Industry Committee on June 13th, 2007

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

Were you able to find any information?

[Lalita Acharya, Committee Researcher]

We had one of our librarians do a search of recent newspaper clippings, and she couldn't find anything in the public domain on that issue.

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

I'm pretty sure The Globe and Mail is where I saw the relationship some time ago, and it was very public. Nevertheless, thank you.

Mr. Chair, perhaps you would proceed with the other part, because I don't have the old copy of the 2002 recommendations we made, if you can believe it.

[The Chair, Conservative, James Rajotte]

The 2003 one?

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

The 2002 and 2003, and then the response by the government at the time, Chair, just under advisement.

Thank you.

I would like to thank all our witnesses for being with us today. Mr. Quintal came back to one point a number of times.

But I would like to say that the dynamic continues to change. However, the emphasis you put on the refinery, I think, is timely and important. We have often talked about crude, and the media like to talk about crude, but we all know that we don't put crude in gas tanks.

There's been a lot of discussion about the cost at the gas station level. People like to get worked up over the issue of collusion, but you could probably put the tens of thousands of gasoline station owners inside the SkyDome, or what we call the Rogers Centre now in Toronto, and fill them up. No one talks about the four refineries that control product from region to region in this country.

Given that the bureau has said there is no evidence of anti-competitive activity, and given that the bureau has not taken any time to look at the overall impact of mergers that have predated our concerns to date, I'm wondering....

Ms. Savage, you talked about some of the recommendations that could be considered and that would be helpful in at least attempting not just to restore competition and price, but also to ensure that Ontarians, among others.... I see that in western Canada, my good colleague the chairman is facing prices even higher than those in Ontario. What steps can we take to ensure that Canadians will even have supply, which I think is of greater or paramount concern to consumers? The price is arguable; it's too high. I thank you for making those presentations about the fat margins that are being made, but I'm also deeply concerned, as should every Canadian, about if we have enough supply, particularly in the winter.

So could you talk a little about your recommendation with respect to the tracking of inventory and how you think that would help?

[Jane Savage]

As I mentioned, there'll be two benefits from tracking of inventories, our association and members feel.

The first is that it would increase the level of accountability. This is not an interventionist move; there are other more interventionist moves. This would at least report inventories—again, on the assumption that parliamentarians believe that petroleum products are somewhat of an essential product for consumers.

The second is the early warning system. And I've been challenged on this as to what exactly it would do for us. The early warning system, I cannot emphasize enough, is essential to bring in the product that we need. When the Nanticoke refinery went down in February 2007, inventory levels, without question, were at absolute rock bottom. So the impact of that refinery going down was huge. If inventories had been higher and we had known that, the impact would have been less.

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

We know on the infrastructure side that Ontario gets a bit of a benefit because of the presence of one very small independent player in the Montreal-Quebec region. I believe it's Norcan. Without them, I'm sure the prices would be a little higher.

Can you explain to us here why it is that with refinery margins of 25.7¢ a litre and with $10 billion a year—using Natural Resources Canada's own findings of 41 billion litres of gasoline sold every year—we don't see competition coming into this business to challenge those fat-loaded margins? Why oh why does it not happen in this industry? Why are there no new competitors coming into this industry to challenge those margins to give consumers the benefit?

[Jane Savage]

There are two main reasons.

In the short term, product should be flooding into Ontario and the Prairies right now, and certainly should have been during that fuel shortage. But there are some restrictions on the ability to get product in, not just because it's landlocked and we can't get the large product ships in, but also because pipelines are totally controlled in this country by refiners, unlike in the United States.

In the longer term, and my second reason—which should really be asked of the refiners—is the economics of building a new refinery. That is a longer-term question. It certainly is an expensive endeavour, without question. I think they have very, very conservative economics, saying that they need to see these huge profits for a long time before they will put that kind of money into the business.

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

It went from 6¢ to 10¢ and, Mr. Quintal suggested, to 25¢, and it could be $1 and you'd still fundamentally have the same infrastructure problems of refineries being controlled by a handful of refiners. In fact, if I understand you well, no one is going to take those risks.

Natural Resources Canada and the Competition Bureau seem to sit on their laurels, content with the comparisons they're making—which, I see, the Ontario government uses as well—between Toronto and Buffalo; Montreal and Burlington; and Bangor, Maine, and the entire production in the Maritimes, and so on, right across the country. Are you satisfied that is a fair and honest comparison, or is it simply playing the consumer, as we've seen in the past?

[Jane Savage]

I don't think it's a fair comparison. As an example, because of the specification issue and the fact that we could not import gasoline into Ontario during the fuel shortage, there was a 12¢ a litre discrepancy—which is huge in our industry—between the Toronto rack and the Detroit rack. That differential should be about a penny a litre, and it never is a penny a litre.

So there are some structural issues. Again, it's a supplier's market—a supplier's market. Basically, the price at the wholesale level is set based on the highest level the market will bear. That is significantly higher than in the adjoining U.S. states.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McTeague.

We'll go to Madame Brunelle.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Ladies and gentlemen, good afternoon. Thank you for being with us today.

We are meeting this afternoon because consumers are concerned. All of us are trying to understand what kind of action can be taken. This is a market where competition is not working particularly well, since we are seeing very significant price fluctuations.

Ms. Marcotte, these increases are a result of higher crude oil prices and refinery margins. I would like to focus on refinery margins. It seems that the refining cost is between 2.5¢ and 4¢ a litre. Your association had already stated that a refinery margin deemed to be adequate, in order to make a good profit, was between 4¢ and 6¢ a litre. However, in 2007, it was 28¢ a litre, which is five to seven times too much.

What kind of solutions could be considered? Is decreased refining capacity having an effect? We noted that the number of refineries has dropped considerably. Is that the real issue? What can we do to resolve it?

[Sonia Marcotte]

It's important to understand the price dynamic and how prices are set. First of all, in terms of prices at the pump, we all know that the crude sector is important. We know that the price of crude oil has increased steadily for a number of months now, and even a number of years. The same applies to refinery margins.

However, retail margins in Montreal, for example, have remained relatively constant, at between 4¢ and 6¢. Indeed, we have a document here that you can take a look at, if you're interested. We are seeing that the price of crude oil has increased, that refinery margins have increased, and yet, retail margins have remained stable.

Why have refinery margins increased to such an extent? Well, it's important to look at what is going on in the United States. Prices set in Montreal reflect what is occurring in the United States. And, prices are set on the basis of what is going on there. Back in 1981, for example, in the United States, there were 189 companies operating 324 refineries, while in 2005, there were only 55 companies left and 148 refineries.

So, it is clear that market concentration has occurred. And, if we took an even closer look, we would see that the 15 largest companies in the United State control 85.3 per cent of the refining capacity. That concentration has a direct impact on refinery margins.

The fact is that an artificial shortage is being created because inventories of petroleum products are kept at very low levels—just enough to meet demand, but extremely tight in terms of supply. As soon as something happens, margins shoot up.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

We were told this week, no later than on Monday, that there were fewer refineries, but that they are more efficient. I have a hard time believing they could be more efficient, given what we are experiencing these days.

[Sonia Marcotte]

Indeed, if they were truly more efficient, prices would normally go down, rather than shoot up. That is really the result of the small number of players in the industry, of the fact that concentration that has occurred and that they are able to maintain very small inventories of petroleum products—just enough to meet demand, but not enough to respond to unforeseen events.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Mr. Crevier, you suggested in your paper that one solution might be to build new refineries, which would guarantee supply—something that is always a concern—and bring down prices.

But, what kind of action do you see the government taking in order for that to occur?

[Pierre Crevier, President, Les Pétroles Crevier and member of the AQUIP's Economic Affairs Committee, Association québécoise des indépendants du pétrole]

The government can certainly take action to reassure investors that the major companies—the ones that are already there—will not be allowed to pressure new players getting into the market. They could also reassure producing countries that they will be in a position to guarantee crude oil supply and that local governments will assist investors in setting up new refineries.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Mr. Quintal, you talked about more forceful political intervention. Do you have suggestions to make in terms of the kind of force that would be needed?

[Frédéric Quintal]

The first oil shock occurred in 1973, at a time when the government was perhaps more courageous, in terms of taking authoritarian action, such as freezing oil prices. In 2007, given globalization and company strength, it would probably be going too far to think in those terms, but some producing countries do just that.

At one extreme, we have Venezuela. Mr. Chavez may be selling gasoline at a price which is too far below the market price—at 12¢ US a gallon, based on 2005 data, which is about 3¢ or 4¢ a litre. However, there are also other producing countries where government-owned corporations sell gasoline to the population at below market prices, and despite that, they do a good business.

If what Hydro-Québec is doing with kilowatt-hours allows it to be profitable to a certain extent, why would that not work with petroleum products? The kilowatt-hour is quoted on the Nymex Exchange in the United States and it fluctuates on a daily basis, whereas in Canada, the price is regulated and companies are still able to make healthy profits.

It is really only a matter of finding a happy medium between the two and perhaps reconsidering the Free Trade Agreement, which the U.S. did not hesitate to set aside when it came to softwood lumber. They dragged their feet on that issue for three and a half years. Why couldn't Canada do the same thing with petroleum products and also reconsider the infamous clause?

[The Chair, Conservative, James Rajotte]

Merci.

We'll go now to Mr. Van Kesteren.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair.

Thank you, witnesses, for appearing with us today.

This study is actually somewhat frustrating. I say it's frustrating, and I said the last time--and I want to clarify it a little--that it's kind of like UFOs: everybody believes they're there, but the governments keep telling us they're not. It's the same thing with gas prices.

As we investigate more and more, we have some pretty good explanations for why gas prices are the way they are. When I look at the Toronto Stock Exchange, at last count I see that Shell and Imperial—and I guess they're owned by Exxon and all these others—are still trading; so you can still buy stocks, and they're still reporting back to stockholders. I'm not saying this is my take, but I'm really starting to form somewhat of an opinion. It seems to me these people have just gotten smart and have decided to stop blowing their brains out and have their refineries produce at near capacity. Keep the supplies tight, and as a result, they really don't have to worry too much about glut and subsequent dumping on the markets.

But isn't that just smart business? Is there anything illegal?

You're nodding. Maybe Mr. Quintal would like to make a comment on it afterwards.

Is there anything illegal about that?

[Frédéric Quintal]

No, the current system fully complies with market rules. There is no problem in that regard. However, the warning contained in the O'Farrell report which, in the fall of 2005, made it clear to the government that Esso's system of publishing the price of its refined products ran the risk of reducing, and possibly even eliminating, competition in the refining sector, was a serious one. Those recommendations were not acknowledged at the time. Now we are suffering the full consequences of that.

Even at the time, the then Minister of Natural Resources, Ms. Pat Carney, was still talking about the price of oil and gasoline in the newspapers. As I already explained, the advent of the new system of publishing the prices of refined products introduced a new element: the refinery margin. That margin did not fluctuate at that time, but began to do so to a considerable degree in 1999, when demand grew and exceeded capacity.

There is some competition when it comes to refining capacity. So, how is it that at a parliamentary committee in Quebec City, some three years ago, Mr. Perez, of the Canadian Petroleum Products Institute, and Mr. Montreuil representing Quebec, stated that a production level below 85 per cent meant a refinery was not profitable, and that in order to make a minimal level of profit, production had to be at about 93 per cent? Suddenly, in April of 2007, approximately six weeks ago, we noted that refining capacity is now 88 per cent. It is no longer 93 per cent, and companies are still making very healthy profits.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I understand that, and I agree with that, but isn't that smart business? I guess you've answered my question, but still, what's stopping a group of people, investors, getting together and building a refinery and introducing some more competition? That's what we're all about. It's free market, it's free enterprise. The stakes obviously are high; there are great profit margins here.

Why aren't we seeing that?

[Jane Savage]

Sure. It's a good question, and members of our association certainly would look at that, like others in Ontario, just to use that example. More product could come into Ontario, for example. we twinned the pipeline, built a new terminal in Toronto, and those sorts of things. This takes enormous amounts of money. The rack price, as an example, in Toronto is at a level higher than other rack prices in the United States, but, one could argue, not high enough to attract more supply into the.... And again, to your point, that's how business works.

It's important for you and other parliamentarians to understand, though, that the free market works extremely well when there are a lot of competitors. The fluid of competition is the number of competitors.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

So that's part of the problem; we just don't have enough. And they've done a pretty good job at reducing competition, which is smart business, which is good for their investors, and you and I can both invest in that.

I have just a final question. I think I have time for one more.

It has been suggested, and we had the competition commissioner, Ms. Scott, mention at our committee on Monday that prices in some regulated markets are actually slightly higher than prices in non-regulated. Do you agree with the commissioner's observation, and if not, do you have evidence to support the opposite view?