Evidence of meeting #70 for Industry, Science and Technology in the 39th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was gasoline.
A recording is available from Parliament.
Conservative
The Chair Conservative James Rajotte
Order, please.
This is the 70th meeting of the Standing Committee on Industry, Science and Technology. We are continuing our study on gas prices and refinery margins.
Today we have two witnesses from the Canadian Petroleum Products Institute, Mr. Dane Baily and Mr. Tony Macerollo. Who will be doing the presentation? Mr. Macerollo? Okay.
You have up to 10 minutes, and then we'll go into questions from members.
Tony Macerollo Vice-President, Public and Government Relations, Canadian Petroleum Products Institute
Thank you.
Mr. Chair, members of Parliament, and Canadians who have access to this hearing, on behalf of the members of the Canadian Petroleum Products Institute, thank you for inviting me to better understand your preoccupations with our industry.
I'll keep my comments brief so as to answer as many questions as possible.
As some of you may know, the CPPI is a national association of major Canadian companies involved in the refining, distribution, and/or marketing of petroleum products for transportation, home energy, and industrial uses. Collectively we operate 16 refineries, representing over 80% of the refining capacity in Canada, and we supply over 7,000 branded retail outlets with transportation fuels across Canada. Our members include Chevron, Husky, Imperial Oil, North Atlantic Refining, Shell Canada, Suncor Energy Products, Ultramar, NOVA Chemicals, and Bitumar Inc. Our members operate refineries in British Columbia, Alberta, Ontario, Quebec, Nova Scotia, and Newfoundland and Labrador. Arco Products Corp. and the Parkland Income Fund are marketers in western Canada.
We recognize that our industry is under the spotlight. For most Canadians we are the indispensable enabler of the drive to work and school, the transportation of paramedic and fire services, home heating fuel, and right now, even the Sunday or Saturday cutting of grass. We provide quality products, proven performance, and our complex facilities operate safely and reliably. We make our products affordable by keeping our costs down. We are also the ones, I will say, who face the consumer reaction head-on, with price signs larger than I am tall.
Affordability of our products is one of the key questions that face consumers, consumer advocates, social activists, environmentalists, scientists, engineers, and economists as well as people like you, the public policy decision-makers. We understand your interest in gas prices and refinery margins, and I hope to provide you with a reasonably straightforward answer today.
The first chart in the presentation that has been provided to you sets out the movements in gas prices in four major urban centres compared to the New York harbour wholesale price for gasoline. This says fairly straightforwardly that we operate in a commodity-based market where we are, in effect, the price taker, not the price maker.
Conservative
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
Could we get that presentation he is talking about?
Liberal
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
I did not see it. Mr. Shipley doesn't have it, and Mr. Arthur doesn't have it.
Conservative
The Chair Conservative James Rajotte
I have a bilingual copy here, French and English.
Everyone now has a copy? Okay.
I apologize for that.
Vice-President, Public and Government Relations, Canadian Petroleum Products Institute
I'll turn to the first graph, which marks 2007 wholesale gasoline prices. In this particular case, we've tracked the price movements, from January through to June, at New York harbour, Montreal, Toronto, Calgary, and Vancouver. What you can see, or at least what this graph attempts to underscore, is that we operate in a North American market for gasoline products. We are very much the price taker, not the price maker, in this situation.
There's an additional phenomenon associated with speculation that I'd like to comment on a bit. To quote Natural Resources Canada:
News of the recent declines in stock levels, combined with the earlier than usual up-tick in gasoline demand, has market analysts speculating about possible gasoline shortages this summer. This has sent speculators and traders scurrying to the market to secure contracts for summer delivery. This trader activity has driven up wholesale prices of gasoline across North America and, subsequently, prices at the pump. Prices are likely to remain high until inventory levels begin to build or analysts are comfortable that there will be enough gasoline to meet summer demand.
That comes from Natural Resources Canada's 2007 “Petroleum Product Market Outlook”, available on their website.
This isn't something we do; rather, this is the reality of commodity trading.
In terms of refinery margins, the second chart presents the movement in margins. It is volatile, there's no question about that. And there is no question that the margins are averaging upward.
In public policy terms, this Parliament and previous Parliaments have mandated fuel policies whose financial impact in terms of fiscal expenditures has been about the magnitude of a high-speed rail corridor between Montreal and Toronto and in a much shorter period of time. Just as an example, in mandating a low-sulphur fuel requirement for gasoline and diesel, CPPI members have invested approximately $5 billion in expenditures to reconfigure this manufacturing process.
We worked in collaboration with government officials to achieve this policy, and we managed to achieve this goal while protecting Canada's competitive advantage in the production and distribution of fuels for Canadians. I'll emphasize this, because it's a lot of money: the investment is $5 billion of private sector money in a private sector-operated and competition-driven modern infrastructure. We will continue to make similar investments as a full partner with you as we take on new challenges with climate change and clean air.
For a few moments, consider the business environment in which the institute's members operate. Our principal input is crude oil, a commodity determined by a global pricing system, sourced from multiple areas in the world. There are taxes from something as complicated—and expensive, I might add—as the CRA definition of the amount of gasoline used to denature ethanol to the GST collected on the final tally. In the former, our members independently bear the cost of administering a public policy decision, and it's not that easy.
The third component is our refinery margins, which is the differential between crude input costs and the price at which fuel is sold, essentially a commodity market on top of a commodity market, which is the crude oil market, based on thousands of transactions all over the world, by the hour, involving futures and derivatives and so on. It is a margin, which is not to be confused with profit. For at least one CPPI company, it ranged from zero in December of 2006 to 10.7¢ when I wrote this brief.
Finally, there is the marketing, those services for which consumers are attracted beyond price—groceries, motor services, the location, etc.
Nevertheless, the fact remains that over the last 10 years, after-tax profits have averaged approximately 1.5¢ per litre. That is reflected in the chart entitled “Downstream Petroleum Financial Performance”.
The Canadian fuel infrastructure is alive and best serves consumers in a fully competitive marketplace. Nevertheless, a confusing policy environment is not conducive to investment decision-making. Removing the tax exemption on renewable fuel mixes should be revisited. It increases the cost of fuel vis-à-vis the United States.
With respect to clean air, the underlying assumption in the latest data provided by Environment Canada suggests that we will need to supplant future consumption with imports. With fixed caps on these criteria air contaminants, it is not going to be possible to grow to meet demand, even though our members possess the technologies that are available right now to produce the cleanest fuel possible. We are being asked to exceed performance requirements of our principal competitors in the U.S.
In respect of GHGs, the uncertainties over the pricing of carbon dioxide credits beyond the short term continue to be a challenge. What we know is that an 18% reduction target by 2010 for all large industrial emission sources, along with a 2% per year escalation thereafter will create a large domestic demand for these credits. This, coupled with the diminishing access to compliance options over time, will impose large costs on our sector, which will not have to be borne by the United States.
In implementing the renewable fuel policies—and I stress policies because we have more than one in this country—major costs have already been incurred to respond to each jurisdiction.
As for price fluctuations, I'll be honest: who doesn't hate them? They're hard to follow, and they're hard to understand, but as frustrating as they can be, they are evidence of the biggest savings over time for consumers. In fact—and other witnesses have referred to this—studies in Nova Scotia suggest that while price regulation causes few movements in price, consumers in Nova Scotia end up paying more than their counterparts in the rest of the country do.
I will plead with you to not ask us to do what we can't. This is a global commodity market where the rule of supply and demand prevails. Successive studies by, among others, the Competition Bureau and the Conference Board of Canada have concluded that Canadians benefit economically even though it can be a frustrating retail experience at any given point in time.
Historically, Canadians have had the second lowest gas prices in the western world. Whether that is good or bad in public policy terms is for you to decide, but our business is to provide Canadians with the lowest-cost fuel at the highest quality and safety, and our industry has an excellent track record of doing exactly that.
There is heightened interest in what we do and how we do it, and the CPPI welcomes that, because though our product may be a commodity, its safety, cleanliness, and low cost are functions of the incredible minds and integrity of the people who work for our members. As is the case with using different light bulbs and energy-efficient furnaces, there are more things that can be done to make consumption more efficient. To that end, CPPI has endorsed the driving tips of the Canadian Automobile Association, and just as an example, yes, tire pressures actually do matter.
On that note, I'm open to questions.
Thank you.
Conservative
The Chair Conservative James Rajotte
Thank you very much, Mr. Macerollo.
I just want to ask a question about your presentation. Would you happen to have a copy, perhaps e-mailable, in colour? Some of the graphs—for instance, the one showing 2007 wholesale gasoline prices—are hard to follow—
Vice-President, Public and Government Relations, Canadian Petroleum Products Institute
In the black and white.
Conservative
The Chair Conservative James Rajotte
Yes. If you could, I would appreciate that. We'd get that to all the members.
Vice-President, Public and Government Relations, Canadian Petroleum Products Institute
I'll send that this afternoon.
Conservative
The Chair Conservative James Rajotte
Okay, thank you.
We'll start with questions.
Mr. McTeague, you have six minutes.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Mr. Baily, Mr. Macerollo, it's good to see you here. It's good to see that some of us have changed hats and some of us haven't.
Two out of three ain't bad, Dane.
Mr. Macerollo, thank you for the presentation. I was interested in what the chair asked for with respect to the graph, because, of course, he knew I was going to ask questions on the differentials between the New York harbour cargo rate and the price. I'm going to find out in about 35 minutes what we'll be paying tomorrow. My sense is that it has always gone anywhere from 2¢ to 7¢ a litre, depending on the circumstance.
Given that we don't have similar gasoline to Buffalo's and Toronto's, and the gasoline sold in Plattsburgh, New York, which is another comparative model that you use, is not the same as the gasoline produced in Montreal, how do you justify, on almost any given day, a wholesale price for gasoline charged to your own members by your refiners, whom you represent, that is higher than wholesale prices at the refinery gate, generally in the United States?
Mr. Macerollo or Mr. Baily.
Vice-President, Public and Government Relations, Canadian Petroleum Products Institute
The first comment I'll make and underscore was made by Ms. Savage from the independents the other day. She said that in fact, while the administrative treatment of the product on either side of the border is different, the product is not actually essentially that different. It's the administrative requirements that cause the difficulties in moving product across the border, but the product specs actually are not that different at all.
In terms of why there would be a price differential between what is sold wholesale here and what is sold wholesale in the States, that is a function of what the market is going to bear.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Mr. Macerollo, your members control virtually 100% of the product in many of my markets, including Toronto. You control the price, the members you represent control the price, and in Toronto those prices are identical at the wholesale level.
Do you then believe either that you have no competition at the wholesale level in places like Toronto or that in fact there is control of the price? I'm not suggesting collusion, because I think it's a bit of a tawdry comment, and I think you and I would agree on that. You worked for the Minister of Industry when a number of suggestions were made to try to restore competition to the wholesale level.
Vice-President, Public and Government Relations, Canadian Petroleum Products Institute
We don't control, as I said to you earlier, Mr. McTeague. The market is North American. It's not uniquely Canadian. The price movements are going to follow very closely what happens at the New York Mercantile Exchange. There are going to be variations from market to market. There are going to be incremental costs that may be associated with transportation and otherwise. They do track each other, and there is a strong correlation. That's what happens, with the exception of western Canada, throughout all of North America.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
I agree with you, Mr. Macerollo, in terms of where this price is going and that we do follow New York harbour as the benchmark, as we do with crude. But the analogy you're giving with gasoline is that it's always 2¢ to 7¢ a litre higher in Canada. We can't trade the product either side of the border. Substitution would only be a penny or two. How is it possible then to make a contention, as you've just done, that it's acceptable and that we don't control that price differential? It seems to me that if Canadians are producing gasoline, the market would bear, say, 68¢ a litre today, not 72¢ in my region or in places like Montreal.
Mr. Baily, you may want to jump in on this as well.
Dane Baily Vice-President, Business and Communications, Canadian Petroleum Products Institute
First of all, there are a couple of pennies in transportation costs. The short-term reality is that the product doesn't flow instantaneously across the border, but if there is a long-term differential, because the products are essentially the same, and if there's an opportunity for a U.S. refiner or a U.S. wholesaler to move product in the Canadian market and make a couple of pennies more, they will do that, at the debit of the U.S. market.
So the product can move across the border. It doesn't move day to day, and that's why, when you take single days or points in time, it can be really misleading. I can pick numbers to say that—you know, I remember one day, I think in 2005, when the gasoline price was lower than crude oil. If our industry had the control that is often ascribed to us, why would we give this stuff away? The markets fundamentally set the price, and we go with that.
When you look in detail, you sometimes ask what happened to Vancouver pricing and how come it distanced—Well, the Vancouver market is a little bit distinct from New York. They tend to follow, but there are special conditions. You can see special conditions happen out west. When the western refining circuit out of Edmonton, which supplies basically Victoria to Thunder Bay, gets very tight, you'll see the wholesale prices rise in that market, and they do that to attract imports. As the wholesale price goes up, what you do is set up a condition to attract imports. If you're short on supply, that's exactly what you want to do. That's how the market balances those situations.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Mr. Baily, I'll get back to the other point in a second, but let me go right to the question of supply.
We in Ontario have been badly affected. Our chairman's area has also been poorly affected. In many respects, during the wintertime in Ontario we were landlocked. We don't just have a price concern, which is being raised to members of Parliament and obviously to your industry and to independents; we have a supply problem. I'm wondering what steps your industry is prepared to take to restore that before it loses what confidence is left in our ability to...as you said, Mr. Macerollo, I think reliability has been put in very serious question.
The second and final comment, to either one of you, is this. The independents have suggested that you provide inventory every week or so to Natural Resources Canada, as many of your parent companies do in the United States. Would this be acceptable to you?
Thank you, Mr. Chair. That's it for me.
Vice-President, Public and Government Relations, Canadian Petroleum Products Institute
The first question, as I understand it, is what members are attempting to do to ensure that there is reliable access to quality product in Canada. I will say to you that they're doing everything they can to make the investments that are necessary to ensure that their operations are running at full capacity, because it's in their business interests to do so.
As for whether or not you are going to see major expansion of refining capacity, be it in a region like Ontario or in other parts of Canada, those will be individual business decisions, where the planners are going to go forward and compete with capital from other parts in their organization to see whether or not they can make a business case to do that expansion.
You will have to remind me what the second question was.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
The independents had suggested providing inventory levels so that we can anticipate supply problems rather than have the shocks we had this summer.