Industry Committee on June 18th, 2007

[Robert Vincent, Bloc, Shefford, QC]

Two weeks before the long weekend in May, people said that gas prices were going to go up. They were right. The Friday before the three-day weekend, the gas price went up by 7%. What a coincidence! The following weekend, the price was back down to where it was before. I do not understand.

[The Chair, Conservative, James Rajotte]

Mr. Vincent, thank you.

[Tony Macerollo]

I think we've answered the question. That may very well happen in some communities, but the only way you can get a comprehensive understanding of this is to do a proper study. You can do a study that looks at a local market, and it might verify your assumptions, but the Conference Board clearly in their national study did not correlate the two together on a nationwide basis.

[Dane Baily]

There is also the fact that two thirds of service stations have their prices set by the station manager. One third of the retailers are managed by the refiners. The largest has 7% of the service stations. It is impossible to push prices up with only 7% of the market. But it is easy to push prices down: if even a single station decides to drop its prices, the market will follow.

[The Chair, Conservative, James Rajotte]

Okay.

[Dane Baily]

All the...

[The Chair, Conservative, James Rajotte]

Thank you.

I don't have any other members on my list.

I did want to ask a few questions of the witnesses. First of all, thank you for coming in today.

When Natural Resources Canada were here they gave us the Canada average pump price components, and I think it's important to keep coming back to this. The 2006 average retail price was 97.7¢ per litre, crude oil was 45.8¢, the federal and provincial taxes portion was 32.7¢, refining margin 14.1¢, and marketing 5.1¢.

Their explanation on crude oil is that Canada produces 3% of the crude oil and we are therefore a price taker and we therefore cannot influence that portion of the final price of gasoline. Federal and provincial governments can choose to increase or decrease taxes, according to how they best see fit. The marketing margin, we are told, is 5.1¢ per litre, so it's fairly small. It's a very competitive market, especially at the local level.

So the hearings have really focused on the refining margin, which according to the 2006 average is 14.1¢. A big question there is of the margin, what is cost and what is profit? I thought I heard you say here today, Mr. Macerollo, that the profit was 1.5¢ per litre. I don't know if that was for 2006, but that's saying that the cost of refining is 12.6¢.

Am I correct in separating the cost and the profit within the refining margin?

[Dane Baily]

That's an average over the last 10 years, the 1.5¢ a litre.

[The Chair, Conservative, James Rajotte]

The 1.5¢ a litre is an average over the last 10 years.

[Dane Baily]

In 2006 it was about 2.5¢ a litre after-tax profit for the downstream. That's not an absolute calculation; it's an extrapolation using Imperial Oil, Petro-Canada, Shell, and Suncor. They are the only ones that produce that data publicly. They represent about 70% of the refining capacity in Canada, so it's a reasonable proxy for what is represented by the Canadian market.

[The Chair, Conservative, James Rajotte]

The rest—at least for the companies that are willing to share that information—is all cost of refining.

[Dane Baily]

I think it was about 2.1¢ a litre the year before. I actually have the numbers.

[The Chair, Conservative, James Rajotte]

Can you provide all that information to us in terms of which companies are willing to share that?

[Tony Macerollo]

Based on those that are willing to share it, yes.

[Dane Baily]

Those are all annual report data from those four companies.

[The Chair, Conservative, James Rajotte]

Another chart we have here shows that the marketing margin is relatively stable over time, but the refining margin in fact is incredibly volatile. It goes through massive swings, up and down. What is the explanation for the volatility in the refining margin?

[Dane Baily]

I'll dispute the point a little bit. In terms of the marketing margin, those are probably monthly averages. On a monthly average they don't change. On a daily, hourly basis, the marketing margin in Ottawa can go up and down 12¢ a litre.

[The Chair, Conservative, James Rajotte]

This chart is monthly. But the refiner operating margin is much more volatile on a monthly basis.

[Dane Baily]

Yes.

[Tony Macerollo]

Sure, because that would also reflect volatility in crude oil. That would also be affected by things like speculation in the marketplace after the energy information agency reports their data on inventories. I'm not sure what the frequency is, but it's at least once a month.

[Dane Baily]

You can pick Katrina, you can pick the power outage we had in 2003--you can see some of those peaks very clearly.

[The Chair, Conservative, James Rajotte]

Yes. Especially recently, this year, 2007, the main question I got in my office from people who were phoning in was.... Look, if you take crude oil as the primary...that is the main cost of the retail price, according to NRCan. People watched the price of crude oil, and the price of crude oil in fact was going down, but the price of gasoline was not following, at least closely.

What's your answer to people who phone us and say, look, the cost of crude is going down, but the price of gasoline is still going up, and therefore the refining margin is increasing and that's where the companies are making more profit than they should be--whatever that expression means? What's your answer to that question?

[Tony Macerollo]

I have two pieces of advice.

Certainly, as one who for many years took calls on the subject on behalf of a member of Parliament, I told them to call the Canadian Petroleum Products Institute.

In the absence of that, if you want to get into a detailed explanation, the crude oil market is a commodity market and the gasoline market is a commodity market on top of a commodity market. Operating at 100%, there's a maximum amount you can make. You may have all the crude oil in the world, but if you don't have—The facilities can only produce so much in a given day. If at any given point in time demand is outstripping the ability of the refineries to produce that kind of supply in the marketplace, you're going to see upward pricing pressures.

It's a North American market. Canadian consumers are competing with American consumers for the same product, and American consumers will pay more, quite frankly.

[The Chair, Conservative, James Rajotte]

Thank you.

I'd love to keep asking questions, but I see that my time is up.

That seems to be where the questions are in terms of the refining margins. Any information your organization or your members could provide on that would be very helpful.

I want to thank you for appearing before us today. Again, if you do have any further notes you'd like to pass along, please pass them through me or the clerk, and I will ensure that all committee members get them.

[Tony Macerollo]

Thank you, Mr. Chairman.