Natural Resources Committee on April 23rd, 2013

[Philip Cross]

I don't know if market diversification per se would bring the maximum benefit. I wouldn't diversify just for the sake of diversification. I think the maximum benefit to aboriginals is the same as the maximum benefit to all Canadians, which is extracting the most value from this product. That may not necessarily involve diversification.

I'm glad you mentioned this paper by Ken and Brian because in fact they'll be launching a major paper and project on aboriginals and natural resource development next Thursday. Ken will be in town and actually speaking to the Ottawa Economics Association. I think their basic thesis is that aboriginals have not always been properly included a lot of times particularly historically in the 20th century. We would move in, set up camps, take the resources out, and sayonara. Not enough was done to involve aboriginals in the development, in making sure that they would be equal participants. I think that's very much what Ken's and Brian's message is: to include aboriginals.

I think there has certainly been progress. Look at the unemployment rates, for example. When I look at the breakdown of unemployment, there are two groups that stand out as having double-digit unemployment in our society today. One is teenagers ages 15 to 19, and the other is recent immigrants who have been here less than five years. I was kind of expecting aboriginals to be in that group, but actually their unemployment rate is down to something like 8.8%, so all that development going on in the west, because of the shortages there, I think there has been an inducement for companies to train and develop aboriginals.

[Joan Crockatt, Conservative, Calgary Centre, AB]

You see that there are some benefits then. One of the things that Brian Lee Crowley said is that if the Kitimat LNG plant were to disappear, and if the Northern Gateway pipeline were killed, the Haisla, who, as you know, have recently changed and want to start talking about this, “will have lost a rare indigenous opportunity for sustainable prosperity”. Do you see energy development as offering opportunities for sustainable prosperity for our aboriginal people?

[Philip Cross]

I don't think there's any question of that if they're properly consulted and engaged. Honestly, I'm not the expert in this. Whatever I've learned is from talking with Ken and Brian, which has been one of the great joys since I left StatsCan. What they talk about is that we have a different view of things in central Canada. We haven't done as good a job at collaborating with aboriginals on economic development as western Canada has done, so I think there are lessons to be learned there.

[Joan Crockatt, Conservative, Calgary Centre, AB]

Thank you.

Mr. Belzile, could I just ask you about Quebec? I thought it was interesting that you think Quebec will become an oil producer. You said Quebeckers' attitudes are changing and that they're quite favourable now to energy development. What is it that Quebeckers have needed to be informed about that has actually changed their attitudes? I'm wondering if they know things, for example, such as that the Kearl oil sands plant which opened this week has the same greenhouse gas emission level per barrel of oil as a conventional refinery in the U.S. Is it those kinds of things? What do they need to know?

[Germain Belzile]

I'll give you an example. We've been doing a few polls, in fact, in Quebec and in Canada. When we ask Quebeckers bluntly what they think of oil coming from Alberta, a small majority are opposed to it. When they're told that in fact the quantity of water used to produce oil is down, according to the experts, in the past few years, and when we give a little information and we ask them the same question afterwards, in fact their attitude is much, much different.

Also, when we tell Quebeckers that in Quebec we import our oil from Algeria, Venezuela, etc., etc., and ask them where they think we should get our oil from, well, 73% or 74% of Quebeckers say that we should get it from Canada. That would be from Alberta.

I think there's a lot of misinformation. I don't think it would be that difficult to change Quebeckers' minds about western oil. I don't think their minds are set in stone.

[The Chair, Conservative, Leon Benoit]

Thank you very much.

Thank you, Ms. Crockatt.

Mr. Anderson, for up to five minutes.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

Thank you, Mr. Chair.

I think another concern that we've had, and something that may have impacted people's minds at one time, was the use of the words “Dutch disease”. I see Mr. Stanford fleeing from it as far as he can when he says he prefers to shed the term, and he's coming up with another one. Mr. Cross, you recently published a paper called “Dutch Disease, Canadian Cure”. I'm wondering if you could present that to the committee, or make sure we get a copy of it for our evidence. Is that possible?

[Philip Cross]

Certainly, I'd be more than happy to share it with you.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

I'd like to hear some of your comments on this because I think it's important. If we're talking about diversification, we're trying to talk about a balanced economy. I'm just wondering if you could give us your opinions on Dutch disease. Has the resource industry contributed to an imbalance in the Canadian economy that would affect the economy's ability to diversify?

[Philip Cross]

I think the main conclusion of the paper, whether or not we did suffer from a mild case of Dutch disease, is not that interesting anymore. That was largely something that happened before the recession. The dollar has been at parity since 2007. If you were a business out there you were waiting for the dollar to go back to 63¢ to make your business viable, you went out of business a long time ago. If you're in business today, you have shown you are profitable at parity. It's been six years. It's time to move on from this debate. We're at parity. The business sector has adjusted. I thought you had some interesting graphs on how small and medium-sized businesses were exporting despite the high dollar.

I think it's misleading too to put the natural resource sector and the manufacturing sector as in opposition to each other. I touched on that in my opening remarks. You can get that impression. You'd look at the 1990s. One sector did well and the other did poorly. The reverse happened in the 2000s. It's too easy to conclude from that that we have to pick one or the other because we can't have both. Well, in the recovery since 2009, we've had growth in both sectors, the manufacturing and natural resources, and that's with parity with the U.S. exchange rate.

If you ask firms if they are bothered by the dollar, and whether this is a major constraint in their business plans today, they say no. In fact, 75% to 80% of manufacturers entering 2013 were quite optimistic about their business. They've moved on, and I think the public debate should too.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

In your conclusion you say that Dutch disease did not apply to Canada during the resource boom over the past decade.

I'm interested in your comments about the adaptability of manufacturers as reflected in their place in the vanguard of industry growth since the recovery began in 2009. You said that manufacturing output growth has been the third fastest of the 18 major industry groups, exceeding even mining and oil and gas. I'm wondering if you have any comments to make on that, because it seems that there has been real strength in that sector.

[Philip Cross]

Yes, and a lot of it has come though, but not many jobs. I'll agree with that. That's how firms have adapted among other things. They've boosted productivity. They're producing more and more. They're participating in the recovery. The auto sector, the housing sector, in particular, are picking up as those sectors pick up in the U.S., but firms are mostly using that increase in output to boost productivity. I suspect that gradually as we go forward, eventually there will be some hiring as they get more confidence and invest more, but for the moment its output is up.

It's also noteworthy that manufacturing firms are investing more. They've boosted investment over the last three years. Investments now near the peaks that they were at, at the very height of the ICT boom in 2000 and 2001. I think that's extremely important going forward as it shows that firms have confidence.

Mr. Hsu, you talked about the time horizon. I spend more time studying investment than any other variable because to me that shows whether firms believe this is just a one-off, or just something that's going to be for six months, or it's going to be sustainable. If they're investing more, it seems to me they have a very long time horizon. That's why I find the recent increase in [Technical difficulty—Editor] very encouraging.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

I have a question for the other folks. Do you think we're in danger of overbuilding pipeline production, given the changes that are taking place in the development of the energy industry in Canada?

[Youri Chassin]

No actually, I don't think so. Mainly because it's private initiatives. They raise their own dollars. Basically, by providing the right opportunity and the right legislative framework, it shouldn't be a problem at all. Actually, it's kind of the same point. Who knows what quantity we will produce in the future, especially if the market is accessible. Basically, I think that rising investment is proof that there is some confidence. I don't think that private initiative would build more capacity than needed.

[David Anderson, Conservative, Cypress Hills—Grasslands, SK]

Do you think access to markets is a good thing rather than a bad thing?

[Youri Chassin]

Absolutely.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Anderson.

Mr. Nicholls, for up to five minutes.

[Jamie Nicholls, NDP, Vaudreuil—Soulanges, QC]

Thank you, Mr. Chair.

Ms. Bak, could you elaborate on the potential of our clean technology exports to developing countries? What is the potential for our industry?

[Céline Bak]

Thank you very much for that question.

As you know, Canada has made significant investments in what is referred to as short-term financing,

short-term or fast-start financing,

in the context of discussions on climate change. Those investments amount to $891.5 million. The investments were allocated to international development funds—the Asian Development Bank, the Inter-American Development Bank, the World Bank, and one of its members, the International Finance Corporation.

Those investments show that this is a priority for the government. However, we're talking about a step that is preliminary to the next stage, which is referred to as long-term finance in the world of climate change. In that next phase, $100 billion a year needs to be invested to facilitate the creation of an energy infrastructure that could help us manage climate change.

Our clean technology companies have products that are appropriate for those markets. However, historically, we have not taken our share of the market. Let's say that there is room for improvement in this area, where Canada could play a much more important role.

[Jamie Nicholls, NDP, Vaudreuil—Soulanges, QC]

Merci.

My next question is for Mr. Stanford.

You've called the Canadian discount, the price differential, a scapegoat for fiscal ailments of different governments.

First, could you explain how prices get driven down by pursuing export pipelines rather than value-added here at home?

I've also noted that the price differential has recently closed, and yet no pipelines have yet been built, which sort of puts that theory of not having the export pipelines.... It sort of puts the theory to rest that it's due to not having the pipelines that there's that wide differential.

Perhaps you could start with my first question. Could you explain how the prices get driven down by pursuing an export-driven strategy?

[Jim Stanford]

In general, I agree with Mr. Cross's views earlier, that in the oil industry in particular there's a tendency to equilibrate prices between different markets because of the largely arbitrageable nature of the products. Oil from one place can largely be substituted for oil from another place, although that depends somewhat on the quality of the products. Among bitumen, heavy crude, and light crude, there is normally going to be a differential between the qualities or grades of crude, as opposed to a differential between different markets. Then transitory supply and demand imbalances within particular markets, given the constraints of pipeline capacity or refining capacity or changing market demand, can cause them to rise one way or another.

To the extent that the Canadian discount we saw reach peak levels months ago, we contributed to it in the sense of our expansion beyond what the market could absorb of the lower grades of product, bitumen being obviously the lowest grade. The heavier crude had a smaller degree of Canadian discount, and that reduced the price of our Canadian exports relative to both benchmarks, so there was the differential versus other crude prices in that continental U.S. market we are tied to. Then the overall price in that market, in part again because of our own actions, was reduced relative to the global price.

I will point out that the Keystone pipeline and other pipelines going to the U.S. will not affect at all the second of those differentials in the discount on prices in the U.S. market relative to world crude. In fact, by some reckonings, it could make it worse by enhancing even further the supply going into that one market.

How long-lasting would that be? Other factors were at play. Obviously, the expansion of the U.S. unconventional crude production was one. Transitory refining issues were another. These are some of the reasons the discount has narrowed in recent months. How long the discount will last is obviously a matter of speculation.

I think the lesson for us should be, though, that there are risks involved in Canada as a nation putting too many eggs in the basket of unprocessed resource exports. What happened with shale oil has happened recently with shale gas. What happened with shale gas has happened with other staples we have produced in waves over our history. This is where I think it makes sense for us to take a longer-term view and elevate the goal of enhancing value-added production at all stages of the production process as part of our goal.

We don't export beaver pelts anymore and it isn't because we ran out of beavers. It's because the market for the product disappeared. Exactly the same threats have hindered our export of other staples through our history, and there's no reason to believe bitumen will be any different.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Nicholls.

We go now to Mr. Trost, followed by Ms. Liu and Mr. Leef.

Mr. Trost, go ahead please, for up to five minutes.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

Thank you, Mr. Chair.

Mr. Cross, I'm not sure if you're able to answer this; if not, that's fine.

I read a paper by one of your colleagues, Mr. Brian Lee Crowley. He was making a counterpoint to Mr. Stanford and Mr. Wilson saying why Canada doesn't build refineries.

I don't know if you're qualified to speak on that as he wrote the paper, but do you have any explanation or response to what Mr. Stanford and Mr. Wilson said as to why Canada doesn't build refineries?

[Philip Cross]

I think the answer is obvious. There isn't money to be made in it. If anything, we have excess capacity. Why would you build more refineries, especially in eastern Canada, when instead of building one brand new you could buy one that's for sale in Halifax. There was one for sale in Montreal. They looked around forever trying to find a buyer. It would be like opening up more auto plants. At this moment in history, does that make sense?

That goes back to this characterization that staples are vulnerable to swings in demand. That's true of any industry. As Jim will tell you, that was true of the auto industry in 2008 and 2009. It was true of the ICT sector. Those of you who were holding Nortel and JDS stocks in 2000 know that well.

Every industry is cyclical. In fact, if you look at the historical pattern, the most cyclical parts of the economy.... I always had a business cycle analysis, leading indicators, all this stuff. This is Canada; I spend more time studying manufacturing and construction than resources, from that point of view. The resource sector is actually relatively stable compared to these sectors.

If you look at the business cycle in this country, if you want to see where recessions occur, a good starting point, but it's not the only place, would be the auto and housing industries, but I don't hear anybody going around saying that if we don't invest in auto and housing, then we won't have as many recessions. It doesn't work like that. You would still have recessions. Recessions are not caused by industry structures. But don't pretend either that we shouldn't invest in resources because that will reduce our vulnerability to recessions. It doesn't work like that.

[Bradley Trost, Conservative, Saskatoon—Humboldt, SK]

You made a very good point that our goal should be to add value. While we didn't quite put that in the title of the study that we're doing, I think that's the implied idea of what we're trying to get to by asking for diversification, assuming diversification can add value.

Is there anything we should be doing to add value as a government, through diversification, through opening up markets, through trade agreements? What would we do within the scope of this report that would add value to our natural resource products?