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

[Bruce Stanton, Conservative, Simcoe North, ON]

Mr. Boag, going back to the question Mr. Carrie posed in regard to this additional taxation, it has been speculated about or proposed that this carbon tax could be upwards of $40 a tonne. Even though the policy suggestion is that it won't be put on gasoline, I think you nodded your head to indicate that it would show up. Could you clarify?

[Peter Boag]

It would clearly depend on the specifics of the policy initiative. I can't speculate on what a policy initiative might be and what the impacts on the industry would be.

[Bruce Stanton, Conservative, Simcoe North, ON]

Would it get passed along, though? What would happen?

[Peter Boag]

Again, I can't speculate and can't forecast how a specific policy initiative that's hypothetical at this point may ultimately impact prices.

[Bruce Stanton, Conservative, Simcoe North, ON]

Thank you very much.

Mr. MacLean, going back to this situation, a couple of you witnesses have referred to this “driving” of the price of oil, and Ms. Savage referred to it as well.

In the reading that I did just ahead of today's meeting, from the interim report that the inter-agency task force came out with in early July, they indicated that really only 2% of the oil futures—and I think this referred to the cash transactions, that is, 2% of the contracts—actually resulted in physical delivery of product. In a case like that, I'm trying to imagine what kind of conditions....

Perhaps I'll ask Mr. MacLean first. What kind of conditions might you see if in fact there was this other speculation going on about those prices? In other words, if the trading drives the prices up, as has been suggested, what kind of circumstances might we see in the market that would give weight to that argument? For example, it has been suggested here that if that was in fact happening, inventories would be higher. But in fact, inventories have not really risen at all with this recent spike in trading.

Could you comment on that? I say this particularly because people would be interested to know that the price they're paying for gas isn't being artificially bumped up by overabundance of trading.

[Warren MacLean]

The first thing I'd say is that there is a role for what we're calling “speculators” in the market. They do provide a huge amount of liquidity to the marketplace. And the reason that—

[Bruce Stanton, Conservative, Simcoe North, ON]

What do you mean by liquidity?

[Warren MacLean]

Liquidity allows buyers and sellers to transact at a given price. Without speculators, there would be less transaction. Something like the bid-asked differential would rise, there would be less activity in the marketplace, and it would stagnate. There would be no transparency in the marketplace. So they do have a valuable position.

I think what you're thinking of is if speculators are manipulating the market. That's a different situation.

[Bruce Stanton, Conservative, Simcoe North, ON]

How would you tell that?

[The Chair, Conservative, James Rajotte]

I'm sorry, Mr. Stanton—

[Warren MacLean]

I don't know how you'd tell. I can't answer that myself.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Stanton.

We'll go to Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair.

Welcome to the committee. There is one question on everyone's lips: why do crude oil producers not have inventory on hand to accommodate any eventuality? Prices go up when there is a mere gust of wind in any oil-producing country. If there was inventory on hand, the price would remain the same even with that gust of wind. Why do crude oil producers not have inventory on hand to take care of those situations?

Is this artificial scarcity not the reason why the price of a barrel of oil goes up?

[Warren MacLean]

I don't think inventory is the answer here. There are situations.... There are stores of inventory. The U.S. has the strategic petroleum reserve, which is a store of inventory for emergency purposes. It generally is not used to regulate pricing.

What producers are trying to do, I would say, is maximize the value of their resource. Holding excess inventory is going to decrease the value. I really don't know why a producer would hold inventory.

[Robert Vincent, Bloc, Shefford, QC]

The price at the pump is high because producers are creating an artificial shortage so that they can keep putting money into their pockets.

Mr. Boag said earlier that he could not understand why prices are going up. Well, when you have a long weekend or are on holiday, you use more gas. So they put up the price and make more money. Does that make any sense to you?

[Peter Boag]

I would repeat my earlier remark, that certainly there are seasonal fluctuations given to supply and demand that have some impact on prices, but—

[Robert Vincent, Bloc, Shefford, QC]

Could you answer my question, please?

[Peter Boag]

—there is no empirical evidence, to our knowledge, that would support the assertion that gas prices traditionally go up at the beginning of long weekends.

[Robert Vincent, Bloc, Shefford, QC]

You work in this area; how come you do not know why the price of oil goes up? Consumers can tell that the price will go up by two or three cents a litre the day before a holiday. Do consumers have more experience than the people who work in the industry and who are in a position to know when prices will increase?

You say that you do not understand why prices go up, so how is it that consumers do?

[Peter Boag]

Mr. Chair, speaking through you to the committee, we're here today to try to explain what is a very complex situation driven by a number of factors, both globally, in the context of a continental North American market, and in the context of thousands of decisions being made by retailers to set prices.

I'm certainly not able, here today, to predict where prices are going to go tomorrow, next week, or next year on a reliable basis. If I could predict the price of crude oil on a reliable basis, I think I'd be doing something else by this time in my career.

Yes, price volatility is clearly a difficult situation, and we understand Canadians' concerns with price volatility. But we're here today to try to contribute to knowledge of the complexity and the factors that ultimately drive prices and drive that volatility.

[The Chair, Conservative, James Rajotte]

Ms. Savage wanted to comment.

[Jane Savage]

This is just to address your question of inventories.

I can't speak on the crude oil side, but on the product side, this is part of the reason we would like to see a monitoring program in place for product inventories—that is, inventories of gasoline, heating oil, and diesel, the key products that Canadians use.

We have been in a period of declining inventories, and we're finding that because companies are financially motivated to reduce inventories, our vulnerable areas of Canada are more vulnerable—to supply outages, to a refinery shortfall, to a pipeline problem, to ice in the St. Lawrence River, to very cold weather. All these things contribute to vulnerability of supply. As a very minimum, I feel we should have some inventory monitoring in place to reduce that.

[The Chair, Conservative, James Rajotte]

Monsieur Vincent, you're right out of time, but do you have a very short question?

[Robert Vincent, Bloc, Shefford, QC]

Mr. Boag, when you answered a question from Mr. Stanton, you said that when the price goes up at the pump...why does the price go up at the pump? It is the same gas that was bought at a lower price, but as soon as the price per barrel goes up, the price at the pump goes up too. It does not work the same the other way round. When the price of crude drops, the price at the pump stays the same. Why?

[The Chair, Conservative, James Rajotte]

Please be brief, Mr. Boag.