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

[Eric Sprott]

There's rarely delivery of a commodity. So money forces can make prices do what they want them to do, and very often the physical market follows that price, because that price is the one quoted in the paper every day. But there rarely is a trade in commodities.

I would point out—and most people wouldn't be aware of this—that the latest example of a company having a problem in the commodity market is a company called SemGroup. It would seem, from information in the public domain, they were short oil. They were short oil and got caught offside.

Remember, there are both buyers and sellers here. Each side can be offside. No one has made the point that the shorters are more significant than the others, and I think Mr. Diwan actually made a very salient point that you missed. He said the best public policy is to have the price go up so that people stop using oil.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Mr. Sprott, you just said that the market is not really regulated, and we saw what deregulation caused the sub-prime market in the United States. So are you suggesting that we should just let the market work its way through this?

[Eric Sprott]

No. I think the commodity markets might be very poorly regulated. That's the paper market. Then there's there real world where oil is produced, consumed, and purchased.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

So you're suggesting we should regulate the paper market.

[Eric Sprott]

Yes, and I already called it the comedy exchange. I think there are too many institutions that force the price around.

[The Chair, Conservative, James Rajotte]

Thank you.

I'll go to Mr. Carrie, please.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

There seem to be a lot of different opinions on this, and I wonder if we could get a comment.

I have a quote here from Mr. Manzoni, the CEO of Talisman Energy. He said that the oil market is in a structural fix, with supply growth lagging demand rather than speculative activity fuelling the high prices. While speculation and currency fluctuations are issues, they aren't driving the long-term oil price. He stated, “It's going to stay structurally high for a year or two, certainly not at $140 a barrel...but at $90 plus”.

I wonder if you could comment on that quote, Mr. Diwan, and then maybe Mr. Masters could comment.

[Roger Diwan]

Sure. As I said in my opening statement, there is a supply and demand issue. You have fundamental issues and you've had two shocks. Think about the last 12 months, when oil prices moved from $70 to $150 and back to $110. Obviously fundamentals haven't changed that much in the last 12 months for supply and demand. They have changed, but not that dramatically. They haven't doubled. We haven't seen such a big difference in what we thought the market would be this year when we were thinking about it last year.

Obviously you have massive amplifications of movement due to money coming in and out of the oil market. Mr. Manzoni is right in a sense, but that doesn't tell me if the price should be $70, $90, $110, or $130. Nobody knows what that price should be; we know that it's amplified. I know only one price I can tell you about, which is basically the marginal cost of producing an extra barrel of oil from a green field. It's probably around $80 or $90 right now, because the dollar is declining. So we know that the marginal price in the long term, if you start a new investment today, is around $80 or $90. That's the only thing I know. I don't know exactly where supply and demand should put my oil prices, because the indicators are all over the place.

[The Chair, Conservative, James Rajotte]

Mr. Sprott.

[Eric Sprott]

I think what Mr. Diwan has said is incredibly important, certainly for us as Canadians. We know what the tar sands cost to produce. It's not $80; it's very expensive. We're not going to get any further production of the tar sands with $80 oil. Nothing will go forward. That tells us what it costs to produce a marginal barrel of oil. To think that even a conventional barrel might cost $80, what would an unconventional barrel cost? It's not easy to find and produce oil.

[The Chair, Conservative, James Rajotte]

Mr. Masters, do you want to comment?

[Michael Masters]

There's no question that the price is, and has been, well above the marginal cost of production for most of the year. When we look at index flows of money into the commodity futures markets, it's very interesting. They have really gone up all year, until peaking around July 1. Subsequent to that time we have seen significant index flows out of commodities, and the price has come down fairly significantly. So we really feel that whether that spread above the marginal cost of production is $10 or $50, a lot of it is dictated by the amplification mechanism of financial investors. That has been our point from the get-go: how much of that do we need to tolerate?

If oil producers don't believe the price should be $130, because they know from their contacts that it's been artificially amplified through speculation, then they're not necessarily going to explore as we would prefer them to.

[The Chair, Conservative, James Rajotte]

Mr. Carrie has one more question.

[Colin Carrie, Conservative, Oshawa, ON]

I wanted to touch briefly on the peak oil theory too. Mr. Diwan talked about how much oil is out there, because we really don't know. There's a gentleman, whose name is Nansen Saleri, who is a former Aramco executive, I guess, working with the Saudi oil company. He was saying that the globe has consumed only 1 trillion out of a grand total of 12 trillion to 16 trillion barrels of oil. He, along with Exxon Mobil and the U.S. energy department, all argue that the high prices are propelling companies to innovate and invest more, and as a result, supply will rebound and prices will fall from current levels.

Do you believe this is true? Mr. Diwan, do you want to start?

[The Chair, Conservative, James Rajotte]

Mr. Diwan.

[Roger Diwan]

Yes. The amount of oil in the ground changes at different prices. It means that what's important is that if you have $600 oil you'll have a lot more oil. If you have $20 oil you'll have a lot less oil. It costs money to produce oil, and as the prices increase you have access to deeper, smaller, more complicated reservoirs. So it's an economic commodity. There's no price, there's no physical limit that we're reaching, and that's my problem with peak oil.

At different prices you discover more oil. Think about it. When oil companies book reserves, they book reserves at different prices.

I know Mr. Saleri, and he knows what he's talking about. He's been managing the reservoirs for Saudi Aramco, so....

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Carrie.

We'll go to Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair.

I welcome you all.

Ms. Russell, you said that a lot of speculation raises the price of crude oil. How could we reduce this speculation in order to have fair prices? That question is for everyone.

[Dr. Ellen Russell]

We are in a bit of a fix in the sense that you, as elected officials in Canada, have very little to say about regulatory policies taking place in the United States, which are so influential in this. So I would encourage you to encourage the Government of Canada to make it known that this speculation in oil prices is having consequences that you don't like and that you would like to see more regulatory moves made south of the border to inhibit speculation.

That's also a tall order for things that people around the table have been saying already. There are lots of interests who are profiting from this and who do not want to see speed bumps reimplemented.

If you're not optimistic that you can get some of these measures made, then we are faced with a decision. I mean, do we wish the volatility in the international price of oil to be causing these difficulties in Canada? If not, then we would have to take much more interventionist measures to try to protect ourselves from some of these excesses.

[Robert Vincent, Bloc, Shefford, QC]

Mr. Sprott, you talked about the paper market and the real market. If speculation were reduced, would it be possible that the people remaining in the real market would form an oligopoly?

[Eric Sprott]

Thank you for the question.

As I've said, I believe there's a paper market and a real market. I think that the real market is a truer market.

It's interesting. I think someone mentioned that the price of oil was up $2 today and they didn't know why. The reason is that we are in so fine a balance between supply and demand, we are right there. For example, when I worry about oil, I worry about the supply going down. I haven't even talked about demand going up. We know demand is going up. I'm telling you that supply is going down. It will go down in the future. That's my expectation here.

I really could care less about the commodity markets, quite frankly. People do make money by speculating these markets, and they shouldn't. It is costing people. It costs companies, on one hand, sometimes if the shorts are winning, and it costs the consumer, on the other hand, if the longs are winning. People dupe big institutions to participate in those markets, and I'd love to see it not happen. But I think that in the long run the really big issue is that you have to deal with supply and demand for oil, and we have nothing but problems to look forward to in that area.

[The Chair, Conservative, James Rajotte]

Monsieur Vincent, Mr. Diwan wants to respond.

[Roger Diwan]

Quickly, I want to answer Mr. Sprott on this notion that there is a physical price and a paper price. No, there is only one price; there is a paper price. The physical price is basically a derivative of the paper price. The price discovery mechanism is on the exchanges; it is not any more into the physical market. The physical players only take the indication from the paper market and apply a price differential if the quality or the location is different.

So we don't have these two markets and one is good and one is bad. There is one market. They are all together. The problem is that traditionally the physical players were a large player in the market but now they are a very small player. They represent probably less than 5% or 10% of the overall market. So in a way, that horse left the barn a long time ago, and the question of how you bring it back is very complicated.

The question of how you influence Washington is very simple. I live in Washington. You hire a lobbyist. That's the only way for Canadians if you want to have an impact on this regulation—you do as everybody else does.

[The Chair, Conservative, James Rajotte]

Mr. Vincent, you can ask a final question.

[Robert Vincent, Bloc, Shefford, QC]

My colleague mentioned the Competition Bureau.

Mr. Diwan, you said that the profit margin for refiners was more or less the same. But the profit margin was 28 cents in 2007 and 14 cents in 2006. Now it is back to a normal level of 9 cents.

If a refiner decides to fix the margin at 28 cents, why would other refiners fix theirs at the same amount? Does competition not mean that everyone moves down in price rather than that everyone moves up? If the Competition Bureau had more power, it could help.

My question goes to you, Mr. Sprott, since you were also in the refining business.