Bank of Canada to Address Committee on Oil Price DropJosh Wingrove
Canada’s main oil lobby group warned that declining crude prices will have widespread effects on the country, as lawmakers began a three-day study on the impact of the economic shock.
Speaking Tuesday at Parliament’s Standing Committee on Finance, Canadian Association of Petroleum Producers Chief Executive Officer Tim McMillan said lower prices will crimp purchases, hiring and tax revenue countrywide. Capital spending will fall to C$46 billion ($36.2 million) this year from C$69 billion in 2014, he said.
“The effect of the low price will be felt across Canada through our supplier network, through the employment that is sourced from across the country and through the taxes and royalties,” McMillan said in Ottawa.
The committee will also hear from the Bank of Canada, bank economists and manufacturing groups as policy makers grapple with the impact of an oil price shock that threatens the nation’s expansion. Finance Minister Joe Oliver delayed his 2015 budget to see how the economic effects play out, and Bank of Canada Governor Stephen Poloz cut interest rates in January to provide a buffer.
Testimony from the oil industry and Alberta stakeholders dominated the first day of hearings.
Steve Reynish, Suncor Energy Inc. executive vice-president of strategy and corporate development, said his company is looking for at least $600 million in operating savings over the next two years. The Calgary-based oil producer has already announced a cut of 1,000 workers that is “reducing or eliminating” the number of so-called “fly in, fly out” employees who typically work in the oil sands region but live elsewhere.
“We believe we’ve seen the return of volatility,” Reynish said, referring to the crude price. The company expects an eventual increase in oil prices, but not this year, he said.
Gil McGowan, president of the Alberta Federation of Labour, said the low oil price is leading to “dramatic job losses” in drilling and oil field services even as previously approved projects are still proceeding.
“The big question is what will happen for the next generation of oil sands projects if the price remains where it is,” he said. “For now, most of our guys are working.”
It was a sentiment echoed by Andrew Leach, an associate professor of business at the University of Alberta who studies the energy sector. Many producers continue to operate at a profit with per-barrel production costs still below current prices, he said.
Existing Canadian oil projects “are at very little risk of actually shutting down, unless the oil prices get a lot worse, of course,” Leach said.
Even CAPP’s McMillan said the industry remains robust, telling parliamentarians production is still forecast to grow, “regardless of the world price” and the energy sector will remain “by far the largest investor in the Canadian economy.”
The hearings, which will proceed through Thursday, were called after a change of heart from Conservative lawmakers who have a majority on the committee. The body voted down a similar study last month, with one Conservative member of parliament saying that hearings instead would focus on a separate study of terrorist organization financing.
Committee Chairman James Rajotte, a Conservative MP, said Monday the committee now wants a closer understanding of the impact of the oil price drop by hearing from economists and business leaders ahead of the federal budget, to be released as early as next month.
The West Texas Intermediate price for oil dropped below $50 a barrel on Tuesday. The price has hovered around $50 in recent weeks, down from more than $90 six months earlier.
“It certainly is having an impact,” Rajotte, who represents an Alberta district, said of the oil price. The committee hasn’t yet decided whether to produce a report from the three days of hearings, he said.
New Democratic Party MP and Finance Critic Nathan Cullen proposed a study of the issue, and saw it voted down in a Feb. 19 meeting of the committee. Conservative MP Andrew Saxton said in that meeting that the finance department, Parliamentary Budget Officer and Bank of Canada have all studied, or are studying, the same issue. Saxton said in the Feb. 19 meeting that the Finance committee instead had a “very urgent priority” to study terrorist financing, rather than the oil price.
“I think this is the leading question facing our country right now - what’s happening in our economy, the importance of the price of oil, the effect on the loonie,” Cullen said in an interview Monday. “This is something I think is deserving of the House of Commons to get into.”
Sharon Kozicki, an adviser to Bank of Canada Governor Stephen Poloz, will speak to lawmakers on Thursday, according to the committee schedule.
In its briefing, made public Monday by the committee, CAPP said Canadian oil and gas industry revenue will drop by a third to about C$100 billion ($79 billion) this year from 2014. Drilling of new oil wells will also drop 30 percent, the group said.
The manufacturing sector, meanwhile, has yet to see a significant benefit from the lower Canadian dollar, according to a briefing by the Canadian Manufacturers and Exporters published by the committee.
There is “little indication” falling oil prices have led to lower freight costs for manufacturers, according to the briefing note from the lobby group. The group’s head, Jayson Myers, will speak on Thursday.
“Lower oil prices, a low dollar and the resurgence of the U.S. market demand are not sufficient in themselves to guarantee short-term business success or long-term growth for Canadian manufacturers,” the note said.
Economists from Royal Bank of Canada and Toronto-Dominion Bank are among those scheduled to speak to the committee this week.