Industry Committee on June 13th, 2007

[The Chair, Conservative, James Rajotte]

You have 30 seconds, Ms. Savage. I think Ms. Marcotte wanted to speak.

[Jane Savage]

Thank you.

If we use Michael J. Ervin data, which are the data that are generally used on the Natural Resources website, statistically there is no difference between regulated markets and unregulated markets. Those who are pro-regulation will cut the data to look like it is better to have a regulated market. Those who are against regulated markets will cut the data differently. If you look over a long period of time, using Mr. Ervin's data, there is no significant difference in the price, so I would disagree with Ms. Scott.

[The Chair, Conservative, James Rajotte]

Ms. Marcotte.

[Sonia Marcotte]

Prices in Quebec are regulated; there is a floor price. If you take Mr. Irvine's data and raw data, and if you take the price of gas at the pump and remove the taxes—because they vary from province to the next… if you compare prices in Quebec to those in the Atlantic region, Ontario and Western Canada, you will see that Quebec has the lowest before-tax prices. I believe Ms. Savage would agree with me on that.

A number of factors are responsible for the current situation. First of all, Quebec has a diversity of retail companies operating because of the fact that there is a large number of independents. We also have an independent importer who, in a way, acts as a sort of watchdog with the refineries.

Quebec has regulations, but it also has some of the best prices in Canada.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Van Kesteren.

We'll go to Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

I want to start by looking at the concept of a world market, and it actually is a business model that's a free capitalist market. I just heard from Mr. Van Kesteren on this. You have, in this market here, a number of different state companies that set public policy that affect how much they extract. You have OPEC, which is a political body, essentially, that a number of American presidents have either made explicit requests to or rattled the sword, so to speak, to have them contribute more volumes onto the market, sometimes even fewer volumes. As well, the United States has a strategic petroleum reserve, which they've already drawn on, I believe, two times to try to influence the sale of gasoline to be lower. There's debate as to whether that has been successful or not, but they also have increased their capacity now to a billion barrels of refined capacity.

My question to start off is, given all these factors that are out there, where is the accountability that eventually consumers can go back to if there isn't a public policy related to this? I really believe that different governments can set target zones and so forth. Is that happening out there with other countries, and is it affecting the overall world market by government policies related to extraction and refinement?

[Jane Savage]

I can't speak for the refining side of the industry; I speak for the independent marketers. I completely agree with you that there is no accountability in Canada and very little, although more, in our neighbour the United States. I would also agree with you that on a world scale, there is intervention in the free market, OPEC being the largest example of that--strategic petroleum reserve probably to a lesser extent, but certainly OPEC. So there isn't a completely free market worldwide, but generally speaking, the price of fuel we adopt here in Canada, which is for example the New York Harbor price, is for a freely traded commodity per se.

[Brian Masse, NDP, Windsor West, ON]

The point is that there's public policy in different countries to protect consumers, or they just set what their objectives are, whether it's stability of price or whether it's lower pricing and so forth.

I note your recommendation, Ms. Savage--and this is open to the other panellists as well. Would it be in Canada's interest to mandate a certain amount of refinement that has to happen in this country that would bring forward some stability in terms of capacity that's online and available to us? The United States has spent billions of dollars to create the reserve funds they have. That would be extremely costly, and there would be environmental issues as well. It's significant for a country to go that route. Why not mandate a certain percentage of refinement of our own natural resources so we have value-added jobs and stock on hand before it disappears to some other country to do that job we should be having done in Canada?

[Jane Savage]

Rather than mandating a certain amount of refining capacity or refinement of our own crude oil, I think the level of intervention we would like to see is one that would address the accountability issue. We could go further if necessary, but I would say the first step, as a minimum, is to understand where inventories are, because that is where the rubber hits the road. Without a knowledge of the industry by consumers and their representatives, there is no understanding at all of what is happening out there and when we're going to be hit with a price spike or a shortage. So that's as a minimum.

You can go further than that. You can mandate minimum operating inventories. You can say they can't go below that, and if they do, you have to take action. That would be a more interventionist step, for example.

You could go even further. Various steps increase the level of intervention, but I would say, as a minimum, knowing what inventories are is a relatively straightforward approach, we think.

[Brian Masse, NDP, Windsor West, ON]

Are there any other comments?

[Pierre Crevier]

There is no doubt that inventory control is very important. As was stated earlier, inventories were really low in the month of February, when the Nanticoke refinery shut down. The same thing occurred in Quebec in 2004, when the Petro-Canada refinery shut down right in the middle of January. Refiners always wait until the last minute to advise people that their refinery has been experiencing problems for one, two or three weeks. As a result, inventories drop. I think there needs to be regular control of inventories and that all refineries should be forced to keep a minimum inventory.

[Brian Masse, NDP, Windsor West, ON]

Would it also be of advantage to Canadians to have standards on gasoline similar to that of the United States? Say, for example in the auto industry, we have safety standards that are to be compliant and match up with the United States, and they actively work in transport to do that. What if those types of standards were placed so we had some common expectations with the United States about petroleum products? That would open up the issue that you addressed with regard to the other states' markets.

[Jane Savage]

Yes, absolutely. I would go as far as saying there's a level of irresponsibility by not having that. I think it's reprehensible that we don't have consistent, or at least the ability for consistent specifications with our bordering states.

[Brian Masse, NDP, Windsor West, ON]

Is our gas generally dirtier and worse than--

[Jane Savage]

No, absolutely not. The specification is the same on sulphur, which is a very critical specification for gasoline. It's the same specification. It only varies in the administration, so during the fuel shortage we found that when we went to the tank to get the fuel, it was of a different quality from what we needed in Canada. It would not harm the environment one bit if we had the ability to waive our gasoline specification to allow that importation.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Thank you, Mr. Masse.

We'll go to Mr. Byrne.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Thank you very much for your presentation.

In terms of the case study, the examples of gas price regulation at the provincial level, if the intention were to reduce gas prices, the evidence doesn't seem to substantiate that, but from your point of view, are there merits to provincial gas price regulation for the consumer?

[Jane Savage]

I've recently undertaken a study of the four Atlantic provinces that have regulated, and every province, including Quebec, has a different form of regulation with different purposes. From my research, I would say that none of the provinces undertook regulation with the intent of lowering gas prices. The intent, by and large, generally was to enhance competition in the retail markets by ensuring a certain margin at the retail level. Quebec would be an example of that. It would be to stabilize prices to a certain level, rather than, for example, Toronto six months ago having 12 price changes a day. So stabilization was an objective in the five provinces that have regulated.

Also, there's transparency, so that when consumers fill up their gas tanks--for some people anyway--there's more comfort that the price was set by a transparent mechanism as opposed to refiners or oil companies. In some provinces, the benefit is, again, transparency for regions. We sometimes see extreme differences in prices between regions. Let's say in an urban market, prices might be much lower than in a rural market, or a far-away market. Those constituents who are in distant markets find it galling that there is such a price difference.

Those are the things that regulation tends to address.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

The margins at the retail sector are relatively low in comparison to the other two processes that occur, the crude oil price and the refining price. There is a certain concern that gas price regulation for the effect of lowering prices could inhibit retail competition significantly. If we're involved in gas price regulation, is there any circumstance in which refining price regulation would be warranted?

[Jane Savage]

Regulating the wholesale price of gasoline, in other words. There is some intervention there that's possible, I would say. The big danger of regulating at the wholesale level...perhaps you recall electricity regulation in California. Intervention has to be done extremely carefully when you're regulating the price of a commodity; otherwise you will interrupt supply. If, for example, the wholesale price of gasoline in Canada were limited, say, by 10¢ a litre lower than New York or whatever, refiners in Canada, in this free market, would export all their product, unless you again force them--another degree of intervention--to sell fuel in Canada.

All the gophers have to be hit on the head, if you will, if you intervene in one spot.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Ms. Savage, if I'm understanding you correctly, what you're really suggesting is that the answer to this may be to have more independent refineries supplying gasoline to the independents.

[Jane Savage]

Independent or not, we need more supply. It would certainly help if we had more suppliers, because that implies more competition. So more supply, more competition, more ability, more infrastructure. If those things can happen, more supply can come in.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

One of the key factors of why there's not a greater supply is infrastructure-based pipeline ownership, and that's a real key concern.

[Jane Savage]

It is.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

And that can be policy based.