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.