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

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

Thank you, Chairman, and my thanks to all committee members for making this day happen. I think it's extremely important for Canadians.

We had determined as a committee to look into the impact of the markets on the unprecedented rising in the cost of energy prices, together with the impacts on futures commodities in general. We assume the prices will continue to go up. That in itself is a concern, but we also recognize that the recent rundown in commodity prices, in particular with respect to crude, does not necessarily mean lower prices for consumers, as one would have expected, given what we've seen in the past.

I have three questions. I will ask one of each witness, if you don't mind, Chair.

Ms. Savage had referred to the Washington Post article.

Unfortunately, I have not had a chance to have this article, which I found on the Bloomberg.com website, translated. But with the committee's permission, I will distribute it. It may be difficult to have it translated because of the copyright.

[The Chair, Conservative, James Rajotte]

Mr. McTeague is asking for consent. There's a Washington Post article that unfortunately has not been translated yet. He's asking consent of the committee to distribute it.

D'accord?

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

Thank you, Mr. Chair. Thank you, committee members.

It's a bit of an illustration here and perhaps provides the basis for my first question to Mr. MacLean.

Thank you very much, sir, for being here today. I appreciate it. Your years of experience will certainly come in handy.

This article points out that one particular company, Vitol, a Swiss company, was able to activate almost 11% of all the actual shares of crude oil on a particular day, June 6, which saw crude rise by $11 in a given day to $138.54, unprecedented, certainly, for market analysts concerned.

Mr. MacLean, you didn't touch on the issue of contango. It's terminology that is not familiar to most, but it really deals with the fact that supply and demand fundamentals can be set aside in favour of this constant belief that prices will rise, obviously predicated on what's happening in the BRIC countries, the Brazils, the Russias, the Indias, and the Chinas.

I'm wondering, given the recent changes to the rules by which people can trade on NYMEX--basically and essentially over-the-counter trades in the evening, intraday, whenever they wish--and with respect to the changes that have been allowed to take place at the request of companies, such as Enron in the past, do you not believe, sir, that there is a large, more preponderant activity that has never been seen before that may have had an undue interest or influence on driving these prices up to where they are today?

[Warren MacLean]

What I tried to present was that there are three different segments in the marketplace--the futures market, or NYMEX, being only one of them.

You referred to over-the-counter, which I would call the swaps market, an independent market not regulated like the NYMEX is, and I think that's what you're referring to as having the Enron effect. I believe that in Enron's heyday they were given credit for convincing the U.S. federal government not to regulate that swaps market.

I was trying to distinguish between the cash market, or the physical market, and the futures market. People may be able to play with the futures market but they can't play with the cash market, because they cannot control all of the physical supply of oil. There's simply not enough capability to do that. They are linked, there's no doubt about it. There's a fairly strong correlation. I spend my career looking at differentials between various markets, and they do move around quite a bit.

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

The article here suggests that Vitol was able, on that given day.... Its contracts amounted to 57.7 million barrels of oil, about three times the amount the United States consumes daily.

Given the revelation of this particular piece of information, does it not change your view that there are in fact several groups--perhaps smaller groups, very powerful groups--who, on a 5% margin, can possibly implement or change the market fundamentals, notwithstanding all the players? The fact is that there seems to be demonstration here of a handful of players who have tremendous market power and are doing enormous damage to the economies of the world, including Canada's.

[Warren MacLean]

I think I said that I can't answer the question about how much is speculation and how much is not, but I gave you my personal perspective. I could be wrong. You're right, I could be wrong.

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

Thank you for that, Mr. MacLean.

Mr. Boag, I have a simple question. I always thought the industry operated on a first in and last out principle; that is, when crude prices go up, the price is immediately reflected the next day at the pumps. And thanks to you folks, I'm able to get those prices at about the same time as you do and pass them on to consumers.

One thing I find interesting in my region, the Toronto market, is that wholesale prices on average in the past four weeks, as crude has dropped, are today anywhere from 2.5¢ to 4.5¢ more expensive than in Kingston, Ottawa, and Montreal. Considering transportation in a short or long type of market and considering that you're integrated companies that make a lot of money at crude, notwithstanding the reasons for the speculation, can you explain to me how it's possible that some regions of this country--I think of Calgary and Edmonton, for instance, which are 15¢ a litre above the NYMEX benchmark--and respecting the fact that it isn't the only market, how is that justified, sir? How do you justify 2.5¢ when your industry is selling some 65 billion litres of gasoline every year?

[Peter Boag]

I think what it reflects are differences between local and regional markets with supply and demand to balance each side. Clearly, across Canada we operate in a number of different local regional markets, and the supply and demand dynamics within those markets do differ. Clearly, we've seen a tremendous amount of volatility in fuel prices over the last number of months.

I can't talk to the specifics of what's happening in your constituency or in your city, Mr. McTeague, on the basis of an individual observation over a short period of time. Certainly we'd have to look at the longer-term volatility overall and longer-term shifts. But clearly, from our position, it really reflects the local supply and demand dynamics, which are not the same in every region of the country.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Boag.

Thank you, Mr. McTeague.

We'll go to Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you. I am going to give the floor to Mr. Bouchard.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chair.

Welcome, and thank you for coming to testify before us about the price of oil.

My first question goes to Mr. Boag. In your text, we read: “In the Atlantic Provinces and Quebec, there is also an overlay of provincial legislation and regulation that limit competition.“

Have these measures in Quebec and Atlantic Canada provided consumers with lower prices, or have they actually helped prices to rise compared with those in other parts of Canada?

[Peter Boag]

Thank you for the question, Monsieur Bouchard.

Our observation—and certainly the research that we have seen on regulated markets suggests this—is that regulated markets do have an influence in reducing price volatility. But at the end of the day, consumers pay more for fuel in a regulated market than they do in a market that operates under market principles.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you very much.

We know that Canada is an oil-producing country. Are there other oil-producing countries where consumers pay less that the world price and less than in Canada? Perhaps Mr. MacLean can answer that question.

[Warren MacLean]

I think the answer is yes. The countries that come to my mind are Nigeria, Venezuela, and probably Saudi Arabia. A lot of the producing countries do subsidize the price of their products to their citizens.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Very good. I have another question.

In Canada, has the price of oil ever been lower than the world price? If so, by what means was that lower price achieved?

[Warren MacLean]

Is that question for me?

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Mr. MacLean.

[Warren MacLean]

Actually, when I started in the business, Canadian prices were kept below world prices. I started in the industry in 1976, and I believe the prices stayed regulated until about the early nineties, and then went to world pricing after that—at the end of the NEP, I think.

The way that was accomplished was that there was a cap put on the domestic production of oil, and then when a company such as Gulf Canada, which I was working for at the time, imported crude, it would pay the world price and the Canadian government would pay it the difference between the capped price on Canadian oil and the world price. At first, I believe, the Canadian taxpayer swallowed the difference between the two, but as the differential became larger and larger, the government funded that program—which we call a compensation program—through a refinery gate tax. In essence, that was passed through to the consumer.

[The Chair, Conservative, James Rajotte]

You have a minute left.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

My last question goes to Ms. Savage.

You said that the price of crude can only go up. You also spoke about distributors, but you said very little about refiners. In some places—I come from Saguenay—Lac-Saint-Jean—like the region around Quebec City, retailers are supplied by a single refiner. Does it seem right to you that a single refiner is able to provide refined petroleum products to all the retailers in several regions, not just for one company, but for all? Could that lead to higher prices?

[The Chair, Conservative, James Rajotte]

Mrs. Savage.

[Jane Savage]

Thank you.

There's no question that the concentration of refineries or refiners in Canada is quite high; in other words, there are very few refiners in Canada, just a handful. I think it's nine, if I have that number right. It's in that area anyway.

Because of this, if one espouses the belief that the more the number of competitors, the lower the price, one could assume that with this high concentration of refiners in Canada, we are paying a higher price at the wholesale level for our fuel. And we can only look at the evidence of that.

Certainly I don't believe there's any collusion, or anything of that nature, between refiners, but I would suggest that because of this high concentration, there is an oligopoly of some sort that enables price parallelism. So parallel prices are set. For example, in Toronto we see the rack prices or wholesale prices move daily, and all refiners move in the same way every single day.

There is a little more price competition in the province of Quebec, partly because of the independent import terminals that operate in Quebec City—which provide competition to the Ultramar refinery in Quebec City and Saint-Romuald—and in Montreal, where Norcan has a facility. So these facilities help to add to the competition.

[The Chair, Conservative, James Rajotte]

Thank you.

Merci, Monsieur Bouchard.

We'll go to Mr. Carrie, please.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

I want to thank the experts for being here today.

I have a question for the panel.

I've been back in my constituency of Oshawa all summer, and one of the most common questions I've been getting is, why are these prices so high? What I'd like to know is, are speculators actually fuelling the price of gas? Do you have any evidence of this? If they are, are they doing anything illegal? And if so, should provincial security regulators step in? Or is this even an argument, that we should have a common security regulator?

I'd like to ask that across the panel.

[Warren MacLean]

Canada is a price-taker. As I've tried to say, these major refining centres tend to be the price-setting marketplaces. So other markets besides them take their prices from these major refining centres for both crude oil and crude oil end products. That's the first point.

Are speculators having an impact? They may very well be having an impact. Are they doing it legally? I think time will tell. I think the U.S. is actively trying to find a bogeyman. Will they find one? My sense is no, but they may. I mean, I was surprised by Vitol's position in the NYMEX, but I don't think that is conclusive about anything.

Again, I'll try to make this point: these are separate markets; nobody is controlling the physical market. Crude is bought and sold via hundreds of thousands of transactions a day, and nobody has enough storage to be able to control it to really move the market. So somebody may be playing with the futures market, which may be having some impact on the physical market, but I don't think it's appreciable.