Thank you, Mr. Chairman.
Members of the committee, good morning, it's my pleasure to be here today.
I represent the refining sector, which is an integral component of Canada's petroleum value chain. Refineries are the manufacturing intermediary between crude oil and refined products. Canada has 18 refineries located in eight provinces, with a total capacity of two million barrels per day. They contribute $5.6 billion in direct GDP and employ more than 18,000 Canadians.
The refining process simply separates, breaks, reshapes, and recombines the molecules of crude oil into value-added products such as gasoline, diesel, and aviation fuel. These transportation fuels typically account for 75% of refinery output, the remaining 25% comprises heating oil, lubricants, heavy fuel oil, asphalt for roads, and feedstocks that the petrochemical industry transforms into hundreds of consumer goods and products that Canadians use and rely on every day, from plastics to textiles to pharmaceutical products.
Crude oil is the single biggest cost input for refiners. Over the long term, refined product prices for gasoline, for example, generally track movements in crude prices although other factors can come into play. The difference between crude oil and the price of gasoline at the pump comprises three components: the refiner margin, the marketers' margin, and taxes. The decline in crude oil over the past six months has been accompanied by a significant decline in retail fuel prices. The current Canadian average retail price of gasoline is about 20¢ per litre lower than it was a year ago.
I've handed out a document, the Natural Resources Canada “Fuel Focus” report. It's from last Friday, March 6. If you look at figure 1 on page 1, it shows on a national basis how retail prices for gasoline have closely tracked crude prices into February of this year. The overall trend line for refiner and retail margins has not materially changed over the past months.
If you look at figure 5 on page 4, and I'm looking specifically at the chart in the upper left, it shows that beyond typical, short-term variations in refiner margins, and that generally reflects seasonal demand changes and other short-term gasoline supply and demand dynamics, there's been a modest downward trend in refiner margins over the past two and a half years, on a national basis. The retail margin trend, again on a national average basis, has slightly increased. As you can also see from the chart, refiner margins significantly dipped in January. Gasoline margins were under significant downward pressure over this time not only because of seasonal demand changes but also because of a surge in production resulting from North American refineries running at very high utilization rates.
Relatively inexpensive crude prices and a refined product futures market indicating higher future prices compared to current spot prices caused refiners to process more crude and store more refined product for future sale. This resulted in bulging gasoline inventories that were well above their seasonal norms, accompanied by lower margins. In the past month, the national average refining origins on gasoline have increased materially. There are several factors behind this: a confluence of recent refinery-related issues, in particular, strikes at several facilities in the U.S.; a major, unplanned outage at a major U.S. west coast refinery; and weather-related issues at several refineries in the eastern U.S. and Canada. Combined with short-term maintenance shutdowns, normal at this time of year, the supply side of refined products has tightened significantly leading to an increase in wholesale prices and refining margins. Another major factor is the record refined product exports from the U.S., in particular for gasoline in the last two months.
However, increasing wholesale prices and refining margins for gasoline are common at this time of year. Despite all the refinery and supply-related issues this year's seasonal increase in refining margins is consistent with historical norms. Current refining margins for gasoline aren't materially higher than they have been throughout the first quarter of the previous three years. Diesel prices have also generally tracked the change in crude prices, although to many this may have been masked by the recent price difference between diesel and gasoline.
Disparities between retail gasoline and diesel prices are normal phenomenon driven by different seasonal demand patterns of two very distinct commodities. Gasoline demand peaks in the spring and summer, while diesel demand peaks in the winter due to its close relationship with heating fuel.
Since 2008 Canadian diesel prices have averaged nearly 7¢ per litre more than gasoline during the period of November to February, while averaging nearly 4¢ per litre less than gasoline from May through August.
Seasonal disparity between the two products has been much more pronounced in recent months and that's largely because of the significant decline in gasoline margins that I previously mentioned. In fact, diesel refining margins remain virtually unchanged from where they were at this time last year, and the gap between diesel and gasoline has already begun to narrow as we move from winter into spring.
In conclusion, lower crude prices have resulted in lower fuel prices. Moreover, according to Statistics Canada's most recent data on consumer prices, overall transportation costs declined 5.3% in the 12 months to January 2015 as fuel prices declined.
Thank you and I look forward to your questions.