Evidence of meeting #69 for Industry, Science and Technology in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was refineries.
A recording is available from Parliament.
3:30 p.m.
Conservative
The Chair Conservative James Rajotte
Ladies and gentlemen, I'm sorry I'm a minute late starting the meeting, our 69th meeting of the Standing Committee on Industry, Science and Technology.
Madame Brunelle.
3:30 p.m.
Bloc
Paule Brunelle Bloc Trois-Rivières, QC
Mr. Chairman, yesterday I tabled a motion. I would like to know whether I have the unanimous consent of members to deal with it now, seeing as how I did not provide 48 hours notice, or should I simply wait until Monday?
3:30 p.m.
Bloc
Paule Brunelle Bloc Trois-Rivières, QC
The motion reads as follows:
Pursuant to Standing Order 108(2) of the House of Commons, that the Industry Committee hear from the Minister responsible for the Economic Development Agency of Canada for the Regions of Quebec, in order to enlighten the Committee about the legality and compliance with the Members' Allowances and Services Manual of the salary paid to Mr. Daniel Giguère, Political Assistant to Minister Jean-Pierre Blackburn, with the mandate to report back to the House of Commons with its findings.
3:30 p.m.
Conservative
The Chair Conservative James Rajotte
I'm informed that this does not have the 48 hours' notice. Madame Brunelle, I believe, is asking for unanimous consent to discuss this motion today.
3:30 p.m.
Liberal
Gerry Byrne Liberal Humber—St. Barbe—Baie Verte, NL
Under the circumstances, would you be able to rule as to whether or not this motion would be in order, were the time requirements enacted, given the fact that this seems a matter deemed more suitable for the procedure and House affairs committee?
3:30 p.m.
Conservative
The Chair Conservative James Rajotte
I would agree with you, Mr. Byrne. I just got the motion today. It seems like a motion either for procedure and House affairs committee or for the Ethics Commissioner. But to bring this to this committee is very odd, I would say.
I'd obviously ask for the advice of the clerk on this matter. But that's presupposing we would get unanimous consent to discuss this motion today.
Mr. Masse.
3:30 p.m.
NDP
Brian Masse NDP Windsor West, ON
I'm just guessing, but I don't believe the government is going to agree to that. Could we get the parliamentary secretary's opinion on that? We're wasting the time of our delegates here and we can at least find out if there is unanimous consent.
3:30 p.m.
Conservative
The Chair Conservative James Rajotte
Okay. That's a good point. Let me ask the question, then.
Does Madame Brunelle have unanimous consent to discuss this motion today?
3:35 p.m.
Conservative
The Chair Conservative James Rajotte
Okay. Thank you. Merci.
We'll get back to our scheduled orders of the day. We have a two-hour meeting, with five witnesses before us, to discuss gas prices and refinery margins. And this is our study pursuant to Standing Order 108(2).
As I mentioned, we have five witnesses today. First of all, from the Association québécoise des indépendants du pétrole, we have Ms. Sonia Marcotte, president and director general; Monsieur René Blouin, senior adviser; and Monsieur Pierre Crevier, president, Les Pétroles Crevier, and a member of the AQUIP's economic affairs committee. From the Canadian Independent Petroleum Marketers Association, we have Ms. Jane Savage, the president and CEO. And from L'essence à juste prix, we have Monsieur Frédéric Quintal, spokesperson.
I believe there is a five- to seven-minute presentation for each association. That's my understanding. Perhaps we could start with Ms. Marcotte.
Are you presenting on behalf of your organization? Okay, you can begin at any time.
3:35 p.m.
Sonia Marcotte President Director General, Association québécoise des indépendants du pétrole
Mr. Chairman, members of the Committee, let me begin by introducing the people who are with me today. Mr. Pierre Crevier is the Chairman of the Board of AQUIP and President of Pétroles Crevier. Mr. René Blouin is AQUIP's Senior Consultant. My name is Sonia Marcotte, and I am Chief Executive Officer of the Association québécoise des indépendants du pétrole.
We want to thank the members of this Committee for inviting us to present our position on these important issues. We do so on behalf of the members of AQUIP, which represents oil companies in Quebec.
They operate in the field of importing, distribution and retail sales of fuel, fuel oil and lubricants. Retail sales of Quebec oil companies total over $1 billion annually.
We do not intend to spend much time today talking about the strategic importance of independent oil companies, since it has been shown that their presence and the competition they introduce into the petroleum industry in Quebec, notably through the importation on cargo ships of finished products, provides Quebec consumers with a price advantage estimated at $361 million a year.
Today, we would like to talk primarily about increases in fuel prices that are raising such a hue and cry among consumers. In January of 1999, Montreal consumers were paying around 50¢ for a litre of gas. At that time, Montreal refineries were paying 11.1¢ for a litre of crude oil. They were demanding a refining margin of 4.4¢ before offering their gas for sale at the loading rack. Again, in January of 1999, the retailer's margin in Montreal was 3.6¢ a litre. That margin was not even sufficient to cover all the operating costs of an efficient serve station.
Now, let us look at how this situation has changed. The most recent data available show that, last May, Montreal refineries were paying 44.8¢ for a litre of crude oil. They were demanding a refining margin of 25.7¢ a litre, an increase of 484 p. 100 over January 1999.
3:35 p.m.
Conservative
The Chair Conservative James Rajotte
Ms. Marcotte, I'm sorry to interrupt you.
I've been asked by the translator if we could slow down just a little.
3:35 p.m.
President Director General, Association québécoise des indépendants du pétrole
Still in May, the retailers' margin was 4.9¢. Since then, the price at the pump has continued to reach new highs. As we will see, these spectacular increased are the results of the combined increases in the price of crude and refining margins. It is clear that the significant increases in refining profits are no accident. They are the result of a strategy aimed at gradually weakening competition and creating an artificial shortage that drives up the price of fuel.
In recent years, sporadic supply outages have affected independent distributors, and even truckers, who have had trouble properly supplying their fleet. These harbingers indicate that the supply problem is real. It has in fact been exacerbated by the recent closure of a Petro-Canada refinery in Oakville, which is depriving Ontario of more than 100,000 barrels a day of petroleum products. Moreover, it is Quebec's refineries that are diverting a significant portion of their production to fill this void. When we know that a large portion of the production of Quebec refineries already leaves the province, to the point where Quebec's deficit is an estimated 150,000 barrels a day, there is clearly cause for concern.
Canada can contribute to initiating a movement which would make it possible to build new refineries and potentially increase the number of companies involved in refining. In addition to representing a profitable investment, the prospect of new refineries being built in Quebec and elsewhere in Canada would guarantee consumers, and independent oil companies, an uninterrupted supply, while maintaining downward pressure on prices. There is no question that these considerations respond to energy security concerns in Canada.
Finally, the idea of a special tax on excessive refinery profits strikes us as an attractive idea. We propose that revenues generated as a result of this special tax be returned to less well-off consumers. Quebec recently introduced similar measures which were not met with criticism.
Thank you for your attention.
3:40 p.m.
Conservative
3:40 p.m.
Jane Savage President and Chief Executive Officer, Canadian Independent Petroleum Marketers Association
Yes, thank you.
3:40 p.m.
President and Chief Executive Officer, Canadian Independent Petroleum Marketers Association
First, thank you for the invitation to address this committee on the subject of gasoline prices and refining margins.
I represent independent fuel marketers in Canada. Independent fuel marketers are those who purchase fuel at the wholesale level. Independents do not refine crude oil or produce gasoline; rather, they purchase gasoline, mainly from refiners, and then sell either to a retailer or to the consumer directly via their own gas station.
Increases in gasoline prices are almost always attributable to increasing wholesale prices, not to increasing retail margins. More specifically, the most recent run-up in wholesale prices is a result of record refining margins. Data shows that retail margins in fact have stayed relatively constant over the past several years, but refining margins have generally grown as refining capacity declines and demand for fuels increases.
As an example, comparing May 2007 to one year ago, May 2006, gasoline prices in Canada increased about 6.5¢ per litre to $1.12. This is a Canada average price. In that period crude oil costs actually dropped 6¢ a litre while refining margins expanded by over 13¢ a litre to a record 28.8¢ a litre. It's important to note that this level of refining margin is higher than what we saw in the month of September 2005, when Hurricane Katrina took place.
I'm often asked to explain why the price of gasoline is up again. The overly simplistic answer is that the world wholesale price of gasoline is up, and Canada operates in a global economy. This is all true. As a global player in an unregulated industry, our prices must reflect world prices; otherwise we risk supply shortages. But what this explanation fails to capture is that the wholesale price of gasoline in Canada is not only higher than it should be, but we are vulnerable to fuel shortages and price spikes in Canada, as we saw last winter.
Why do we have some of the highest wholesale prices on the continent, and why are we more vulnerable to fuel shortages? I would like to explain that and then follow with some clear recommendations we have for this committee.
First of all, why is it that we have some of the highest wholesale prices on the continent? First of all, there is too little supply. In several areas, especially Ontario and the Prairies, we import gasoline from outside the country. Both Ontario and the Prairies are landlocked in the winter, preventing large cargoes from coming in to mitigate supply issues.
Second, we have too few suppliers. Only a handful of refiners in Canada—in contrast to the United States, where there are many more—control the wholesale markets, and there is little price competition at the wholesale level. It is a suppliers' market. Contrast this with the retail markets, where there are many retailers competing for Canadians' loyalty and many gas stations on the verge of closing because retail margins are thin.
Third, pipeline and terminal infrastructure in Canada is controlled almost exclusively by this handful of refiners. Unlike the U.S., where common carrier pipelines and terminals are more common, in Canada there is little access to wholesale fuel markets by traders, wholesalers, and independents.
In combination, these three--inadequate refining capacity, few players, and full control of infrastructure, with the exception of one independent terminal in Montreal--have led to high wholesale prices, fuel shortages, and the potential for more fuel shortages, not only in Ontario and the Prairies but where there are no deepwater ports and in every region of Canada.
A fourth reason is that, unlike in the U.S., there's no accountability to the Canadian public of inventories. One could argue that petroleum products produced by refineries are essential products to the people of Canada. Although we are working hard to reduce this dependency on fossil fuels, the fact of the matter is that Canadians are still very dependent on petroleum products. We need heating oil to heat homes, diesel fuel to transport our groceries and goods, and gasoline to take our kids to school, commute to work and run our businesses.
In the U.S., refiners and terminal operators report inventories weekly to the Department of Energy as an accountability measure and an early warning system of potential shortages that can then be mitigated. No such accountability exists in Canada.
The fifth reason, the fifth reality, which came with glaring evidence during the fuel shortage, is the inconsistency of gasoline specifications with bordering states and the legislative inability for ministerial waiver of key specifications to enable importation of gasoline from our neighbouring states.
On paper, Canada and the United States have the same specification for sulphur in gasoline. It is the right specification and it's very low. But what we found during the fuel shortage is that while we were at tank bottoms in Ontario, the U.S. was awash in gasoline that we could not import because of some very slight differences between the way the specification is administered in the two jurisdictions.
Moving on to recommendations, we have five. I'll try to cover them quickly.
First, we must federally mandate cross-border consistency of fuel specifications with adjacent states to ensure the markets flow freely so that during the next fuel shortage, gasoline can be easily imported to relieve the supply and price pressure. At the very least, we must have ministerial capability to easily intervene in the event of a shortage.
Second, we need to investigate alternatives to the structure, ownership, and use of pipelines and terminals, encouraging more market participants and more supply of petroleum products. Pipelines are a federal jurisdiction in Canada.
Third, we would like to see implementation of a federal public accountability system, specifically tracking key inventory levels of essential fuel products on a weekly basis. Not only would this increase accountability, but it would also give us an early warning system that would enable wholesalers, importers, and independents to do what needs to be done to replenish inventories, so that if we get a refinery outage at a time when inventories are low, which is what happened in February 2007 in Ontario, we will be able to mitigate the effects of that refinery outage.
Fourth, we recommend that we rethink the costs versus the benefits of inter-refinery product exchanges. These were justified and approved on the basis of efficiency, but have resulted in lower inventories and higher vulnerability to supply disruptions. They also result in fewer players, reducing competition.
Fifth and finally, we would like to reiterate that to encourage and enhance competition in the retail gasoline business, we request that parliamentarians undertake a much needed modernization of the Competition Act. Without this modernization, little is being done to preserve competition in the retail gasoline industry. We reiterate that in both the wholesale and retail gasoline markets, there is no better instrument to moderate price than through competition.
Thank you for this opportunity.
3:50 p.m.
Conservative
The Chair Conservative James Rajotte
Thank you very much, Ms. Savage.
We will now go to L'essence à juste prix, Monsieur Frédéric Quintal.
3:50 p.m.
Frédéric Quintal Spokesperson, Gasoline at a far price
Thank you, Mr. Chairman. I would like to thank Committee members for allowing me to make this presentation today.
This marks the fourth time in four years that I have taken part in the parliamentary process. I have already seen most of you.
I have been an observer of, and stakeholder in, the oil sector since the year 2000. Two years ago, I published a book on the subject, which presents an overview of the period from 2000 to 2005 with respect to what occurred in the oil industry in Canada.
The purpose of today's meeting is to explain recent fluctuations with respect to refining, primarily in April and May of 2007. I will give you a quick overview of the current status of refining margins.
In the 1980s and 1990s, there was a decline in refining capacity, an increase in demand and a common pricing system established for refined products. Starting in 1999, demand increased. Capacity also increased with demand, and since then, demand has been affected by speculation. This is what is known as refining margin fluctuations.
The refining margin system has been in place since June 1, 1985. In Quebec, Esso published this information in the media on Friday, June 21, 1985, and the same announcement was made in Toronto on July 2, 1985. I explain all of this in a documentary that will be released in the fall and which I have been working on now for several months.
Nowadays, oil prices are closely associated with the price of gasoline. No one in the oil industry has rushed to explain to the media the difference between oil listed on the stock exchange and refinery products, which are also listed on the stock exchange. For ordinary Canadians, all of that is still quite vague, ambiguous and confusing when, in actual fact, it is really quite simple. I will give you an example of a raw material on another market, which may be easier to understand. Oranges are listed on the stock exchange, but orange juice is not. There is competition.
I would refer to the important announcement made in June of 1985, because it was sharply criticized in the O'Farrell report. Mr. McTeague, I recall that you worked on that report. It made recommendations to the Conservative government in December of 1985 with a view to preventing the implementation of a new system of public pricing of refined products, ensuring that Petro-Canada, which was a Crown corporation at the time, would not follow the industry's lead.
Unfortunately, however, those recommendations were simply ignored. We are now suffering the full consequences of that, which are associated with the Free Trade Agreement. The pricing of refined products in Canada has to be in step with American pricing on the Nymex Exchange.
Since April and May of 2007, what has the speculative value been solely based on? Well, every Wednesday, the U.S. Department of Energy publishes the inventory levels of crude oil and refined products. If the inventory level does not meet the expectations of analysts, the result is speculation that the price will either rise or fall. Inventories are not in danger; they simply go from 37 to 36 days, and not from two to three days. There is no danger whatsoever, but this is enough to attribute a speculative value to a product that has no value-added for the consumer.
On April 30, on Nymex, the price of a gallon of gas, used as a reference for a litre of gas here in Canada, was $2.44, which is the same price as on August 30, 2005, during a period of high gas consumption, as a result of people travelling on vacation and Hurricane Katrina hitting some 16 refineries in New Orleans. The months of May and August 2007 marked the between season low. Refineries are not producing heating oil at that time and the period of strong demand for the summer holidays has not yet begun. However, the same record price of $2.44 US a gallon was achieved.
Where are we heading? Well, if that is not a demonstration that a crisis is about to occur, nothing is. Compared to the 1980s, the word “crisis” doesn't seem to be part of the vocabulary of government leaders, and that is unfortunate. It probably has something to do with globalization or the development of the wonderful world of communications and public relations.
It may be a good idea to consider more forceful political intervention. Some politicians who are here today have criticized me in the past for raising the spectre that goes along with that kind of terminology. Indeed, such interventions have been made in the past, and they were costly. Let me give you an example. The Auditor General's Report clearly stated that the cost of the imported oil subsidy program between 1974 and 1985 was $5.8 billion.
Some said that this caused the Canadian debt to balloon, and I was criticized as a result. On June 1, 1985, Canada's debt stood at $190 billion, and I do not believe that this factor was responsible at the time for causing it to swell. However, some people may have forgotten to mention that the national oil policy allowed Alberta oil producers to force everybody living west of the Outaouais area to buy their oil at a price that exceeded the world price for some 13 years, from 1960 to 1973.
The Bertrand report analysis, about which oil company supporters neglect to mention that they did not pass the test, shows that in 1980 constant dollars, refineries billed Canadian consumers an extra $5.3 billion. Yet nobody talks about that. In that regard, I mentioned more forceful intervention earlier. The most recent great invention coming out of the Conservative Party was the decision, last year, to cut the GST by 1 per cent. It would seem that is as far as they are prepared to go in terms of giving consumers a break. However, in 2005 alone, between January and August, the before-tax price of the same product fluctuated by 114 per cent. Between 1999 and 2007, it was subject to fluctuations of some 234 per cent.
If those percentages are not adequate proof that there is starting to be a real crisis for consumers… Here is another example. The industry was in crisis when, in March of 1986, the price of oil dropped considerably. The Conservative government decided at the time to eliminate or to cut more quickly than planned an oil and gas tax of a value of some $2 billion, and to force consumers to pay an additional tax of 3¢ on gasoline.
In 1986, we helped the industry, which was in crisis, and yet the only thing done since then is the 1 per cent cut in the GST. In February of 2003, Mr. Manley's budget gave the oil industry a massive tax cut. It allowed provincial royalties to once again be included with expenditures, and lowered the tax rate from 28 per cent to 21 per cent. I did the number crunching for only one item, and I noted that oil royalties in Alberta in 2003, 2004 and 2005, at a tax rate of 21 per cent, meant a tax reduction of $6.5 billion for the oil companies. And yet, the documentation prepared by the Minister of Finance talks about $165 million for that three year period.
If you are having trouble finding ways to come to the aid of consumers, why is it that you are finding it so easy to give huge tax cuts to this industry, which seems to be enjoying incredible increases in profits year over year?
Thank you for your kind attention, Mr. Chairman.
3:55 p.m.
Conservative
The Chair Conservative James Rajotte
Thank you very much for your presentation.
We will begin with questions from members. The first round is six minutes, and the second round is five minutes. Members have a very short period of time, so if I could ask witnesses to be brief in their responses, that would be very helpful.
We'll start with Mr. McTeague, please.
3:55 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Mr. Chair, I just want to make sure we have the information I had requested earlier with respect to the relationship between Esso and the marketing of Canadian Tire gasoline stations, as well as copies given to members of Parliament before we terminate on the recommendations made by this committee to effectively amend the Competition Act of 2002, including the support at the time of the then Competition Bureau.
3:55 p.m.
Conservative
The Chair Conservative James Rajotte
I'm just advised that we could not find any public information on that.
