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

[The Chair, Conservative, James Rajotte]

Mr. Boag, do you want to comment?

[Peter Boag]

I certainly would echo Mr. MacLean's remark that because we're operating in the context of a North American fuels market, of which Canada comprises approximately 10%, we're ultimately price takers with respect to the price of wholesale fuels.

The rise in fuel prices paid by Canadians this past few months has clearly been driven by the increase in crude prices. That has had an impact on refiners, in that refining margins have decreased significantly from where they have been in the past year, as demand in the U.S. in particular has begun to ease. Retail margins have been consistent for some time. So as far as speculation in crude markets goes, I would echo Mr. MacLean's remarks.

[Colin Carrie, Conservative, Oshawa, ON]

Madame Savage.

[Jane Savage]

We are absolutely price takers; that is, we operate in a global pricing environment.

I take issue with just one thing Mr. MacLean has said about the physical markets--the question of speculation and how much speculation impacts the actual price we're paying at the pump. The physical markets are, without question, actual trades of crude oil or gasoline in large volume. However, most of them are priced off the NYMEX. So if I go out as a trader to buy a cargo of gasoline, I'm usually buying it as a number related to the NYMEX. The price discovery mechanism--say, Platts or Reuters--uses the NYMEX as a guideline for prices. So there is that component. Then it goes back to the question of how much the speculative component is affecting price in these things.

In Canada, we don't have jurisdiction over that because the trading happens in New York. The Commodity Futures Trading Commission in the United States oversees the futures markets. So it is not a provincial jurisdiction. We can only bring pressure to the United States' regulators to move this forward to understand fully what's going on in the speculative component.

[The Chair, Conservative, James Rajotte]

Mr. Carrie, you have about a minute and a half left.

[Colin Carrie, Conservative, Oshawa, ON]

I know consumers are really concerned about the price of gasoline, and they want to know what goes into the price they pay for gasoline. My understanding is that there are four components. It's the cost to locate and get crude oil out of the ground, which I believe takes a lot of energy; the cost to change the crude oil into gasoline, the refining margin; the cost to operate the local station, the transportation charges; and the taxes of the provincial, federal, and municipal governments.

In your opinion, what would a carbon tax do to the price of gas? If we put a tax on carbon, would people want to keep the price of gasoline down?

[The Chair, Conservative, James Rajotte]

Does anyone wish to answer?

Ms. Savage.

[Jane Savage]

Presumably a carbon tax would increase the price of gasoline at the pump. I'm certainly not going to comment here on whether that would be a favourable or unfavourable thing to do.

[Colin Carrie, Conservative, Oshawa, ON]

Okay. I just wanted an overall opinion.

[Warren MacLean]

I agree it would raise the price.

May I just rebut one thing Ms. Savage said?

An example of the disconnect that can occur between the physical market and the futures market happened some time in 2007. The New York Mercantile Exchange trades a crude called WTI, West Texas Intermediate--the commodity crude--and it is physically produced in Texas. It's used in refineries in and around that area. There were major problems with a couple of refineries in that area, and that crude could not escape that particular market so it couldn't get out. There was tremendous pressure downward on that crude.

Another crude is Brent, which is produced in the North Sea. The typical spread is $2 in WTI's favour. It went to $8 to $10 in Brent's favour. So if there were speculators playing with it, they would have kept WTI up and the rest would have gone up with it.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Carrie.

We'll go to Ms. Nash. I will gently remind our witnesses to be briefer, if they can. We are running over time here. It's a very good discussion, but we are running over time.

Ms. Nash, you have six minutes.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Mr. Chair.

I'd like to thank my fellow committee members for supporting my motion and agreeing to be here in Ottawa before the House resumes to attend to this important issue of oil and gas prices. It's something, clearly, that we've all heard about from our constituents over the past several months. I believe these are important hearings.

It's a complicated subject. I'd like to thank our witnesses for being here to help us understand what goes into the price of gas at the pump and what the various factors are that are involved in price increases.

I was struck by an article earlier this summer, based on a report by an economist at the Bank of Montreal, that said—this is before things started to moderate somewhat—that oil prices had passed the tipping point and were a drag on the Canadian economy. He called the price a “heavy anchor” undercutting consumer confidence and leading to higher inflation, and he said that the prices were now burning up about 7% of Canadians' disposable income, a record high. Clearly we have all heard that from people in our communities.

What is frustrating for a lot of people is that we are the second largest oil supplier in the world. Consumers, I think, are rightly frustrated by an inability to understand why it is we are paying so much for oil and gas.

Mr. Boag, we heard you talk about supply and demand. But what is also frustrating for people is that we see prices fluctuate. They tend to go up before the summer. They tend to go up before a long weekend. They can even fluctuate during the day--they seem to go down in the evening and up during the day.

If these are world markets and it's supply and demand, why do the prices change over the course of a day?

[Peter Boag]

Ms. Nash, thank you for the question.

Yes, there's no question that there's a significant degree of volatility in gas prices. I think everyone would agree that this can be very distressing for consumers.

I would just reiterate that ultimately the price paid at the pump is a function of three markets. One is that there are, yes, global implications in terms of setting the price of crude, which is the most significant component of the price of gasoline at the pump. There are North American markets, and we've had a significant discussion already this morning around the North American wholesale market for fuels. Then ultimately there's the retail market; that is, across Canada, thousands of individual decisions by retailers, who set the price at the pumps based on local market conditions and the assumptions they make and the information they have with respect ultimately to supply and demand conditions within their local market.

As they respond to that level of information and the information that's relevant to their market, they're going to adjust prices as they see fit to meet their business objectives, recognizing that this is an industry—the only one, to my knowledge—that posts prices at the street level on signs as large as you and I are. Consumers in Canada and around most parts of the world are very sensitive to those price differences. A tenth or two-tenths of a cent per litre difference will cause a consumer to change behaviour and choice of service station. As various retailers look at that and decide they're not going to lose market share to a competitor and can see that price change across the street, they're going to respond as they see fit, based on their business model.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Mr. Boag.

Ms. Savage, I'll ask you, then, why prices go up before a long weekend.

[Jane Savage]

I don't think they do, necessarily. I think that's a perception that is out there with consumers.

[Peggy Nash, NDP, Parkdale—High Park, ON]

You see me smiling.

[Jane Savage]

I know. I really don't think they do on a consistent basis. Competition is really the reason that prices fluctuate as much as they do. In some markets they don't fluctuate as much; in some markets they fluctuate ten times a day.

[Peggy Nash, NDP, Parkdale—High Park, ON]

These are really the retailers deciding what they're going to do before a long weekend or in the course of a day, and this is their fluctuation.

[Jane Savage]

Keep in mind that there are hundreds and hundreds of retailers in this market. Using economic theory, the competition at the retail level is very high. I would suggest that at the wholesale level those prices underpin retail and that there is much less competition at the wholesale level.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

Let me go back to the change in prices. It seems to me that sometimes events such as a refining fire in the southern U.S. or political tensions between countries on the other side of the world can suddenly cause crude prices to go up. Is that an excuse for oil pricing to take advantage before there is a legitimate justification for price increases? Why does that kind of fluctuation occur?

[Peter Boag]

In answer to your question, I would say no. I think what you're seeing is ultimately people's perceptions on how an individual event, whether it's a hurricane or something else, is going to affect the supply of crude and how that's going to ultimately reflect—

[Peggy Nash, NDP, Parkdale—High Park, ON]

Is that just the market speculating?

[Peter Boag]

It's not the market speculating; it's the market responding to a perceived change in the supply and demand balance.

I want to come back to the question you posed to Ms. Savage about gas prices going up before a long weekend. I share her view that, although there are perceptions to that effect, there's no empirical evidence for them. In fact, an extensive report done by the Conference Board of Canada several years ago came to the conclusion that there was no evidence that prices went up before long weekends.

We will generally see some seasonal differences in prices. As the summer driving season arrives, there is a much increased demand for gasoline, and the supply and demand balance changes. We generally see an increase in the price in the summer.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Boag.

Thank you, Ms. Nash.

We'll have another round of questions if we have time.

Mr. Alghabra.

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

Thank you, Mr. Chair.

Good morning, everybody. Thank you all for being here.

Ms. Savage, I want to start with you. You touched upon the lack of competition at the refinery and distribution level. Perhaps that's understandable, given the barriers to entry and the high capital requirement for such a thing. What do you think a government role could be in ensuring that there is at least some fair competition in that market?