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

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

When the APPI presented itself before the U.S. Congress, it pointed out that there was variance in pricing at the retail level. It would appear that your retail margins in Toronto, in the GTA, are absolutely identical. I'm not going to suggest why that is, because I think in 1998 it made a number of recommendations to avert that.

But I wanted to ask whether you believe someone has an enormous amount of market power in order to make the price exactly one-tenth of a cent within a 150-kilometre radius, which makes my job of predicting prices the next day much easier. It's something I'm not exactly pleased with.

[Peter Boag]

To answer your question, no, I would say that's a reflection of a highly competitive market where retailers are competing to get market share and are not prepared to see their competitors take their share from them.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Does anybody else want to comment on this?

[Jane Savage]

I'll just comment on the wholesale prices that underpin retail prices.

Certainly in Toronto we've seen an increase in the spread between Toronto and Montreal on the wholesale level. Traditionally, Toronto runs at about 0.8¢ to a penny higher than Montreal does, and that reflects that the incremental barrel is coming from Montreal and costs about a penny to get into that market. Recently that spread has blown out to as much as 3.5¢ a litre.

Again, the market control by the folks who are setting those prices is high, and we've spoken to that before. The concentration of refining interests in Ontario and the land-locked nature of Ontario enable refiners to price whatever they want, really, at the wholesale level.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Let me ask you about the Toronto picture. It's my understanding, with the ethanol regulations in Ontario, that what in fact happens to meet that particular 5% standard is that you have 10% ethanol content in most GTA, Toronto, gas tanks. This means you have, in effect, perhaps as little as one supplier coming from Petro-Canada in Montreal providing product to Bronte, which provides product pretty much to the entire city. In fact, when you drive up to any station and you see someone dropping off a load in a no-name tank truck, you'll see that the product usually comes from one supplier, often Petro-Canada.

Is this how the market is best characterized—one supplier, one price, and with an absolute four players who don't compete against each other at wholesale—and the reason why one can explain why prices move up and down in lockstep fashion? What would be the impact on independence if they decided to, say, challenge that 6.5¢ margin for regular unleaded or that 12¢ margin for premium? What would happen in that scenario?

[Jane Savage]

I think the scenario you paint is correct, with perhaps one exception, and that is that the incremental supply of fuel in Ontario is from Petro-Canada in Montreal via the pipeline that runs between Montreal and Toronto. The last barrel, if you will, comes in from Montreal. There are four refineries in Ontario that refine and blend product, including ethanol-blended product in Ontario. So with that exception, I would say that what you're painting there is correct as far as the scene goes.

[Warren MacLean]

I think he said that Petro-Canada was supplying all of the GTA, and I don't think that's correct at all. There are pipelines coming from Sarnia on which both Shell and Suncor have product coming into Toronto. There's product coming from Esso Nanticoke on a pipeline. Petro-Canada brings it in by pipeline, but so does Ultramar.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Chair, I wonder if it would be possible for the researchers to reflect what Mr. MacLean has said. For instance, the Nanticoke refinery does not have reformulated gasoline—ethanol. Therefore, it cannot supply the Toronto market. This is part of my concern.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McTeague.

As the chair, I'm going to take the next spot.

Members and witnesses, we started about 10 minutes after 10, so perhaps I can ask the witnesses this. I know we asked you to stay until noon. If you have to go, you have to go. But perhaps we could impose upon you for a few more minutes, if that's okay.

I just wanted to drill down, Mr. MacLean, to some of the understanding, especially with respect to the price of crude. That seems to be where the main concern is. Crude is, as you've all mentioned, the primary determinant in terms of the price of gasoline. There is a concern, and Mr. McTeague has provided a very good article in terms of speculation.

In terms of the price of crude, we have the physical market, also known as the cash market, where we have the commercial participants. Then we have the futures market, and people are saying this is where the speculators are taking their action.

Can you drill down for the committee what percent...? Is there a way of telling, if the price of crude is a certain amount today, what amount is due to the cash market, what amount is due to what people may describe as more legitimate trading versus how much is due to the actual futures market, which is people not actually buying the product but buying to hold for future gain? Is there a way of drilling down to find out how much is due to the futures and how much is due to the actual physical market?

[Warren MacLean]

I think people over time, people a lot more knowledgeable than I am, have spent time trying to exactly figure that out. It's not only speculators; it's what the security premium in the market is. In other words, is what's driving the price higher the Iranian nuclear program, the Middle East situation? People are always trying to parse the price of crude by various factors that they have, in my opinion, no way of ever figuring out.

I get back to this: if speculators are manipulating the market, that's another question. I think that's what's under investigation. The whole situation with Vitol having 11% of the open interest on the NYMEX, I think, is going to...if it's true, because I'm not even sure that's true. That's what's reported, but those are the things that I think the U.S. is trying to figure out right now. But again, it's due to manipulation. I don't think anybody can parse the price of crude by the various factors,

[The Chair, Conservative, James Rajotte]

It was interesting that in your last response to Mr. Van Kesteren, I think, you mentioned that in your view diesel is actually driving up the price of crude. Am I correct that you said that? If so, can you explain that?

[Warren MacLean]

Sure.

Nobody consumes crude oil--nobody. Consumers consume gasoline, diesel, and various other products. But at times the market will be driven by various parts of the market. If there's a shortage of crude and crude prices run up, if it's really crude-driven you'll see a shrinking in the refining margin because refiners are trying to outbid each other for crude that's scarce.

What I think you've seen in the last number of years is a shortage of diesel in China primarily, but also in India. If you want to look at a refining margin, look at the refining margin for diesel. It has blown out tremendously. There was a run-up after 2005, and then again toward the end of 2007-08. If you trace that back, you can see that demand in China for diesel was tremendous. In 2005, I believe they had some hydro-electricity problems and their electricity system was very suspect, so people had their own diesel generators and were out buying diesel from the marketplace.

Again, it happened after the earthquakes in China, where they shut down about 30 coal mines. They didn't have coal available to run power plants, so individual consumers were out buying diesel to generate their own electricity.

[The Chair, Conservative, James Rajotte]

My final question--and I'm sorry I don't have more time--may be more for the afternoon panel.

The U.S. lawmakers, the ones who are concerned about the role of speculation, are saying there's two factors. One is that there were regulators in the past who put limits on the amount, in terms of how much they could have in terms of a commodity exchange, so you would limit the amount that happened, say, in a futures market over commodities like the price of crude. Second is the allowing of what are called private electronic platforms. So the U.S. lawmakers are saying these two things are causing the role of speculators to increase, driving up the price for their benefit, not to actually reflect market price.

I don't know whether you can touch on that. It may be a question for the afternoon panel, but do you want to touch on those two things, whether those two developments are perhaps things we ought to look at?

[Warren MacLean]

I think those two things do make sense, that if there is an issue and you want to solve it, those would be the mechanisms through which to solve it. One would be to really decide who a speculator is and who is a commercial player and then to put limits on them in the futures market. The other would be—and I think they're headed for it anyway—to regulate the over-the-counter market or the swaps market.

[The Chair, Conservative, James Rajotte]

Thank you.

Members, Monsieur Vincent has one more question, so what I'm proposing we do is allow each party one more spot. If we can limit it to one question per party, we can then have a brief response to the members.

We are going over time right now, so I'll start with Monsieur Vincent, then Mr. Alghabra, and then a Conservative, then Ms. Nash.

Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

I cannot ask you just one question as it comes in three parts.

Mr. Boag, you started your presentation by saying that you represent 16 refineries. First, do the refineries, or the refiners, influence the price at the pump?

Second, in recent years, can the cost of refining go up and down?

Third, why does every refining company have the same per litre rate?

Please be assured that I will have a supplementary question after you answer.

[The Chair, Conservative, James Rajotte]

Mr. Boag.

[Peter Boag]

As I indicated in my initial remarks, there are a number of components, ultimately, of that price. There's the crude price of crude, there are taxes, and there are ultimately the refining and retail margins. So I guess to that extent, yes, refiners do have an impact and do have a role in the price.

Around the issue of setting the price, ultimately the wholesale price, the price that refiners get for their product, is determined in the context of a North American market, and that's done in a transparent way through trading and posting of rack prices.

As for the third element of your question, the cost of refining is relatively stable, but it does change over time. Probably the most significant change to refining costs is the costs imposed on refiners due to increasing environmental regulations. We've talked about the costs that industry incurred in terms of a $5 billion dollar investment to respond to the desulphurization of gasoline and diesel, and we have looked beyond that, potentially, to other costs imposed on refining through the imposition of more strict regimes in terms of air pollutants. So yes, refining costs are an element of that, but this goes all the way from the price of crude to the retail margins, and ultimately it's the decisions of retailers who set the price of what consumers pay at the pump.

[The Chair, Conservative, James Rajotte]

Okay.

Trente seconds, monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Could you tell me why oil cost $73 a barrel two years ago and a litre of gas was $1.06? A year later, the same litre of gas sold for $1.10, but a barrel of oil was $61. The difference was $12, but the price of gas at the pump stayed the same. Why did your profit margin go from 9 cents to 28 cents per litre in the same year?

[The Chair, Conservative, James Rajotte]

Be very brief, Mr. Boag.

[Peter Boag]

I'm not able to give you a definitive answer. You've thrown out some numbers that I can't respond to here. And certainly I would again caution you that margins don't necessarily mean profit margins: the margins are the difference between an input cost and a selling price.

[The Chair, Conservative, James Rajotte]

Thank you. Merci.

We'll go to Mr. Alghabra, please, for three minutes.

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

Thank you, Mr. Chair.

I know, and I think Canadians know, that there's a lot we can't do about crude oil prices. We are price takers when it comes to crude oil.

Also, today, I'm not going to ask you a whole lot of questions about the speculators, because we have a panel on that later on. I think what we're trying to do is to figure out, given the restrictive nature of competition in the refinery and wholesale market, is how we can ensure that there's some fairness in that market. So yes, we can't control crude oil prices, and yes, there are issues with the financial market, but we're talking about inventory levels and price monitoring.

Regarding the point that was made earlier about the 5¢ up and down fluctuations that frequently are seen at the gas pumps, I'm curious to see if they are a direct reflection of...which, by the way, is not usually associated with the movements of crude oil prices up and down. Usually crude oil is stable or could go down, but still, on a weekly basis we'll see gas prices go and down about 5¢ or so. That's not relevant to the crude price, but is it relevant to the supply or the wholesalers—or is it the retailers? And if it is, and if we have such a competitive market at the retail level, why wouldn't the gas station next door be willing to accept a little lower margin and not follow the 5¢ increase, but instead accept a higher volume at the lower margin?

This is what I think a lot of Canadians have questions about, as they are not understanding these frequent 5¢ increases and decreases.

[Jane Savage]

The most important thing for Canadians to understand is that the price at the pump is underpinned by the wholesale price of gasoline. Crude affects the wholesale price of gasoline, but gasoline impacts the wholesale price of gasoline. In other words, the world trades in gasoline as well as crude oil. So the difference between crude oil and gasoline changes, and that difference is how much margin is available to refiners. It is the wholesale price of gasoline, not the cost of gasoline, that moves every single day in Canada. So when a rack price increase or decrease goes through, the independent retailers, who make up 70% of the market, have to buy at that price every day. So the daily fluctuations in price at the pump are fundamentally underpinned by the daily fluctuations in wholesale gasoline prices.