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

[Jane Savage]

I think transparency is the key thing. One thing we have talked about regularly is having information beyond price available in the public domain. The amount of fuel that's available at any particular time--gasoline inventories and heating oil inventories, for example--is not in the public domain in Canada. It is in the United States.

I think inventory levels have quite an effect on price. Access to them would help the entire industry, as well as Canadians in general, to understand some of the price moves in Canada a little better. I am talking about an inventory monitoring system that would simply aggregate all the inventories in Canada and put them out there on the Internet for everybody to see. That would be one suggestion.

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

Thank you.

Mr. Boag, I would ask you to respond to that. Why don't we have such a mechanism? Would the industry be open to it?

[Peter Boag]

First of all, let's put this into context.

Yes, over the last number of years we've seen a significant rationalization in the number of refineries in Canada. Notwithstanding, we've actually seen an increase in refinery capacity. As we've reduced the number of refineries, remaining refineries have expanded significantly. Today we produce more refined petroleum products than we did many years ago, and with fewer refineries. That has been done as refineries have striven to achieve greater levels of efficiency, to respond to productivity, and to achieve economies of scale. This helps Canadian consumers by keeping product prices down, because the production costs are lower.

As to a government role, given the high capital costs associated with building a new refinery—several billions of dollars—the role of government is really to create economic conditions conducive to investment in that kind of capacity. This adds value to Canadian natural resources. It's the investment climate that makes Canada attractive to billion-dollar investments that have extremely long amortization and pay-back periods.

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

Thank you, Mr. Boag, but I'm still curious as to your response to my question. Would the industry be open to publicizing or publishing their inventory level and having some kind of monitoring occur?

[Peter Boag]

I think in the past the industry has been supportive of having a monitoring agency. We think that in the end that information is useful to Canadians. Certainly we'd be willing to discuss how that might work and what might ultimately be of use to Canadians.

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

With the previous government, wasn't there an agency created to monitor inventory levels and gas prices?

[Peter Boag]

Yes, I believe there was.

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

Where is it now?

[Peter Boag]

I don't think anything came of that. I'll have to take a bit of a pass on this because I am relatively new to this industry. While I'm clearly very focused on the issues of today, on past government actions too far back I'd have to get some better information for you.

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

My understanding is that it was cancelled by Conservative Prime Minister--

[Peter Boag]

My understanding is that it did not come into effect, yes.

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

Okay. But the industry would not be reluctant to have those inventory levels published.

[Peter Boag]

I think we'd have to look at the specifics of what was being published. Certainly the concept of information is not something we're opposed to, but I think we'd need to have a broader discussion on the specifics of what that information might be.

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

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Alghabra.

We'll go to Mr. Stanton, please.

[Bruce Stanton, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

Thank you to our panellists here this morning. It's a very intriguing topic, of course, and it's on the minds of many folks particularly through this past summer, going back to early July.

Mr. Boag, returning to the theme you were discussing with Ms. Nash's question, I want to come back to that briefly, the notion that shocks in the supply--and I think back to Hurricane Katrina--instantly show up at retail. I know I get the question regularly from constituents in my riding, who ask, how is it that it shows up literally the same day when there's an event that causes that?

Could you explain that?

[Peter Boag]

I think what really is behind that is the sensitivity of markets to those kinds of shocks. Those events are instantly read in the markets and ultimately have an instant impact on the kinds of markets that Mr. MacLean has been talking about trading. They do actually happen that fast, as the market responds and prices change.

[Bruce Stanton, Conservative, Simcoe North, ON]

But clearly the gas that's in the tank at the local retailer was purchased at a lower price, so they don't necessarily have to charge a higher price for that.

[Warren MacLean]

Could I try to answer this one?

[Bruce Stanton, Conservative, Simcoe North, ON]

Please.

[Warren MacLean]

That's true, there is an amount of inventory that's always in place. The problem is that when you take one out, you have to replace it. What do you replace it with? You replace with what you paid for it that day. So that answers the question why, even though there's inventory in place, you still get the current price on the current day.

In terms of why Katrina translates immediately, it is because it's such a liquid market and so transparent. If I'm a wholesaler and my choice is to sell to market A or B, and market A just went through a hurricane and needs product and is willing to pay for it, why would I sell to market B at a lower price? It's simply the way the price translates through the marketplace.

[Bruce Stanton, Conservative, Simcoe North, ON]

So it's an anticipation of the fact that we're going to have to purchase—

[Warren MacLean]

It's an arbitrage process.

[Bruce Stanton, Conservative, Simcoe North, ON]

Okay. And that's why it's instant, is what you're saying.

[Warren MacLean]

That's right.