Industry Committee on June 18th, 2007

[Tony Macerollo]

We can't do that.

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

But tomorrow morning—I will wager that on any other day you don't appear here, I can predict the price pretty much in eastern Canada to one-tenth of a cent per litre.

Mr. Taylor from the Competition Bureau thought he'd be cute and say he knows the discount prices, but that doesn't stop Canadian Tire or Esso from posting the price that is exactly what it's going to be. The three factors that you quite rightly pointed out will be your wholesale price, your taxes, and your retail margins—5¢ in Toronto and 6¢ up here. Thankfully, they have a margin.

My question is this. If you are making a 17.5¢ crack spread, I know that no refinery in this country, regardless of the kind of oil they're putting in, is going to make more than 5¢. That would be a handsome return. So you're making at least 12¢ a litre on the crack spread alone, and you're now making another 4.7¢ a litre tomorrow morning, assuming 40 billion litres are sold every year and you can keep this up for a couple of years. That's a couple of billion bucks out of the bottom line for consumers, which I don't have a problem with as long as you're reinvesting it.

How do you do that? How do you manage to get an identical wholesale price by every city right across this country, and why doesn't the Competition Bureau rule that offside? Perhaps it's a rhetorical question.

[Dane Baily]

You'd probably have to ask the Competition Bureau that.

The Competition Bureau has on many occasions said that parallelism in pricing is not an indication of a lack of competition. It's the same as asking, why can you go around to all the retail sites and find they are the same? The same thing applies. Canadian consumers demand competitive pricing. We as consumers are extremely price sensitive; we look for value. So when we're shopping for gas, if somebody is two-tenths of a cent cheaper, we'll cross the street. You can't afford, as a retailer, to lose 30% of your volume—we did some surveys on that—for two-tenths of a cent, plus all the traffic that generates money for your convenience stores, your car washes, and your doughnut shops.

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

I understand that. You can sell oodles of potato chips and have no margin, which was the contention of Mr. Macerollo's predecessor some years ago.

My interest here is that the consumer doesn't know the price yet. You've already established the wholesale price for tomorrow, which sets in motion...given the extent to which you control not only the retail sector but also the refinery sector. Mr. Macerollo began by listing all the companies that both of you represent. That, to me, sounds like 95% of all the gasoline coming into this country, or better.

How is it possible? The consumer has no impact on that price. The consumer doesn't even know this. In fact, our government refuses to publish these prices beforehand. But that will be the price at the pump tomorrow, regardless of what the consumer, driving over six lanes of highway, if I've heard the explanations from the Competition Bureau before.... These are prices that you've already predetermined. How do you do it? And more importantly, how is it that it's always identical, region to region?

Mr. Baily.

[Dane Baily]

The pump prices are not uniform in terms of the market. You can drive around Ottawa and find all kinds of different prices. So I have trouble understanding the question.

If you're talking about the rack prices, I think most of the companies follow a very similar methodology. They look at what has happened to the wholesale prices, at least in eastern Canada and in New York. What's my supply demand? If everything is normal, then I'll follow the normal market. I've seen cases where one company happens to be in distress and they move their rack prices higher again to push demand away. As Tony said, supply flows to a higher price and demand flows to the lowest price. That's how the markets balance themselves.

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

Anybody who knows this, Mr. Baily, would have to say that if you have a wholesale price that's set to one-tenth of a cent and it's identical, and it remains that for the whole day, that, above all, would lead to a number of conclusions that you may want to consider. But the one that is escapable is that someone has an awful lot of control to be able to set that price, such that the pump price, at least wholesale, will be what it's going to be tomorrow morning. I guarantee that the numbers I've cited here on record will be the price tomorrow morning.

Now, if I know that, why doesn't the government know that? Mr. Macerollo, why would you not share information as to the inventory, if this is done in the United States? If it's good enough for Americans, why shouldn't it be good enough for Canadians?

[Tony Macerollo]

Again, Mr. McTeague, as I said before, in the context of the establishment of a petroleum monitoring agency, which, by definition, would have to collect these kinds of data, we support the concept.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Arthur.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

Good afternoon, sir.

If your clients or people you represent had to make a choice between refining and selling retail, what would they choose?

[Tony Macerollo]

Between refining and retail? You'd have to ask each one of them, because each one of them has different strategies. Some emphasize retail and others don't.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

So some would choose one and some would maybe choose the other, and then we would have a real market.

[Dane Baily]

If it were ten years ago, most of the companies might have said retail.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

But refining is kind of nice these days.

[Dane Baily]

Nowadays it's very nice, but back then it wasn't nice at all. Like everything else, things change. If you're talking about separating retail and wholesale, they tried that in the States several times, and in fact all of the states that have laws that you can't be a refiner and a marketer don't have any refineries. I don't know if that's cause or effect, but it doesn't really have any bearing on it.

From a competition law standpoint, you have to sell to people who compete with each other as long as they have similar volumes and they're in the same business. It's illegal to sell at a different price. If one of our members has an independent service station, and even one of the service stations that may be an independent but flying their flag, they would have to sell at the same price.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

So what is good for communications today is not good for gasoline.

[Dane Baily]

I'm less familiar with telecom.

[Tony Macerollo]

You're referring to the issue of structural separation, and that has been a hotly debated context across a number of industry sectors for which there's no definitive answer. We don't have complete structural separation in the telecommunications sector either.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

We are short on supplies, and the price tends to go up after refining.

[Tony Macerollo]

When demand is going up and supply is not going up as fast, that's right.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

The price between gasoline in Canada and diesel fuel in Canada is a little bit higher when it gets out of the refining process than it is in the States.

[Tony Macerollo]

Not always.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

These days.

[Tony Macerollo]

Well, no. For example, we did this with CBC TV in Vancouver not even a month ago, and we found that the actual pre-tax price in Vancouver was lower than it was in Blaine, Washington, and consistently so.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

If we look at volumes, they depend on production, they depend on demand. The more people ask for gasoline, the more will be refined, we hope one day. And there's also thermodynamics.

I am a cross-border driver. I drive heavy equipment, I drive cars.... It is common knowledge among most Quebec drivers, be they bus drivers, truck drivers, or snow birds, that you can go seven to nine kilometres farther on a gallon of American gas than on a gallon of Canadian gas. Most people attribute that to the difference in additives. Some additives are illegal in Canada, like molybdenum, and some additives are legal in the States only. This difference is stretching the mileage and therefore reducing the demand accordingly. Is this true?

[Tony Macerollo]

I'm the economist.