Finance Committee on March 11th, 2015

[The Chair, Conservative, James Rajotte]

I appreciate that.

The second issue I wanted to raise, Mr. Ambler, is in the C. D. Howe report. It says:

One Council member recommended that the Bank clarify whether it attributes the recent fall in oil prices to supply effects or to demand effects.

If you look on pages 7 and 8 of the information Mr. Locke has presented to the committee, and if you look at the increase in production in the United States in particular, it seems to me, on the face of it, it's supply effects. It's not demand effects.

Would anyone like to comment on that, or does anyone believe it's demand effects rather than supply effects that have caused the dramatic price drop?

[Prof. Steven Ambler]

I think it's a bit of both.

My understanding is that there's been a huge, unplanned accumulation of unsold petroleum. You hear at least anecdotal stories of ships being hired and then basically sailing around waiting for stocks to deplete. I think there is something happening on the demand side, as well.

Yes, there is a fracking revolution, the shale gas revolution, so there's been a shift in the supply curve to the right. But I think growth in demand due to weaker growth overall in the world economy has played a part as well.

[The Chair, Conservative, James Rajotte]

Okay.

Does anyone else want to comment on that?

[Prof. Wade Locke]

Clearly, the supply-side impacts have been bigger than anybody anticipated. Demand has been growing, just not as quickly as people originally thought. Most of the effects are demand driven. As for people using tankers for storage, those cases have been going down.

Right now, as I said in my presentation, if you look at the most recent drilling report that came out two days ago from the EIA, we will start to see a fall in production come April. The expectation is that the productivity people talked about for shale can't keep up with the fall in the rigs. The expectation is that, while inventories are building up in the States and elsewhere, they're expected to start to come down.

[The Chair, Conservative, James Rajotte]

Very good.

[Prof. Jean-Thomas Bernard]

The period of 2010 to 2014 has been very unusual in the oil industry in the sense that we had very high prices—about $105 per barrel, sometimes a bit more at $110 and sometimes a bit less—in terms of historical periods. We have to go back to the oil shock of 1979 before we hit that same level.

This was very high and not only high, but stable. Somehow people in the industry and the government came to the view that the prices were high and would continue to be high and also stable. This is not the reality of the oil price when you look at it over a longer period.

We are getting back to the usual way of the industry. This unstable high price boosted supplies to levels that were not met by demand. That's why the price collapsed.

[The Chair, Conservative, James Rajotte]

I'll just pop in one last question.

Mr. Wright, I think you said the best thing for low oil prices is low oil prices. I sort of posed the question yesterday.... I think you've heard some of the comments today that if the Saudis and OPEC simply adjusted some of their behaviour that this would be the biggest thing that could impact the price in the short term.

Yesterday one of the witnesses said the Saudis don't have the policy levers that they used to because of the changed dynamic and the changed makeup in terms of who our global producers are today. Would you agree with that statement or is there any disagreement with that?

[Craig Wright]

I think when you look at the why the Saudis didn't do what they typically do last November, there are a number of a different theories for it. My thinking is that it's in light of the U.S. shale build up that we've seen. Obviously the U.S. isn't oil independent, but they're relying on less oil and their imports are continuing to drop relative to overall consumption.

The Saudis are more sensitive to losing market share elsewhere like in China and onwards. I think they are trying to drive out, even within the OPEC group, some of the higher-cost producers. Their break-even price in Saudi Arabia is somewhere close to $10 a barrel, but their fiscal break-even price is a lot higher because they do have a fairly sizeable spend on the social front in Saudi Arabia. They're living off the earlier surpluses and there's a limit to how long that can take place. I think it's mostly a market share game, and even Saudi Arabia has a limit on how far they can run with that.

[The Chair, Conservative, James Rajotte]

Okay. I appreciate that.

I'll go back to Mr. Cullen.

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

Thank you.

I enjoyed this committee, this is....

[The Chair, Conservative, James Rajotte]

Yes, it is. I think we're going to run it like this from now on.

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

Yes, we may have a few more votes.

We do appreciate this. There were a number of us who thought to have this type of expertise at the panel and then be popping in and out of votes and not using your insights was going to be a shame, so thankfully all of this is being recorded and we're bringing it in.

I want to pull a little further back in terms of job growth expectations for this year. We saw what some have called relatively anemic growth last year in 2014 at 0.7% or 0.8%. Combine that with, as CIBC pointed out recently, a generational downturn in job quality in Canada.

I'm going to assume this $50 barrel and 80¢ loonie for current circumstances, and we can all look for a climb depending on what the Russians may or may not do. Given this current circumstance what are your expectations for the Canadian economy going through the rest of this year in terms of potential job growth with this as one of the factors? Does this improve job growth perspectives across the economy or diminish the expectations that you had for this year?

Anyone have some insights on that?

[Craig Wright]

As to our employment outlook, this year we have a slight acceleration as you mentioned. There was lacklustre growth last year on a monthly basis and it was about 10,000 jobs on average each and every month. We had a pretty strong January and we'll get the February numbers this Friday, but we see it moving.... We have growth at 2.4% this year, so to us that suggests somewhere between 15,000 to 20,000—

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

Is that 2.4% readjusted?

[Craig Wright]

That is our current growth forecast.

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

Is that adjusted downwards?

[Craig Wright]

We do quarterly forecasts and our next round comes out tomorrow. It's a full macro with global, U.S., Canada, and then provincial numbers. We only do provincial on a quarterly basis. From December in our last quarterly forecast to tomorrow's forecast, our growth forecast comes down from 2.7% to 2.4%.

That is a bit above trend. Unless we get this productivity on a sustained basis, our speed limit's in and around 2%. As long as the growth in the economy is a bit stronger than the speed limit, we'll see the unemployment rate continue to drift lower. We think trend growth, if the economy is at 2.5%, is around 15,000 a month.

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

You mentioned the strong January, but does your forecast concern itself with what kinds of jobs are being created? We saw a net loss of full-time employment, a net gain of some 50,000-odd part-time and—

[Craig Wright]

You could look at it every which way. I tend to look at it on a year-over-year basis. Then you could look at it over a post-crisis period. What we found is that just over 80% of the job gains over a post-crisis period or over the most recent year have been full time rather than part time. They also tended to be more private sector than public sector.

Self-employment's also been up. I think that's probably a demographic challenge. As we go forward we're going to see more people staying engaged in the labour market longer, and that suggests to us that self-employment may not be a bad thing at all. To me, any job's a good job.

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

Sure. But traditionally part-time employment and self-employment were considered, broadly speaking, as more precarious. No? Not from the bank's perspective?

[Craig Wright]

I don't share that view.

[Philip Cross]

I'll jump in on this one.

I wrote what you could call a high-spirited op-ed in the Financial Post yesterday on the CIBC jobs report. First of all, part-time and self-employment peaked 20 years ago. It's been a declining share of employment over time. So the idea that jobs are shifting into this precarious labour force, no, it doesn't work. This index is not something Statistics Canada would ever produce. Conceptually it's a very weak index.

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

Those are fighting words, Mr. Cross.

[Philip Cross]

And I'm pulling my words now compared to the op-ed. I would bring your attention to that op-ed.

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

I will. I think the finance minister called it a sham economic picture.