Wright]

I think the sign is correct. As I said, nominal GDP feels the effect, and there is a range of estimates again for nominal, so in the prebudget meeting with the minister we'll have all our latest forecasts out there. For nominal GDP, last year it grew by just under 4.5% and this year we have it just under 2%, so we're looking at a two percentage point hit to nominal GDP, which will translate into roughly a similar magnitude.

The federal government has the fiscal sensitivity tables, as you're well aware, and you can work through the fiscal sensitivity for a 1% drop in nominal GDP. So we're at 2% relative to where we were a short while ago and I think that's probably the way to go about it. Then you can work that through the math and the fiscal numbers.

Our own view is that given the starting point, we have nine months of the data for the fiscal year just ending this March, and it's about $11 billion ahead of what it was for the same period last year, so there is a cushion built in there, plus there is also the adjustment for risk, which is exactly for these sorts of surprises.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Colleagues, we have about 14 minutes until votes. I'm going to recommend that as long as one opposition member stays I will stay in the chair and keep the meeting going. If members want to come back after the vote, they can. I'm not going to hold members here, but frankly, this discussion is interesting. As long as we're somewhat paired we can stay, but I'm not holding members. We have three opposition members. We have a number of Conservatives. As long as one opposition stays, I will stay and I will let the rest of you pair as you see fit, or not.

We will go to Mr. Van Kesteren, for your round, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

I have to tell you that I have been looking forward to this, to get the economists here, and the one thing that strikes me more than anything else is the relative calm that you have. I think most Canadians in general are a little bit nervous about these oil prices. These are uncharted waters. They are not necessarily uncharted. We've seen this, but it's comforting, I suppose, to some degree to feel that from you because it's something that I was a little bit nervous about, I must say.

I have a few questions that maybe you could clarify for me. I'm wondering where more of a negative effect would be felt. Would it be felt more in the shale gas production in the U.S. or in the oil sands and the offshore? Which area would have more of a negative effect?

I throw that out to anybody.

Mr. Cross, you look like you want to answer.

[Philip Cross]

I'll jump in. The oil sands have 30-year to 40-year production. You and I could start a business for shale oil. For $1.5 million to $2 million, we have our little fracking operation going. That money can be turned off pretty quickly. With oil sands, you're talking about billions of dollars committed and the investments are all made up front. That's why I say that once you've made the investment you have no incentive to turn it off. You've already incurred all the costs and you need the revenue to pay it back.

I would think that because of the lower upfront capital cost, the shale is going to be more vulnerable than the oil sands.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

The other thing I find rather surprising is the lack of consensus as to what exactly is going on. I'm certainly not an economist, but I dug into this as much as possible and I really can't say that I've hit on anything that would answer why this is happening.

I suppose one of the questions I would ask is if it were a reaction to the Saudi attempt to drop shale production—you sort of answered, but I want a clearer answer—isn't it something that they could easily correct just by shutting the taps just a little? It seems like there isn't a whole lot of fluctuation that's causing the price drop. Isn't it something they could correct rather quickly?

[The Chair, Conservative, James Rajotte]

Is this for Mr. Cross?

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

It's for anyone.

[Philip Cross]

Craig would like to say something.

[Craig Wright]

I'll just follow up on Mr. Cross' comments on the shale plays. It is relatively less capital intensive, but once you get it going you have to keep it running, and it's a higher-cost play so that break-even price is higher for shale than for others. With shale gas, a lot of the capital raised comes from credit markets. So it's not just a price correction, there has also been some tightening in credit because they tend to go to the high-yield market. They're getting hit both by the soft price, below their break-even price, but also by the fact that the capital market, the access to credit, has tightened up, which isn't the case across the rest of the globe.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Isn't it something that, if there is manipulation in the market...?

I think, Mr. Locke, you were—

[Prof. Wade Locke]

I was just going to say, to answer your initial question, that it depends on how long you think the price change is going to be for. If you think it's a short-term phenomenon, then the reaction will be somewhat different from what it would be if you think it's going to be a longer-term phenomenon. If you think the price is going to be $50 to $60 for a long period of time, that will change the reaction for many things.

It is true that shale can start or stop more quickly. In fact, what has happened is that the shale plays have drilled their wells and have not completed them, because two-thirds of their cost is in completion. If you believe prices are going to go up, you may as well wait six months, spend one-third, and.... What some people don't understand about shale is that half of your shale production occurs in the first three years, so if you believe prices are going to go up and half of your production is done in three years, you may as well wait for the price to go up.

But it comes down to how you react to price falls. It depends on whether you believe it to be a short-term, a medium-term or a longer-term phenomenon. If it's a longer-term phenomenon, many of the projects that might go forward—not currently operating but that might go forward in the future—won't go forward.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Okay. I have one minute left, and this question is the one I really wanted to ask more than anything else.

That's the one side of the equation. The other side of the equation is that real production is dropping, that GDP is dropping worldwide. Do we have the real numbers for the production happening in China?

The other part I want to ask is: how much are the numbers we're getting out of the U.S. something we can really bank on as well? Do we know the actual numbers in China? Do we know the actual numbers in the U.S.? Is this just the result, possibly—and Mr. Ambler, you look as though you want to jump in on this one—of a real drop in production in the world?

[The Chair, Conservative, James Rajotte]

Make just some brief remarks on this.

Mr. Cross.

[Philip Cross]

I'll take a stab at it, being a statistician. Statisticians love these industries in which you have a small number of producers. Basically, it's an oligopoly. The dream industry for StatsCan is the auto industry. Survey six industries and you have a census.

These are large firms. I think the data is extremely good. Wherever you go, the industry collects very good data on this. It's a small number of people that you have to survey. I think there is extremely good data in North America and indeed around the world on this. It's one of the best industries in the world, right up there with autos.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Okay, thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much.

We'll go to Mr. Cullen.

I think, Mr. Cullen, that you and I will just swap five-minute rounds.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

That sounds good. It sounds great.

I want to turn to manufacturing for a moment. We've spent a fair amount of time on the oil side of things, but part of what this committee is attempting to do in, as you can see, an incredibly constricted manner is to get a snapshot sense of where the Canadian economy is and what the federal government response should be, because that is where, as policymakers, we are.

I very much take the advice given about the mistakes, in the U.S. example and some other examples, of overreacting. However, turning to manufacturing for a moment, I want to get your sense of where you see the state of affairs to be.

Allow me to put two things in context first. One is that we have lost a significant number of manufacturing jobs in Canada over the last six, seven, or eight years—400,000 according to StatsCan, I believe. That's the number that we use. The scenario of a low, 80¢ loonie and a 4%-plus growth in the U.S. market typically and traditionally has meant a quick response on the Canadian manufacturing side; our products are cheaper and there is an American consumer looking to buy.

Two factors concern me about this. Have we hit a structural impasse on the manufacturing side? We saw production increase last year but did not see a great deal of uptake on employment. Second, the Canadian consumer seems to be perhaps getting double-hit in this particular scenario, in which any imports are more expensive to buy and consumer debt load in Canada is incredibly high, historically high—is that right, Mr. Cross?

[Philip Cross]

Totally.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Okay. So we have a very high debt load being borne by Canadian consumers. What are Canadian manufacturers, Canadian value-added companies looking at right now? Is the net impact of this particular scenario—low energy prices, low oil prices, and a lower loonie—good for Canadian manufacturing? When are we going to see the hiring come back of the 400,000 who have since been laid off? “Are we going to?”, I suppose, is a fairer question.

[Craig Wright]

Maybe I can start.

We did a report on the outlook for the manufacturing sector in light of the decline in oil prices and we took on board some of the considerations, that it is more the structural change that made the manufacturing industry different, insomuch as it is not positioned to recover through this period.

What we found is that the auto sector—15% of the Canadian economy—is running up against capacity limits. If you look at capacity limits as being pre-crisis levels, the auto sector is already back there. But they could always lengthen shifts and run a bit longer, and then, if that doesn't work, they invest, which is—

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Do they have room still?

[Craig Wright]

Yes.