Thank you for enabling CIPMA, the Canadian Independent Petroleum Marketers Association, to address this committee on the subject of oil, gas, and other energy pricing.
CIPMA represents the larger independent fuel marketers in Canada. What defines “independent” in the downstream sector, which is the refining and marketing sector of the oil industry, is companies that buy rather than refine the petroleum products they sell. Independents' profitability on gasoline is therefore tied closely to the retail margin, which is the difference between the price you and I pay at the pump and the cost at the wholesale level.
Of the 13,800 gas stations in Canada, as Mr. Boag mentioned earlier, about 70% are owned by independents, with the balance being owned by refiners. CIPMA has 15 member companies that own or have some level of control of about 15% of the retail sites in Canada; the balance are not represented by a trade association.
The subject of today’s committee meeting is to understand more about the rising price of petroleum. Specifically, there are two aspects I would like to address: who is benefiting from this rising price of gasoline, and the speculative component of the crude oil markets.
We would like to contribute as best we can to that understanding, first by discussing the broad sectors within the Canadian oil industry, and specifically the relative profitability of the independent sector. We will do this in the context of gasoline. Second, we'll request that the committee take action to limit the speculative interests in the crude oil futures markets. We'll explain why this is important to the independent sector of the Canadian oil industry as well as Canadians.
Who is benefiting from the price increases at the pumps? The simple answer to that is crude oil producers. I've taken a long-term view of prices, and we see that crude oil has gone up 46¢ a litre of the total of 47¢ a litre in the past five years. There have been some cost changes. All sectors of the oil industry have seen cost increases, but we can safely say that most of the profit from higher gasoline prices is accruing to crude oil producers in this country, not to independents.
To simplify this complex industry--again, my colleagues have addressed this somewhat--there are three broad sectors in the oil industry. There are crude oil producers, which is traditionally called the upstream of the industry. And in the downstream there are two sectors: refiners and refiner marketers, and independent fuel distributors and marketers.
All three sectors work within the economic limit of a market-based margin that is given or determined by the market. As Mr. Boag pointed out, this does not necessarily reflect profit, but it reflects the available margin to each of these sectors. Refiners work with the difference between the market price of crude oil and the wholesale price of fuel products. Independent distributors and marketers work with the difference between the wholesale price of fuel products and the retail price that consumers pay.
Again, in the last five and a half years, we have seen an increase of about 47¢ a litre at the pump, and the vast majority of that has been in the sector known as crude oil production.
Contrary to what most Canadians think, almost 10,000 of the 14,000 gas stations, i.e., those owned by independent business people, have seen their available margin increase by a tiny amount, but net profit has been declining. That is simply because credit card costs increase as a percentage of the cost of fuel at the pump. Seventy percent of the gas stations in Canada actually see reduced profits as prices rise. The independent sector is in fact financially motivated for lower prices, contrary to what many Canadians believe, which is that it is the gas station making the money.
I'd like to turn now to the subject of speculation in the crude oil futures markets. Whatever the root causes driving crude oil markets higher may be, there is no debating that the volume of trading by non-oil or speculative interests in crude oil futures and indeed all energy commodity markets has increased. A recent article in the Washington Post has revealed that a full 81% of the oil contracts on the New York Mercantile Exchange, a far bigger share than had been previously stated by the Commodity Futures Trading Commission, comes about through speculative interest.
I want to define “speculative interest” because I think there's some confusion about it. Fundamentally, speculative interest on the crude oil markets are those interests that don't have any physical crude oil or crude oil-related products to buy or sell. So these are folks who are in the markets to invest and make money.
Up until recently, speculative interest in the volatile commodity oil markets has been naturally limited by the high risk associated with this volatility in commodity oil markets. But recently, reports of declining supply and rising world demand, together with ever-increasing forecasts of higher prices by investment banks, have led to the worldwide belief that crude oil markets cannot go anywhere but up. This has increasingly caused investors to ignore the traditional and increasing inherent risks of commodity oil markets. Of significant concern for this committee and for Canada is, for example, the increasing percentage of Canadians’ retirement income that is at risk in the most volatile crude oil market seen in decades.
U.S. regulators have put forward a number of possible interventions in the trading of crude oil markets. These vary from relatively inconsequential measures to eliminating the speculative component altogether, which would be a huge intervention. We respectfully call on the political leadership in Canada to acknowledge this risk and support U.S. regulators to increase market oversight, which would be a key change to the CFTC at this point. Also, stepping back for a moment, equity markets—that is where most of us have our retirement investments—are extremely well regulated. One could argue that the same level of regulation does not exist in the oil market.
I'd like to conclude by emphasizing that at least 70% of Canada's gas stations see no benefit from rising prices. Rather, profits are declining as a result of increased credit card costs. We also ask this committee to look very carefully at the speculative component of crude oil markets.
Thank you.