Industry Committee on June 11th, 2007

[Philip Jennings]

The agency was set up at a time when we were regulating prices. There was a necessity for that type of information.

As I said, through decisions that were made a few years ago and ones that we implemented as early as last year, we feel the information that's now collected by Natural Resources Canada and the products we produce through Fuel Focus, through the report as well as the website, give sufficient information to provide Canadians with information on how the market works and how the products they buy in their markets compare to other markets across Canada, as well as provide tips to Canadians on how to use energy more efficiently.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Carrie.

We'll go to Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chairman.

I know that you have no control over taxes or anything that has to do with taxes. This is normal and has existed for years. Canada can intervene only with regard to the profit margin made by refineries. The price of refining is so high that oil prices can remain steady or fluctuate. The prices change and they are set on an ad hoc basis.

In your document, I see that the estimated cost of crude oil is fairly stable, but the curve of refining costs is staggeringly steep. You said that crude oil prices were set by other nations. Therefore, we have no control over crude oil, and the taxes do not change. However, can we do anything about the price of refining?

[Philip Jennings]

I will try to answer your question.

First, the graph on page 8 shows that the government has implemented regulations over the years. These regulations partly account for the rise in profit margins for refining. Here, it has to do with regulations for benzene and sulphur.

It was also said that the rise in prices was accompanied by a decline in demand. However, we noted that demand in Canada and in the United States still remained quite strong. There was an increase in refining capacity, but it was not sufficient to bring the difference between supply and demand back to what it previously was.

We note that the profit margins for refiners are higher because demand is still as strong as before. This was the first time in decades that we heard proposals to build new refineries in Canada. At present, we know of three proposals to build refineries, and this could make a difference, because an increase in refining in Canada could have an impact on prices.

[Robert Vincent, Bloc, Shefford, QC]

We know that refineries have been closed down in order to increase demand. As a matter of fact, the refineries could have continued working, but that would have been useless because there would have been a plentiful supply of gasoline and there would not have been any way to explain why the prices had gone up instead of going down. So, why is nothing being done about this?

[Philip Jennings]

Despite the decline in the number of refineries in Canada over time...

[Robert Vincent, Bloc, Shefford, QC]

However, they are being opened and closed at will.

[Philip Jennings]

Canada's total capacity has gone up. For example, we had 30 refineries in 1990. However, at present, 19 refineries are producing more than what was produced in 1990. Canada's refineries have increased their production by about 5% over the past 15 years. Therefore, the relevant factor is not the number of refineries, it is their production capacity.

[Robert Vincent, Bloc, Shefford, QC]

The same graph shows that sulphur in gasoline was regulated in 2002. However, it was not sufficiently regulated. Why was there further regulation in 2005? I understand that there was an increase between 2004 and 2005, but sulphur in gasoline was regulated in 2005, and the price of refining went down, it went from 16.3¢ to 16.1¢ due to the regulations, we are told. Here, the regulations are accompanied by a decrease in price...

[The Chair, Conservative, James Rajotte]

Please come to your question.

[Philip Jennings]

In fact, regulations are not the only factor affecting price changes.

As I said, demand is very strong and still on the increase despite an increase in production capacity, which is not as quick as the increase in demand. Moreover, some very specific events took place last year and this year. In fact, refineries had to be closed down for various reasons. For example, in Ontario, the Imperial Oil refinery in Nanticoke was shut down for five weeks, which decreased supply and increased the prices.

Therefore, with regard to the 24.3¢ profit shown in the graph for 2007, we note that the closing of refineries had a specific and substantial impact on gas prices in Canada, because one of the 19 large productive refineries was shut down for a duration of five weeks. This brought about a decrease in available inventory. When demand remains strong despite a substantial rise in prices, there is a substantial effect on gasoline prices.

[The Chair, Conservative, James Rajotte]

Thank you.

I'm sorry, we're well over time, but I do have a few questions and I want to take the last spot.

First of all, let me take you to the graph of the two pumps. It's the Canada average pump price components for the 2006 average, 2003 average.

I think most Canadians, when they follow the price of crude oil and they follow the price of gasoline, don't understand why there's not an exact replication between the two, or they often see prices the same. I think if we break it down, as you have done here, we can go through each section.

If you look at the 2006 average price of 97.7¢, you have crude oil, which is 45.8¢. I want to clarify this in terms of this component. Canada produces about 3% of the world's crude oil, so we are a price taker. Is there anything we can do as a nation, other than implement another national energy program, to affect the crude oil price that we have there?

Mr. Brown.

[Howard Brown]

No.

[The Chair, Conservative, James Rajotte]

If we look at the federal and provincial taxes, obviously this is something within the ambit of the federal, provincial, and in some cases municipal governments, the 10¢ excise tax, the GST, 6%. Now you have broken down the refining market and marketing margin. The marketing margin is basically the retail margin, is that correct?

[Philip Jennings]

That's correct.

[The Chair, Conservative, James Rajotte]

And most retailers tell me—and you can tell me whether this is correct or not—that a lot of retailers are not in fact making money on their gasoline now, they're making money on their other products. They use gasoline to draw the customers in. Is that a fair assessment?

[Howard Brown]

I think that's fair.

[The Chair, Conservative, James Rajotte]

Now, in terms of the refining margin—and I just want to clarify this because I think you addressed this, Mr. Jennings, but about three slides later—the refiner/operator margin is very erratic; it goes up and down much more than the marketing/operating margin. I believe you said it's volatile and seasonal.

Can you give us an explanation as to why it is so erratic?

[Philip Jennings]

Let me deal with the seasonal first. The demand for gasoline is typically higher in the summer months, so the product is worth more, and so the refiner is able to sell it for more. You tend to have an increase. The estimate is typically between 5¢ and 6¢ higher over the summer months compared to the rest of the year.

In terms of the really high peaks, if you see July 2005, that's explained by Hurricane Katrina, where you had over 20% of the refinery capacity in the U.S. that was put out for some time. So that explains that big peak.

The recent peak is explained largely, as I said, by a lot of unanticipated events that have shut out some of the refinery capacity. One of the largest ones actually was what happened in Ontario with the Imperial refinery in Nanticoke, which was out for five weeks. So that was an unplanned event. We've had other events in Canada and quite a few in the U.S. that have been the cause, for various reasons, that refiners had to shut down operations in times that were not planned.

What that has led to, as I mentioned before, is that because demand is so strong in the face of higher prices, inventories are getting drawn down; and the lower the inventory is, essentially the higher the demand is for that product in terms of people trying to secure product for the market.

[The Chair, Conservative, James Rajotte]

Can I just clarify this? You said that refineries are running at about 95% capacity, they cost about $5 billion to build—that's a new refinery—but there are.... How many refineries are being considered for Canada now?

[Philip Jennings]

I've heard of quite a few. We characterize three of them as being more serious in terms of being considered, in Canada. All of them are in the order of about 150,000 to 300,000 barrels a day. That would be additional capacity.

[The Chair, Conservative, James Rajotte]

If you look at refining margin and you look at crude oil, can you actually separate cost from profit? If you look at crude oil, if you're dealing with tar sands, the cost of extracting that from the earth is a lot more than the cost of extracting it from the sands in Saudi Arabia. The cost of refining certain types of crude is much more expensive than the cost of refining other types of crude. Is there actually a way in which to measure at least that extracted and refined within Canada, as to what is actually cost versus profit?

Mr. McTeague, I'd like the witnesses to answer.

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

Chair, you're over your time. You asked the indulgence of the committee.

I'm simply talking to my colleague here. If you have a problem with that, I can certainly put it on the record.

[The Chair, Conservative, James Rajotte]

I thought you were answering—

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

It's 3¢ for light and 5¢ for heavy—[Inaudible—Editor]...which is in your riding.