Finance Committee on March 11th, 2015

[Prof. Steven Ambler]

Indeed.

There are a couple of people on the council who have speculated about the fact that there are some countries, notably Russia and Iran, to the extent that it's not subject to sanctions, that basically have fixed requirements to meet in terms of income from royalties. The speculation is that countries like Russia and Iran might actually have a downward-sloping supply curve for oil. This is politics, right? As the price goes down, they have to pump out more of the stuff to meet their revenue requirements.

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

Keeping oil prices lower still, or at the same rate.

[Prof. Steven Ambler]

Exactly. This certainly adds to the uncertainty.

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

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Cullen.

We'll go to Mr. Saxton.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

Thanks to our witnesses for being here today.

I'll be splitting my time with Ms. Bateman.

My first question is for Steven Ambler of the C.D. Howe Institute.

Mr. Ambler, is this oil price drop peculiar? Is it different from price drops in the past, or is it following the characteristics of previous price drops?

[Prof. Steven Ambler]

I think there are structural differences. I mean, it has dropped more quickly and farther than previous oil price drops.

Craig brought up OPEC. The share of OPEC's production in total world oil output has actually fallen quite a lot. Even if the Saudis wanted to clamp back on their production to drive oil prices back up, OPEC doesn't have as much of an influence on world oil prices anymore.

I think there are differences.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Craig, I have a question for you as well.

What impact do you think this oil price correction is going to have on Canada's GDP this year?

[Craig Wright]

We have a small negative impact in terms of real GDP. As I suggested, the negatives are clear and they'll show up soon, and that's why most people have had a soft first half of the year. The positives, in terms of exports growth and investment outside of the energy patch, will show up with a bit of a lag. We think a good part of that will show up in the manufacturing sector. If you look at the rebalancing across provinces, people are taking Alberta and Newfoundland and Labrador lower, and lifting Ontario, reflecting that pickup in manufacturing given the U.S. economy and the more competitive Canadian dollar.

We have a small negative hit for real GDP and a bigger nominal hit for the dollar value of what we produce.

[Andrew Saxton, Conservative, North Vancouver, BC]

Finally, what is your prediction on oil prices three years from now?

[Craig Wright]

We have them moving higher.

On an annual average basis for this year, we had $53 a barrel, and then next year we have $77 a barrel. We think that in that soft first half of the year we could even drift lower from where we are today, just sub-$50, and then a recovery as we move through the second half of this year and into next year. In the long run, we're still of the view that the cruising speed for oil prices is higher.

In the old days, we used to think $25 a barrel. OPEC targeted $22 to $28. Now we think, given the divergent growth around the global economy and higher costs of capital, labour, smaller finds, and the like, it's probably something higher, maybe in the $70 to $80 range for the long run.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

[Joyce Bateman, Conservative, Winnipeg South Centre, MB]

That's wonderful.

Thank you all for being here, and please accept our sincere apologies for the compression of time.

Mr. Cross, you spoke about the cyclical nature of the industry and referenced other times that there have been incredible fluctuations, but then you made the comment that price isn't the only thing going on in the longer term. I'm wondering if you could expand on that for me, sir.

[Philip Cross]

Sure.

I think it is quite revealing. Going back to the old phrase “never waste a good crisis”, this industry didn't waste the crisis in 1998. Even as oil prices were falling, I think down to $10 a barrel during that period, the industry undertook its remarkable shift from conventional to non-conventional production. That was because they switched technologies. They were using the old bucket wheels at the time to extract oil from the oil sands, and somebody hit on the idea of scraping this off and putting it in big trucks and delivering it directly to the upgraders. At the same time it was made more profitable by changes to Alberta's royalty regime that were adopted in 1998.

We do tend to fixate on prices. It's not just that. There are other technological changes going on in this industry. Over half of all oil production in Canada now is coming from the oil sands, but within the oil sands, soon over half of oil sands production will be in situ with the steam-assisted gravity drainage. Every time there's a picture of the oil sands now in the papers, you always see the monster trucks and everything, and soon we're going to have to update those pictures. It's going to be a quite different industry—much less visible in the future.

[Joyce Bateman, Conservative, Winnipeg South Centre, MB]

Craig, perhaps you could speak to this positive upside as well.

[Craig Wright]

Briefly, if you look at the 1998-99 episode, we saw a much sharper price decline. Peak to trough, oil prices fell 70%. The Economist had that sub-$10 oil on the cover. This time around we've peak-to-trough fallen just over 50%, so it's less dramatic.

In the 2008-09 period, there was the financial crisis, so credit was tough. There was the uncertainty with global recession, depression, deflation—all these big ugly stories out there—and notwithstanding all of that, you did see Alberta oil production in that period rise.

To the earlier comments that we've seen a switchover, there's never a good time for a shock like this, but we are seeing more of a play from the non-conventional than from the conventional. These are 40-year to 50-year production phases, and in that period, they would be accustomed to some ups and downs. We're a little more insulated now relative to where we were only a short time ago.

[The Chair, Conservative, James Rajotte]

Okay. Thank you.

We'll go to Mr. Brison, please.

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

Mr. Locke, a lot of Atlantic Canadians work in the oil industry, in the oil sands, and as such are paying provincial income taxes in our provinces as well as paying their mortgages and car payments, and the rest of it. That's a significant part of our economy. Have you done some analysis as to how big a part of our economy that is, and how vulnerable provincial governments and our economies are to layoffs in this sector? For instance, Suncor has announced 1,000 job losses. Have you done some consideration as to the impact of that revenue and that economic benefit as a result of those people working in the oil industry?

[Prof. Wade Locke]

We are in the process of doing specifically that now for Newfoundland. In terms of people working in Alberta, about 25,000 Atlantic Canadians is the most recent number from Stats Canada, so it's a substantial number. It's the fly in, fly out people who would be adversely affected, and it will have a dramatic impact in rural parts of your province and rural parts of our province, specifically Cape Breton and on the west coast and south coast of Newfoundland.

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

Sure, people are on the planes with me every Monday morning on early morning flights connecting through Ottawa on their way out west.

Mr. Cross, you said that a positive outcome could be that the Alberta government could be going through a fundamental reassessment of its overall fiscal strategy. The Alberta government is introducing a budget on March 26. You didn't mention the federal government. It appears they're going through a bit of a re-evaluation of their fiscal strategy as well. I'm just curious as to why you wouldn't mention the federal government, which is actually delaying a budget as a result of falling oil prices.

[Philip Cross]

I didn't mention them because I didn't think the issues were as large for the federal government as the Alberta government. On the idea, for example, of Alberta potentially adopting a sales tax or making better use of its heritage fund, the situation would seem to call for a much more...I don't want to use the word “dramatic”, but a much more fundamental response from the Alberta government. I don't think there's the implication in this that the federal government needs to fundamentally re-evaluate its strategies. Not that much money is implicated here for the federal government.

I'll just get back to your previous question about the interprovincial aspect; that's something that has bedevilled StatsCan. How many people working in Alberta fly out from Newfoundland? We really have no way of measuring that. It's something we discuss internally a great deal. If in the survey week, you're in Alberta, and we catch you there, and you answer the survey, well, you're down as Alberta. If we capture you in Newfoundland, in your off-week, we just ask, “Do you have a full-time job?” If you say yes, then you're going to show up as employed in Newfoundland. It creates real problems for statistics, and statistics aren't as nice and cut and dried as a lot of people think. It's a messy business out there.

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

It would be helpful to have that information to understand the relative vulnerability of various provinces, and Revenue Canada ought to be able to give us some idea in terms of where people are actually filing their taxes.

[Philip Cross]

I think that's more likely to be your better source of that, because they're going to ask where you earned this money. That's going to be reported by the employer and that's going to be different in the province of residence.

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

You've said that, in fact, there's not as large a reason for the federal government to re-evaluate its fiscal plan. Any idea why they're delaying a budget, in that case?

[Philip Cross]

Coming from Statistics Canada, I've been very far removed from the policy process over the years, and I feel very comfortable and happy with that.