Good morning.
Thank you, Mr. Chair. I very much appreciate the opportunity to be here today to contribute to your deliberations on a very topical and important issue for Canadian consumers.
Far too often, when we contemplate the workings of the marketplace, there's a tendency to discount the role information plays in ensuring that consumers are well armed to make choices about how to allocate their hard-earned dollars. So your work and that of CPPI is important in ensuring that Canadians can make the best choices for themselves and their families.
As many of you know, the members of the Canadian Petroleum Products Institute are the major refiners and marketers of petroleum products in Canada. Collectively, they operate 16 refineries and supply the bulk of transportation fuel choices across Canada. Their presence, products, and services are a daily necessity for Canadians. At the very root of their existence, my members are intensely competitive companies that strive to provide high-quality, affordable products. No other industry interfaces with the consuming public with a street-level, transparent display of product prices and signs as large as you and I are.
Three markets influence the cost of fuels at these stations--markets that are driven by the economic fundamentals of supply and demand. The first two are international commodity and financial markets.
First is the global market for crude oil. Thousands of daily transactions are executed by traders around the world. I believe it's well recognized today that increasing global demand, especially from Asia and the Middle East, is fundamentally driving increases in crude prices. Just look at how many people are coming out of poverty in Asia, in particular, and upward pressure on crude prices should be no surprise.
Second is the North American market for wholesale fuels. There is no unique Canadian fuels market. Wholesale prices in Canada are driven by product supply and demand balances across North America.
The third market is the local retail market--the decisions of individual retailers in any given community at any given time. As of December 31, 2006--the most recent retail survey of Canada--there were 13,772 retail gasoline stations operating in Canada. With only about 30% of those retail outlets under the ownership of major refiners, there are more than 9,500 decision-makers involved in setting the posted price of fuel at gas stations across Canada.
In the Atlantic provinces and Quebec there is also an overlay of provincial legislation and regulation that limits competition. In the Atlantic provinces, they set a maximum pump price either weekly or twice a month. In Quebec, the Régie de l'énergie sets a weekly floor price.
All three of these markets—global, North American, and local—have shown considerable volatility in the last year, with Canadian pump prices reaching all-time highs in July.
Crude oil is by far the single largest component of the pump price. Data prepared by Natural Resources Canada shows that at the current average Canadian pump price for regular unleaded gasoline—as of earlier in August, that was $1.30 a litre—crude accounts for roughly 82¢ of that cost, or just under 65% of the pump price.
Pump price changes in Canada over the past months closely track changes in crude prices set in the global market. There are a couple of charts in my presentation that show how the price components break out across Canada and how the crude oil and gasoline prices correlate over the past number of months.
This same data shows that taxes are the second largest component of pump prices--on average 34¢ per litre across Canada, or about 26% of that average $1.30 a litre pump price. Finally, the data shows that refining and marketing operations account for the smallest component of pump prices. In early August it was about 14.5¢ a litre, or about 11% of the pump price.
Refining margins are substantially lower today than they were one year ago. I stress that margins do not equal profits. Refining margin is the difference between the price of crude entering the refinery and the wholesale price of fuel leaving the refinery. Profits, if any, exist only after all costs are paid. Refining margins in early August were hovering under 8¢ per litre, at about the same level as the national average marketing margin--the difference between the wholesale price exiting the refinery and the pump price consumers pay.
Refiners have been squeezed by the significant increase in crude prices over the past few months. According to data from NRCan: “For the four week period ending August 12th, refiner margins were below 8 cents per litre at the national level and trailed last year’s levels by more than 9 cents.”
Weakening U.S. demand has exerted downward pressure on North American wholesale gasoline prices. The most recent data available from NRCan—this is in early August—shows that on a national level wholesale prices in the United States and Canada were within 1¢ of each other.
While it may be of little consolation to Canadians, the volatility we have recently witnessed is not unique to Canada. What is unique to Canada is that, notwithstanding this turbulence, Canadians pay the second lowest price in the western world for petroleum fuels. This is a function of a competitive marketplace with a very efficient refining sector.
We acknowledge the important role that the federal government plays in ensuring our competitive marketplace, and in particular we congratulate this committee for the important work it has done over the years with its review of the Competition Act. In conjunction with a very professional and knowledgeable Competition Bureau, Canadians can have confidence in a marketplace framework that truly defends the rights of consumers. As the federal government looks to further improvements in the Competition Act, CPPI will be a responsible partner with government in keeping marketplace laws modern.
For the moment, I would like to bring to your attention and that of Canadians some of the factors that affect the cost of fuel produced and sold in Canada, factors that are unrelated to increasing the amount of fuel produced. Some of these considerations are justified by environmental considerations, but they are costs nonetheless. The decision to desulphurize fuel resulted in environmental expenditures of about $5 billion by the Canadian refining sector. In April of this year, the government eliminated the federal excise tax exemption on the blending of renewable fuels.
In conclusion, we understand Canadians' concerns and frustrations with fuel price volatility. At the same time, this is the best evidence of a marketplace delivering a choice of quality products at the lowest cost possible. Global supply and demand factors are the principal drivers of fuel prices, and while CPPI does not study all international dimensions, it is clear that the demand for fuel products is likely to rise in regions like Asia, where people are buying their first cars.
Taxes are the second largest component of pump prices, and while it is not the role of CPPI to evaluate taxation levels, this component is the single largest discretionary element in the cost Canadians pay. There are other government policies that are driving costs, some supported by sound scientific reasons for environmental improvement.
Our industry is committed to providing Canadians with quality fuels at the lowest possible cost, from safe and reliable facilities. We can also provide you with conservation tips to stretch your hard-earned dollar. At the end of the day, Canadians are best served by a competitive marketplace. Today they pay the second-lowest prices in the western world.
Thank you.