Evidence of meeting #3 for Industry, Science and Technology in the 41st 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.

On the agenda

MPs speaking

Also speaking

Tricia Anderson  President and Chief Executive Officer, Canadian Independent Petroleum Marketers Association
Mark Corey  Assistant Deputy Minister, Energy Sector, Department of Natural Resources
Jeff Labonté  Director General, Petroleum Resources Branch, Department of Natural Resources
Peter Boag  President, Canadian Petroleum Products Institute
Michael Ervin  Vice-President and Director, MJ Ervin and Associates, As an Individual
Allan MacEwen  President, MacEwen Petroleum Inc.; Chairman of the Board, Canadian Independent Petroleum Marketers Association
David Collins  Executive Vice-President, Wilson Fuels; Canadian Independent Petroleum Marketers Association
Dan McTeague  Director, tomorrowsgaspricetoday.com, Lib.
Mollie Johnson  Deputy Commissioner of Competition, Legislative and International Affairs Branch, Competition Bureau
Tom Huffaker  Vice-President, Policy and Environment, Canadian Association of Petroleum Producers
Michael Greenberger  Professor, University of Maryland School of Law, As an Individual
Richard Bilodeau  Acting Assistant Deputy Commissioner, Civil Matters Branch, Division B, Competition Bureau

3:30 p.m.


The Chair Conservative David Sweet

Good afternoon, ladies and gentlemen. Welcome to the third meeting of the Standing Committee on Industry, Science and Technology.

We have quite a number of witnesses here presently, and I'm going to go through their names and the organizations they represent. I just want to remind our witnesses that there is a ten-minute opening statement per organization. I see that some people have multiple representatives here from their organizations. If you are going to have more than one person speak, understand that you are splitting that ten minutes.

From the Canadian Independent Petroleum Marketers Association, we have president and chief executive officer Tricia Anderson; chairman of the board Allan MacEwen, who is president of MacEwen Petroleum Inc.; and David Collins, who is the executive vice-president of Wilson Fuels.

Could you tell me who will be doing the opening remarks for that organization?

3:30 p.m.

Tricia Anderson President and Chief Executive Officer, Canadian Independent Petroleum Marketers Association

I will be.

3:30 p.m.


The Chair Conservative David Sweet

Ms. Anderson.

Then from the Department of Natural Resources, we have Mark Corey, assistant deputy minister of the energy sector; Jeff Labonté, director general of the petroleum resources branch; and John Foran, director of the oil and gas policy and regulatory affairs division.

Who will be doing the opening remarks? It will be Mr. Corey. That's great.

From the Canadian Petroleum Products Institute, we have Peter Boag.

As an individual we have Michael J. Ervin, vice-president and director of MJ Ervin and Associates.

I will start with the Canadian Independent Petroleum Marketers Association for ten minutes.

Just before we start the clock, members, our first panel is from 3:30 to 5 o'clock, and then our second panel is from 5 o'clock to 6:30. At the end we will take a couple of minutes for a budget issue that I need your vote on with regard to expenses of witnesses.

Please go ahead, Ms. Anderson, for ten minutes.

3:30 p.m.

President and Chief Executive Officer, Canadian Independent Petroleum Marketers Association

Tricia Anderson

Thank you.

Thank you very much for the opportunity to participate in this study on the fluctuation of gas prices. As mentioned, my name is Tricia Anderson and I'm president and CEO of CIPMA, the Canadian Independent Petroleum Marketers Association.

I'm joined today by two CIPMA board members. Allan MacEwen is our CIPMA board chairman. He is president of MacEwen Petroleum, a Canadian-owned and operated business for over 30 years, and one of the first marketers to provide ethanol-enhanced gasoline in Ontario. I'm also joined by Dave Collins, who is vice-president of Wilsons Fuel Company Limited based on Halifax. Wilsons Fuels has a long history in the fuel business, and has a retail gasoline network in all four provinces of Atlantic Canada.

High prices and dramatic fluctuations in the price of gasoline are issues of great concern to Canadians and to our members, who are essentially the largest customers of gasoline in Canada. CIPMA represents independent fuel marketers. These are independent business owners who buy their fuel mainly from Canadian refiners at wholesale prices, and then market their product and service offerings to Canadians at retail service stations. Independents are generally family-owned, multi-generational, small and medium-sized enterprises. They have built their representations by being solid local businesses that reinvest profits in their local communities and local economy.

CIPMA members account for approximately 22% of Canadian retail gasoline sales on an annual basis. Some brands you might recognize include Mr. Gas, UFA in the western provinces, Canadian Tire, Parkland Fuel, Pioneer, Can-Op, and McDougall Fuels.

Our members play a key role in the Canadian fuel marketplace. Independent fuel marketers bring healthy competition into what would otherwise be a one-dimensional retail gasoline market. Historically, independent marketers, through efficient operations, responsive tactics, and innovative product offerings, have moderated the price that Canadians pay at the pumps.

Our members do not manufacture or refine the products they sell. CIPMA members purchase gasoline from the limited number of gasoline refiners in Canada. Some of our larger members are purchasing petroleum products numerous times a day from locations across the province, or in some cases across the country.

While we recognize that the committee's focus is on the fluctuation of gas prices, it's important at this time to also consider the impact of the higher prices we have been experiencing over the last several months. They have had a deleterious impact on our members and their businesses.

It may be helpful to use an example. I've developed a chart that I'd be happy to distribute later. It looks at the various elements that go into the price of a litre of gasoline. For purposes of today's discussion I've used the Toronto market and June month-to-date pricing.

The month-to-date pricing based on Kent Marketing Services data is $1.28 a litre. Crude accounts for about 63.8¢ of that, and refining margins for 17.9¢, for a total of 81.7¢, or 64% of the total price going to the producer refinery. These elements of the retail price are completely out of the control of the independent marketer.

Federal excise taxes, GST/HST that includes a tax on a tax, and provincial taxes account for an additional 39.4¢ per litre, or 31% of the overall price. These elements, of course, increase as prices go up. These elements are also beyond the control of the independent marketer.

So far we've accounted for 95% of the $1.28 a litre. The final 7.1¢ per litre, which is around 5% of the total price, is the operating envelope for the independent marketer. Note that this number, which is known as the retail margin, has been around 7¢ per litre in the Toronto market for all of 2011. It has ranged between 4.5¢ and 7.4¢ per litre on average across Canada over the last six years. There has been very little movement on that front.

It's important to note that is a gross-margin number. From the 7¢ per litre, independent retailers need to finance the purchase of the land; build the site; pay property taxes; pay transportation costs for delivery of the fuel; pay for hiring, firing, compensating, and training of site-level and support staff; pay utilities; pay costs related to collecting AND remitting federal EXCISE and provincial road taxes; and pay for all other operating costs, including credit card fees.

Credit card fees are an area of particular concern for our members. Approximately 40% of our members' customers opt to pay by credit card. Credit card processing fees, which are in the area of 2%, rise with every increase in retail gas prices. High credit card costs, currently around 2.5¢ per litre--about 30% of the overall gross margin that our members are dealing with--significantly erode operating margin and profits for our independents during times of higher prices.

Other operating costs increase with higher fuel prices as well, such as fuel surcharges, which increase delivery costs. Convenience store sales, which are often an important contributor to the bottom line of independent petroleum marketers, also drop off as consumers feel their disposable incomes pinched.

Returning to the issue of gas price fluctuations, it is important to note that dramatic price swings significantly impact independent petroleum marketers. As mentioned earlier, our members are essentially the largest customers for gasoline in Canada. They are notified by their suppliers each day between 3 o'clock and 3:30 p.m. of the price for various fuels for the next day at the rack. This is known as “rack pricing”, which refers to the price at the loading rack.

Our members generally have supply contracts with a major refiner as a way to ensure reliable supply of product to meet their business needs. Upon receiving notice of gas prices for the next day, independent marketers determine their purchasing tactics.

Given storage and transportation limitations, our members do not have the flexibility to buy and store fuel when prices are low. That said, larger members will use some specific tactics to mitigate the impact of large price increases, incurring extra labour and transportation costs to secure product before a price increase, or running inventory levels extremely low and keeping drivers on standby to take advantage of announced rack price decreases.

The impact of significant price swings can dramatically affect the viability of our members' businesses, so they commit a tremendous amount of time and resources to deal with big price swings, which come with very short notice.

Dramatic price swings also impact our customer relationships. Although we are price-takers and only control the last 5% of the price, and we're responding to price levels that can change dramatically from day to day, customers take out their frustrations on our members and their staff on the front line. Our members experience an increase in hostile encounters with customers, reductions in important store sales, and an increase in fuel thefts, or gas-and-dash incidents.

We encourage the committee to carefully consider the challenging position of the independent petroleum marketer during this review. As stated earlier, CIPMA members play a key role in ensuring a competitive market for retail gas in Canada.

Our members believe in an open and competitive marketplace. We believe that a closer review of the wholesale marketplace, a review of tax policy related to gasoline, regulation of the credit card and interchange fees, and more public education on fuel prices can contribute to a healthier marketplace for consumers and for our members, the independent small and medium-sized Canadian fuel marketers who are key contributors to Canada and their local communities.

Thank you.

3:40 p.m.


The Chair Conservative David Sweet

Thank you very much, Madam Anderson.

Now we'll move on to Mr. Corey for ten minutes.

3:40 p.m.

Mark Corey Assistant Deputy Minister, Energy Sector, Department of Natural Resources

Thank you, Mr. Chair.

We do have a deck that I was going to walk you through. As well, we did send over a brief in advance, a three- or four-page backgrounder. I'll just walk you through the deck now.

Slide 2 shows that the purpose today is to provide an overview of factors affecting the price of gasoline in Canada. This is the analysis that our department has done, and it's particularly focused on the last couple of years.

Slide 3 underlines that Canada has a market-based approach to gasoline pricing at the federal level. The provinces own the resources. As a result, federal responsibilities mainly relate to interprovincial and international trade and pipeline regulations.

In 1985 the Government of Canada adopted a policy to accept a market-based approach to pricing gasoline, accepting global crude oil prices as the basis of oil and petroleum product prices in Canada. That's the policy we've had since 1985.

As a result, prices are set in competitive markets to provide signals to producers and consumers regarding production, investment, and consumption decisions. I have to underline that in our department, Natural Resources Canada, we do not exercise any control over petroleum prices except in the case of a national emergency. In the case of a national emergency, we would actually have emergency powers.

Now, some provinces do regulate the price of gasoline: Prince Edward Island, Newfoundland and Labrador, Nova Scotia, and Quebec. I should add New Brunswick to this slide as well; it's in the backgrounder, but it's not on the slide. New Brunswick also regulates the price.

As for the impact of these controls, it's generally done to reduce price volatility. Interestingly enough, in a Conference Board study done in January 2001, when they looked at controls, they concluded that this does not necessarily lead to lower prices.

The next slide shows that our department generally plays a role in analysis and information. As a centre of expertise, we deal with petroleum products markets and analyze data on gasoline and crude oil markets and prices. This means: recognizing the importance of providing transparency and understanding of gasoline markets; producing analytical studies on the energy and petroleum product security; and finally, producing information for Canadians via the Fuel Focus bi-weekly report. In addition, we provide programs and information on energy efficiency and conservation efforts.

Our role is primarily one of analyzing markets and making sure we understand them. There are a lot of people who use the information that comes out of Natural Resources Canada, including members of Parliament, the Competition Bureau, companies that purchase fuels in the marketplace, and the general public.

We have a fuel focus website, which is updated weekly, and Fuel Focus, a report that is produced every second week, so we track these things.

Fuel Focus provides information on gasoline prices and markets so that Canadian producers and consumers can make informed choices about energy production and usage.

Also, as I mentioned, the Office of Energy Efficiency offers a number of programs, websites, and publications to assist Canadians in reducing the cost of transportation by reducing their consumption of fuel.

What I'd like to do now is turn it over to Jeff Labonté, director general of the Petroleum Resources Branch, and get him to take us through the analysis of recent gasoline price fluctuation and some of the factors we've seen that are behind them.


3:45 p.m.

Jeff Labonté Director General, Petroleum Resources Branch, Department of Natural Resources

Thank you for the chance to address this committee.

Looking at the differentials and price fluctuations, we can see that the average price for Canadian gasoline has climbed steadily since 2011 from about $1.10 a litre in January to $1.35 a litre in May. It has recently declined to $1.27 in June. So it demonstrates the rise and the variation of the pricing.

The peak for Canadian average retail prices at the pump, if anyone was looking for it, was in 2008, in July, when it reached $1.39 per litre for a period over a weekly average.

When we look at slide 7 in the presentation and the material we have from different cities, we can see that variations in price occur at many different urban centres across Canada. We track prices in larger urban centres just to identify and look at variations and look at the pricing structures. Our graph that we have provided here provides data from April to June this year, looking at Calgary, Montreal, Ottawa, Toronto, and Vancouver. One can see quite a bit of variation between those.

Looking at slide 8, in terms of the components, we see the variation in pricing of gasoline in Canada is predominantly driven by three major elements. Those elements are predominantly the crude oil purchase prices, and in the Canadian context this is half from western-produced crude oil in Canada or offshore in the Newfoundland and Labrador area, as well as imported crude oil that comes predominantly from the North Sea as well as from North Africa, from which the eastern part of Canada all the way to Toronto generally imports crude oil.

The second major factor that looks at the cost structures around gasoline is the refining and marketing cost and the margins associated with the refiners, as well as the retail distributors and different modalities between the business models that different retail outlets use to bring their product to market to consumers in Canada. I think the previous speaker addressed a number of those points from the independent perspective.

A third point that we'd want to look at is the other major variation between the different cost structures in gasoline, which is our provincial, federal, and municipal taxes. Those taxes take various forms and they differ greatly from region to region. There are further data that I can present on that in the next few slides.

Slide 9 looks at tracking from 2007 to 2011. The green graph demonstrates the price of crude oil. The red graph is the price of refining and marketing margins, when added. The purple is with the taxes. One can see that the price of gasoline tracks very carefully with the price of crude oil and that the variation is simply between the differences of the other two aspects. As crude oil increases in world markets, so too does the price of gasoline for consumers at the pump.

Moving to slide 10 and looking at refining and marketing costs and margins, I want to draw attention to two things. The first is the blue or purple line. The running straight line shows the average. If you have black and white it would be the top line in the graph, which provides the refining margin, which currently is slightly higher when one looks at an average across Canada, and levels. But one would note that as you look at the trend line, it is a cyclical graph, and certainly it is within the normally observed ranges.

I want to draw attention to one other aspect behind the model in this particular graph. The model looks over time at the benchmark price for crude oil on North American markets. If I wanted to draw your attention to November 2010, from November 2010 the benchmark price for crude oil in North America, which has traditionally been tracked very closely to the global crude price, separated so that North American crude oil price is actually lower than the benchmark crude oil price across the world. So given that Canada both exports and imports crude oil, the model hasn't taken up the variation that actually exists between global crude prices and North American crude prices.

The variation between those today is about $20 per barrel but it has ranged over the last seven months between $3 and $20 per barrel. So when one takes the consumption of imported crude oil at a higher cost into account in the model, the model actually reduces the margin that refiners see by about 6¢ per litre, which means that it is very close to the actual average that has existed for the last number of years in Canada. So one of the factors is the variation in the price of crude oil and what type of crude oil refiners are consuming when producing gasoline.

The second part is about the distribution in terms of retail margins, which is the bottom line. If one looks at that, one can see that the current retail margin is nearly exact to the average over the last number of years, so the variation in terms of that margin is not significant from a statistical point of view.

Turning to the third aspect on slide 11, provincial, municipal, and federal taxes, the federal excise tax on gasoline and diesel has remained constant at 10¢ and 4¢ per litre respectively. Across Canada the average provincial and territorial taxes were 5.5¢ per litre higher in 2011 than they were in 2008. Those variations are due to a number of factors. Certainly those have to do with differences between different transportation, carbon, and different levels of provincial taxation.

If one turns to slide 12, we provided examples of the different variations of federal tax, provincial tax, integrated harmonized tax, as well as carbon and municipal taxes that are available in different parts of the country. In British Columbia there's a carbon tax, for example, as well as a municipal tax. In Montreal one also finds a municipal tax. So those add to the cost at the pump for consumers in those particular parts of the country.

In summary, gasoline prices tend to closely track crude oil prices, refining and marketing costs, and margins tend to be cyclical. Those margins are slightly higher in some cases at this point but within the normal range. Certainly they have been part of the dynamic. The major differences in gasoline in different cities tend to be toward the different levels of taxation.

Thank you very much.

3:50 p.m.


The Chair Conservative David Sweet

Thank you very much.

Thank you for quite a bit of analysis is those ten minutes, Mr. Labonté.

Now we'll move on to Mr. Boag for ten minutes.

3:50 p.m.

Peter Boag President, Canadian Petroleum Products Institute

Thank you very much, Mr. Chair and members of the committee, for this opportunity to shed some light from a refiner and marketer perspective on the issue of fuel price fluctuations and transparency in fuel pricing. CPPI represents the companies that produce and supply gasoline, diesel, aviation fuel, home heating oil, and a variety of other petroleum products.

First, a few quick facts about our industry. CPPI members operate 16 refineries across the country that employ 17,500 workers. We supply 12,000 retail outlets with fuels across Canada. Retail operations across Canada--and certainly Ms. Anderson spoke to that--employ in total some 82,000 additional people. Our industry members invest on average $2.8 billion annually, and they contribute $2.5 billion to Canada's GDP on an annual basis. In the last ten years our industry has spent $8 billion on environmental improvements at our refineries--an investment, I might add, that has not produced one more drop of capacity in terms of producing fuels for Canadians.

Our industry understands Canadians' frustration over gas price volatility as they deal with the many decisions they need to make to balance their family budgets. And while some consumers may believe that gasoline pricing is not transparent, I would contend that the opposite is actually true.

Let me begin, then, by explaining the four factors that affect the pump price. Mr. Labonté has certainly touched on these, so some of this might be a little repetitive. Nonetheless, these factors are transparent, and they really are subject to unique influences that, independent of each other, can cause pump price changes. The first factor is crude oil prices; the second is the wholesale price for refined petroleum products; the third is retail markup; and the fourth is taxes.

Crude oil is a commodity that trades in world markets. The market price of crude oil at any time is a function of commodity traders' assessments of supply and demand conditions, both current and future. These assessments take into account factors such as economic conditions, natural disasters, and geopolitical or military events, especially in major oil-producing regions of the world.

The daily trading price and future price for various crudes--West Texas intermediate, for example, and Brent crude, which is another example, are set and posted on commodity exchanges, such as the New York Mercantile Exchange. They're quoted in newspapers, and they are available online at any time during the day.

Prices generally listed are futures prices, not today's spot price, which can sometimes confuse the relationship between crude prices and pump prices. Futures prices, as the name suggests, are a bet as to what the crude oil price might be at some future date.

Similarly--and I think this is an important point--wholesale gasoline is a commodity that is traded daily on commodity exchanges such as the NYMEX. However, unlike crude prices, these commodity prices, determined through trading activity, are rarely quoted in the media. Yet, since retail gas dealers buy gasoline, not crude oil, this wholesale price is a more relevant factor than that of crude oil in influencing fluctuations in the retail pump price.

Although crude oil is one factor impacting wholesale gasoline prices, underlying supply and demand conditions for gasoline, both current and anticipated, can often be more important in influencing trading decisions and ultimately the wholesale price of gasoline. Factors such as planned refinery maintenance, unplanned incidents, inclement weather, temporary surges or declines in demand, and gasoline inventory levels all have the potential to impact the supply and demand balance for gasoline and result in wholesale commodity price fluctuations independent of the price of crude.

As a result, wholesale prices, and consequently retail prices, can be increasing even when crude oil prices are decreasing, and vice versa. There's a chart in the submission we handed out that tracks the price relationships of crude, wholesale gasoline, and retail gasoline over the past four years.

Overall, Canada is a small segment of a large integrated North American fuels market. There is no unique Canadian market for fuels; hence wholesale prices in Canada generally align with prices in adjacent U.S. markets.

When commodity trading causes U.S. wholesale prices to rise, Canadian wholesale prices generally rise to ensure the product remains in Canada. Otherwise, U.S. buyers would purchase lower-priced Canadian fuel, leaving Canada in short supply.

Conversely, when U.S. wholesale prices decline, so too do Canadian prices. If not, Canadian retailers would end up importing cheaper U.S. wholesale fuel.

Local wholesale prices take into account the cost of transportation from the supply point to a retail destination, so you will see differences in wholesale prices from community to community across the country.

Pump prices fluctuate up and down, primarily in response to changes in wholesale markets, and while wholesale prices generally closely track crude prices, that is not always the case because of unique supply and demand dynamics in the commodity of gasoline. When wholesale prices and conditions are changing rapidly, pump prices can become quite volatile. The result can be a sudden change in the price as dealers move to maintain a viable marketing margin or attempt to gain a competitive advantage over competitors. These local price movements and volatility are signs of a highly competitive marketplace, although many consumers perceive the opposite.

Retail margins and taxes are the final factors that affect pump prices. Retail margins, as Ms. Anderson has indicated, include all costs of operating a retail operation, not just the profit, and as she indicated, the majority of retailers are independent businessmen and women who make their own pump price decisions, based on their business plans, even though they may do business under a major marketer's brand. Only 16% of all gas stations come under the price control of the three major national oil companies. And 74% of all gas stations in Canada are price-controlled by individual outlet providers or non-refiner marketers. They also offer a range of services, such as convenience stores, car washes, and automotive services.

Wholesale prices do not include tax, and that can often confuse the comparisons people want to make between the wholesale price and the retail price, because the wholesale price does not yet have the tax included. Retail prices include federal and provincial taxes, and in some municipalities, such as Vancouver, an additional local tax. In the submission there is a bar chart that shows the different prices and the different price components in major cities across the country.

Tax differences are a key reason why pump prices differ across Canada and are indeed a major reason why pump prices are generally lower in the U.S. than in Canada. Canadians pay, on average, over 35¢ per litre in fuel taxes, while in the U.S., the average tax per litre is only 12¢. That is an average difference of 23¢ per litre.

Finally, we should not underestimate the influence consumers have on pricing. Consumer behavior has a direct effect on pump prices, as retailers compete for their business. Consumers shop while driving, making purchasing decisions from highly visible prices on the largest price signs of any retail business.

Transparency is a hallmark of gasoline pricing. At every level of the value chain, price components are available and accessible for public viewing and consideration. They are critical for those interested in the value added through the refining, distribution, and marketing of petroleum products.

Thank you again for this opportunity to provide some insight into the factors that influence gasoline prices. I hope that this information is useful to members of the committee. We have more information available on our website, so I would encourage you to view that or to call us at any time if you'd like more information.

I look forward to your questions.

4 p.m.


The Chair Conservative David Sweet

Thank you very much, Mr. Boag.

Now we will move on to Mr. Ervin, for ten minutes, please.

4 p.m.

Michael Ervin Vice-President and Director, MJ Ervin and Associates, As an Individual

Thank you.

Good afternoon, and thanks for your invitation for me to appear today before this committee on the subject of petroleum prices. The committee's invitation was based on our firm's reputation as an impartial expert in the field of petroleum refining and marketing. This reputation is reflected in the wide variety of clients and organizations we do business with, including federal and provincial governments. In fact, the data published on the NRCan website is collected by us in major part, but also large institutional consumers of petroleum products, academia, and of course oil companies themselves, ranging from multinationals to small regional independents.

Over the course of 30-plus years of my experience in this industry, the majority as a consultant in the sector, my firm and I have conducted numerous studies into the nature of petroleum marketing and competition relating to the sales of petroleum products, as well as ongoing monitoring and analysis of fuel prices, particularly retail gasoline prices and their constituent components.

One word that might characterize the impetus for this committee's current focus on fuel prices would be the word “transparency”. How transparent are pump prices, and what can be done to make them more so? My remarks today will address those two questions, and will provide some recommendations.

I'll apologize in advance that some of my comments might sound very similar to those of witnesses who have preceded me, but I think that does illustrate some common principles at play here.

To evaluate the transparency of the petroleum industry with respect to pump prices, one must look at the transparency of not one, but three, distinct markets: crude oil, wholesale fuels markets, and of course retail fuel markets.

Crude oil, being the raw material from which gasoline is made, is perhaps one of the most transparent of all commodities. With respect to gasoline, for what other product can a reasonably well-informed person on the street tell you its raw material cost? Many media outlets report crude oil prices on a daily basis, and the resulting transparency leads to the inevitable question, if crude oil prices dropped yesterday, why has the pump price not dropped today?

This typical observation actually illustrates one of the consequences of transparency, and this is that in an attempt to bring this transparency to a general audience, other equally available but critically important facts are often left out by the mainstream media. I think that's in an attempt to simplify things for the audience, not to mislead.

For example, when we hear that the price of crude oil today is $93 per barrel, as it was a couple of days ago, it is seldom reported that this is the price for delivery at Cushing, Oklahoma, not at a refinery in Toronto, for example. It is seldom reported that this is the price for a particular grade of crude oil, whereas other grades might be heavier and much less expensive to buy, but conversely much more expensive to process into gasoline. It also doesn't reflect differences in crude oil that might be supply and demand driven, as opposed to being based on grade differentials as well. WTI and Brent crude, which come from the U.S. and the U.K. offshore respectively, are similar in quality, but there sometimes can be upwards of a $10 per barrel difference in pricing as a result of supply and demand factors that play upon them. Most importantly, it's seldom reported that the price quoted is based on futures market trading, and not what refiners might be paying today or tomorrow, as Mr. Boag had mentioned as well.

These are the kinds of facts that are needed to better understand the relationship between crude oil prices and those at the pump, and even then they would not fully explain that relationship. The reason for this is there is a far more important benchmark to consider than the price of crude oil if one truly wants to understand the nature of gasoline prices, and that benchmark is the wholesale price of gasoline. Because petroleum marketers and dealers buy wholesale gasoline and not crude oil, it is the wholesale gasoline price that most directly influences the price at the pump, not the crude oil price.

Wholesale rack prices for gasoline do not simply follow the crude price. Although over the long term we see a relationship on a day-to-day basis, there are differences, and sometimes significant ones, because gasoline is subject to supply and demand variables of its own, causing its wholesale price to rise in times of tight gasoline supply, even if prevailing crude prices might be falling, or vice versa.

Wholesale fuel prices are also transparent. Many petroleum refiners post their rack prices on the Internet for all to see, and other organizations, such as ours, MJ Ervin and Associates and The Kent Group, collect and make available consolidated reports of these rack prices.

Unfortunately, the mainstream media do not routinely report rack prices, leaving many to continue to use crude prices as the basis for trying to understand yesterday's change in the pump price, which is, put simply, a very poor if not useless predictor of gasoline's day-to-day price movements.

This brings me to the matter of pump price transparency. Gasoline is fairly unique in its ability to be comparison-shopped for at sixty kilometres an hour. Increasingly, consumers are also able to comparison-shop for gasoline prices before leaving home, using the Internet or a smart phone. I would therefore suggest that retail gasoline is one of the most price-transparent consumer products in Canada by virtue of its price transparency at the levels of crude oil, wholesale rack, and retail markets.

Even if one agrees that fuel prices are transparent, that stills beg the question, yes, but are they fair? To properly answer that question, one must look at the four components of the pump price individually. Those four are the crude cost, the markup by the refiner from crude to wholesale price, the markup by the marketer from wholesale to retail price, and of course taxes.

One might suggest that crude oil prices are too high, driven by speculators or by oil cartels. For whatever reasons, Canadian producers sell crude oil at world market prices, and Canadian refiners buy that crude at those same market prices. Simply put, the price of crude oil is beyond the control of the Canadian oil industry.

Similarly, the amount of markup by the refiner, referred to in the industry as the crack spread, is something that cannot be arbitrarily set by Canadian refiners. Wholesale gasoline prices must be competitive with those in the United States. If they are too high, Canadian marketers will flock south of the border for their supplies. If they are too low, U.S. marketers would deplete Canadian fuel inventories, leaving consumers with low pump prices but no gasoline to sell at those low prices.

Is the retail markup fair? Fairness is a very subjective term, of course, but there are some objective data that would suggest an answer to that question. The fact that the number of retail outlets has declined from over 20,000 to under 13,000 in the last 15 years would suggest that this is not an easy business from which to profit. The fact that some traditional players in the retail gasoline business have in part or in full divested themselves of the day-to-day ownership or operation of their branded networks would also suggest that retailing of gasoline has not traditionally made a strong contribution to the corporate earnings of integrated oil companies. Finally, the fact that for the past 20 years the gross retail markup on gasoline in Canada has remained virtually stagnant in nominal terms and has declined in inflation-adjusted terms speaks to the fairness of the retail price.

I therefore suggest that a number of market mechanisms at the levels of crude oil, wholesale, and retail markets each provide for the fairness of pricing of petroleum products, although a fair price may not necessarily be a low price by the standards of the consumer. If, however, fuel prices are fair, then why is there such doubt about the fairness of pump prices?

Firstly, I think it's useful to understand that gasoline is a fairly unique commodity product among consumer products. It is what marketing academics would refer to as a low-involvement purchase. Unlike most other goods we buy, we don't care about gasoline's colour, smell, taste, or sense of security or well-being. As a result, the focus tends to be on the price itself.

Secondly, the visibility and volatility of pump prices, the very things that are indicative of its competitiveness, actually create the opposite impression in the minds of many consumers. This is a huge paradox: the significant transparency of the petroleum industry is the very reason why it has been strongly competitive for decades, yet the same transparency in many ways creates the opposite impression in the minds of the media, the public, and often regulators, who take their direction from elected officials.

I will conclude by making one recommendation, and that is to improve what is already a very transparent industry to be much more so by providing more comprehensive data on fuel prices across Canada. Right now our company, for instance, surveys pump prices on a weekly basis. With today's availability of electronic transfer of data, there's no reason why the coverage of fuel prices across the country cannot be done on a 24/7 basis for virtually every site in Canada. This would create a wealth of information and a wealth of transparency, which only requires some assurances from industry, and particularly the Competition Bureau, that the provision to a collector such as ours would not be seen as being in contravention of the Competition Act.

Again, these recommendations would make the industry even more transparent, but of course in an industry such as this there will always be regular scrutiny, such as now in times of increasing prices.

Thank you.

4:10 p.m.


The Chair Conservative David Sweet

Thank you, Mr. Ervin.

Thank you to all the witnesses for their opening statements.

Now we'll move on to our rotation of questions.

Mr. Lake, you have seven minutes.

4:10 p.m.


Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

Thank you, Mr. Chair.

Thank you to the witnesses for good presentations, a good way to start off the industry committee for this Parliament.

I'm just going to ask a question that my constituents would ask me, which I wonder about on a regular basis. It's pretty straightforward. You have four gas stations on the same corner; one of them raises the price and within 15 minutes the other three all raise the price as well. As scientific as the pricing is for gas, it can't be that scientific. That's what most consumers would say when they see that happen. Maybe you could explain why the prices seem to go up so quickly, all together at exactly the same time, particularly on a Thursday before a long weekend.

4:10 p.m.

Allan MacEwen President, MacEwen Petroleum Inc.; Chairman of the Board, Canadian Independent Petroleum Marketers Association

First of all, at the retail level, we refer to it as hyper-competitive. Often when there's a price increase like that, where one goes up and the other three follow immediately—which doesn't always happen quite that fast—it's because we're selling at cost or sometimes below cost, and we're pretty anxious to get to a positive margin. It can happen, but it's happening at the street. Our operators, the people who operate our stations, part of their job is to advise us of what the market is. If we've got a station at one of those corners, and the operator sees a competitor's price going up, he's to advise us immediately. We make a decision whether or not he puts the price up. We may say no, we don't want it to go up because we don't think that's a realistic number, but usually if there's a price increase it's related to wholesale fuel prices and crude and so on.

With regard to the comment about prices going up before a long weekend, if that happens, it's purely coincidental that wholesale fuel prices and crude have gone up, and if you get into the data that's available from the various organizations, you'll see that's the case. The industry...why would we do that? I think it would be very primitive to take advantage of our customers and say they're going to be driving more this weekend so we're going to gouge them. We don't do that. It's a coincidence if that happens. That's my view.

4:15 p.m.


Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

Mr. Boag, do you have anything to add to that?

4:15 p.m.

President, Canadian Petroleum Products Institute

Peter Boag

Actually, I think Mr. MacEwen, who is actually a station operator, has answered that very well and I would defer to him, because that's the kind of real, on-the-ground experience that can probably illustrate that issue better than I can.

4:15 p.m.


Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

Now to the Department of Natural Resources officials. I'm looking at slide 10 of the slides you had there, and it seems to me that the retail margin cost stays very, very close to the line. You referred to the cyclical nature of the refining margin costs, but I'm not sure I heard a reason for why it's so cyclical. It does seem as if it goes up and down pretty substantially, but I'm not sure I understand the reasons why that happens.

4:15 p.m.

Director General, Petroleum Resources Branch, Department of Natural Resources

Jeff Labonté

With the refining margin and cost structures, you have to take into account that on an annual basis, refineries often have to have downtime for maintenance and have investments made in capital to keep the production facilities at the optimal level to be producing.

There are changes in the variety of crude oils that refineries use that often require them, on a kind of cyclical basis, to change again how they produce gasoline. Refineries are amazingly technologically sophisticated operations that try to extract the most out of every ounce of oil or crude they're putting in. So the cyclical typically has variations related to those aspects.

The other aspect is the source and price at which they're acquiring the crude. I had mentioned earlier the variation between the offshore crude and the crude that's from North American production. We're seeing some variation--what you would see here--in terms of the line that's moving as opposed to the average, which our model hasn't accounted for because of the variation between North American prices and global. It hasn't, for a long period of time, had a huge differential. Right now it's quite substantial and has been increasing over time.

We're looking at adjusting our model. We ran some other aspects to the model before we arrived here just to demonstrate in our minds that the cyclical nature is actually much more smooth when you look at the pricing of crude oil from global and North American markets.

So that's one thing to look at from the perspective of what aspects feed that particular variation.

4:15 p.m.


Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

There was some mention--and I know others have talked about it--of price speculation in the futures market and how that affects the price of gasoline. Can you explain that a little bit?

4:15 p.m.

Director General, Petroleum Resources Branch, Department of Natural Resources

Jeff Labonté

We can certainly try to give you some more information on it, but some of the other folks at the table probably have equally sophisticated views of it.

As was pointed out by a number of the speakers, the price of what the future cost will be of oil is speculation: it's what people believe the price is to be in the future. So that's what we typically will see in the media. It may not actually be the price at which they can acquire crude oil and get it shipped to or brought to the location at which they want it; it's a price at a place in the world.

In North America, it's typically Cushing, Oklahoma, which is the West Texas intermediate. In Canadian terms, you have an Edmonton par, which is delivery to Edmonton. But getting from Edmonton to Sarnia, there is a fair bit of distance that has to occur through pipelines and through tolls and a number of other things. Similar in the world is Brent, which is delivered to the U.K.

So it's the variation of moving the crude around as well as the type of crude we're speaking to. You see a lot of simplifications to help people understand, but they don't help us appreciate the variation we're trying to understand as consumers as it moves from a future to a reality to delivery, and then to actually being moved into a good that can be moved to a retail outlet for sale.

4:15 p.m.


Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB

Does anyone else want to comment on that? Mr. Ervin, or Mr. Boag?

4:15 p.m.

President, Canadian Petroleum Products Institute

Peter Boag

I just have a couple of comments with respect to that.

Some of the cyclical aspect you're seeing in those charts is seasonal. You do have the summer driving season, when there is a higher demand for gasoline. Certainly the supply and demand balance changes as you go into the spring as refiners try to build inventories of gasoline. That has an impact on the refining margin. Subsequently, as you go into the fall season, you see a drop-off in the demand for gasoline, so that has an impact on capacity utilization.

Then you have the seasonality of other products. Let's not forget that gasoline is only one of the products that are produced from a barrel of oil. One barrel of oil doesn't equal one barrel of gasoline. There are a number of other products, gasoline being the highest-value product.

So there are seasonal fluctuations with respect to the overall demand of what component of the barrel of oil is required for gasoline.

4:20 p.m.


The Chair Conservative David Sweet

That was the last question in that round.

Now we'll go to Mr. Masse for seven minutes.

4:20 p.m.


Brian Masse NDP Windsor West, ON

Thank you, Mr. Chair.

I'm going to give a couple of minutes of my time to Mr. Thibeault.

One thing that was missed in the discussion here, and that's really important, is that this industry is the Canadian public's own product. It's operated by foreign multinationals that by far and large have had record profits and record bonuses and record payouts.

One chapter that hasn't been touched, and I'm rather surprised, is how much public subsidization goes into this industry. It's massively subsidized to the billions of dollars per year through a number of different things. I'm going to list just some of them that are important to note.

There are just the general corporate tax cut reductions that have been taking place over the last number of years. There is no doubt about that. I will remind everyone here that we're borrowing that money right now and paying interest on it until we get into a surplus right now. There's also the flow-through shares subsidy that's available, and the Canadian exploration expense subsidy. The Canadian development expense subsidy is available. The Canadian oil and gas property expense subsidy is available. And the capital cost reduction allowance subsidy is available.

When you take the last figures that are available, from 2008, this industry paid an average of 10.5% federal tax. Meanwhile, you had the manufacturing sector or small businesses paying 16.5%.

To Mr. Boag and Mr. Labonté, why do Canadian taxpayers have to massively subsidize this industry, given the fact that it has this profit margin in its multinationals?

4:20 p.m.

President, Canadian Petroleum Products Institute

Peter Boag

I'll take a first crack at that question, Mr. Masse.

First of all, I'm here to represent the downstream component of the sector. That's the refining and supply, and in some cases the retail component of the business. That's very much a manufacturing industry, and certainly that component of the industry enjoys the same level of taxation and the same level of investment tax credits, etc., as any other manufacturing industry enjoys.

Some of our members are not integrated member companies. In fact two of the largest refiners in Canada are refiners only. They do not have an integrated business model. They do not have upstream assets.

From the perspective of the refining component of the industry, this is an industry that's treated the same with respect to tax treatment and subsidies as any other component of the manufacturing sector.