Industry Committee on June 22nd, 2011

[Mark Corey]

Mr. Chair, I would mention that all the measures that were mentioned really fall within the purview of the Department of Finance. We would probably need to get people from the Department of Finance here to explain the details.

I would mention that some of those are either/or. The companies don't get all of those. And I'd also mention that there was further reform in the last budget, and there were changes, for example, in a number of measures, which affected some of those that were mentioned.

[Brian Masse, NDP, Windsor West, ON]

Yes, they still exist. If those subsidies were then phased out, do you have any reason to believe the industry would be harmed by that? I understand you're suggesting it's a finance department issue, but would this massive reduction of public subsidies out of the industry have any repercussion, given their bottom lines?

[Mark Corey]

Again, Mr. Chair, I would have to defer to officials from the Department of Finance to go into more of the details.

I would point out that a number of the measures that are mentioned are things that are...there are deductions, and there are things that are available to a number of various industries. I suggest you would need someone from the Department of Finance to go into the details of those measures.

[Brian Masse, NDP, Windsor West, ON]

Similar to that--but I think it should be in your department, and I invite others to share in this--is with regard to the reduction in the GST that took place a number of years ago. What happened to that? We've seen profits rise. We've seen the price of gasoline rise. What happened to that 2¢ that was removed? Who benefited from that?

[Jeff Labonté]

I think it's fair to say, given all the factors we talked about that go into the pricing of gasoline, I can't give you the specifics to that particular moment when the GST was reduced by 1¢ and another 1¢ at a particular point. But at the point, if wholesale prices of gasoline were rising or crude oil prices were falling, one would have seen volatility in the price of gasoline based on all the factors. In other cases you see the harmonization between different rates of taxation. So there are a whole number of factors.

I can't comment on the correlation between a reduction in the GST and profit growth of any oil companies or otherwise.

[Michael Ervin]

A change in the GST, if it were going up, would generally be passed along to the consumer the very next day. If a decrease in taxes were not passed along to the consumer, through our analysis, we would have seen a sustained increase in the rack-to-retail margin. We don't see that. It is very evident that underlying changes do get passed along to the consumer. Much in the same way, when wholesale prices go down, as they often do, we don't see retailers simply holding on to the extra margin. Because of competition, that margin drops to a sustained level, to an historical level in whatever market is applicable. So we do not see dealers benefiting from drops in the underlying costs they have.

[Brian Masse, NDP, Windsor West, ON]

The industry in general, though, has received more profits than that, and I don't think it has been conclusively proven that consumers benefited from that reduction.

I'm going to pass my remaining time to Mr. Thibeault. Thank you very much for answering the questions.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you very much.

I know we're all here right now looking at gas price fluctuations, and we're all pointing our fingers at the big oil companies.

Ms. Anderson, you mentioned credit card rates and the effects that those interchange rates are having on the smaller retailers. Maybe you can elaborate a little more on some of those costs and how that's affecting the gas prices.

[Tricia Anderson]

Obviously, as I mentioned earlier, credit card fees are a percentage of the retail price, regardless of what products you're purchasing. What we see in the retail gasoline market is a high incidence of customers choosing to purchase by credit card, for lots of different reasons--convenience in terms of accounting for their purchases; maybe for business-related expenses, as well. So we see about 40% of customers choosing to use credit cards. As prices go up, as I mentioned, there's a direct relationship in terms of the 2% or 2.5% retailers are charged for credit card processing. Of course it increases with every increase in gasoline pricing.

As I mentioned, right now we're looking at a situation where credit card processing costs are about 30%, roughly, of the operating margin the retailer has to work within. With the balance of that, the other 70%, they're having to cover all of their other operating costs.

Independent retailers very much feel the pinch with rising prices and with customers continuing to use credit, perhaps even more so in a situation in which they're challenged with cashflow. And it really is impacting their ability to continue to operate. As I mentioned earlier, these are many small and medium-sized businesses that are providing, in many cases, vital services in rural communities and smaller communities and which are very much being impacted.

[The Chair, Conservative, David Sweet]

Thank you, Ms. Anderson. That's all the time we have now.

Now we'll go over to Mr. McColeman, for seven minutes.

[Phil McColeman, Conservative, Brant, ON]

Thank you all for coming and helping us gain some education here.

Mr. MacEwen, you mentioned in your comments to the committee, in answer to one of Mr. Lake's questions, I believe, that at times you're selling at a loss. In other words, you're selling below your cost—I think those were your actual words—which would imply that at other times you're charging a much larger margin than the average margin. Is that the case?

I come from a business background in housing, which is similar to that. There are definitely peaks and valleys. Is that how retailers get to the average?

[Allan MacEwen]

No, it's not. Just because we end up selling below cost from time to time doesn't mean we charge an extra x number of cents per litre at other times at other locations. It's extremely competitive at the retail level.

[Phil McColeman, Conservative, Brant, ON]

I hear you about the competitiveness. What I'm trying to understand is the fluctuations that happen from time to time. Having owned and operated a business all my working life, I understand that at the end of the year I need a basic margin with which to operate my business, or there's no sense having a business. At certain times my margins were higher and at other times they were lower, and I came out with the average. So if you're selling below cost, that would mean that it would have to be much higher than the average at other times.

Does that make any sense?

[David Collins, Executive Vice-President, Wilson Fuels; Canadian Independent Petroleum Marketers Association]

Yes, absolutely. I would say that retailers do contribute to the price volatility. You're right. But what ends up happening, and what Allan's trying to point out, is that because it's so competitive, it will fall down. In some areas where motorists see large increases overnight right away, it's an effort to try to scramble back to what we would like to get to as a margin. So if we average 7¢, and we're down at zero for a day or two, you'll see us try to climb back to 8¢. And if that happens, then you'll see an 8¢ swing overnight.

At the end of the day, and to take full responsibility, retailers do set the price. How much impact do we really have at the end of the day? Are we contributors? Are we flywheels to that? Do they accentuate those price changes? Yes, but we tend not to profit from them. We tend to, with rising prices, find that our margins get wrecked, to put it simply. At $1.28, the banks are making far more than we are out of the sale of gasoline.

[Phil McColeman, Conservative, Brant, ON]

I appreciate your being candid about that, because you see, that makes sense to me. At the end of the year, when you look at your financial statements, you say that this is my margin on something, and therefore I should be in business because it makes sense, or not. It has to do with the fact that you are, at times, making larger margins and at other times are making smaller margins.

[David Collins]

Right.

[Phil McColeman, Conservative, Brant, ON]

I think that's something, though, that I'm not so sure is being communicated all that well or has been communicated here today. It explains some of the fluctuations and why they happen, at least at the retail level. So I appreciate your being candid about that.

This is a question for Mr. Labonté. I noticed that your latest Fuel Focus report mentions that the price of a barrel is reflected almost instantaneously in the price of a litre, notably because retailers use the last-in, first-out accounting method. In layman's terms, can you explain for Canadians what that method is, and how it could conceivably lead to price fluctuations?

[Jeff Labonté]

I can give you the lay definition, what it would essentially mean, but some of the other industry experts could probably talk to the motivation and how it actually happens.

As the price of crude oil would increase, retailers and other distributors would see what the future cost of replacing, roughly speaking, their inventory would be. So if crude oil is increasing rather quickly, the cost of buying gasoline in the future is also going to rise because refiners are going to be buying at a higher cost. Therefore, they are thinking about how much it is going to cost to replace the inventory they have. There are other huge aspects within that in terms of gasoline and wholesale, which others could probably speak to, but the first-in, first-out, how much it costs to get the replacement, is the simplest part of the concept.

[Phil McColeman, Conservative, Brant, ON]

I'd like to go to Mr. Ervin then.

Your independent analysis of the industry and what you've said here today I think focus more on the wholesale price of gasoline being the benchmark in terms of where the retail price will be versus the crude oil price. But what we've just heard, I think--and correct me if I'm mischaracterizing this--would be that people are actually looking at that crude oil price and making their own speculative judgment as to what the future price might be.

[Michael Ervin]

I would suggest that a large number of dealers don't know what FIFO means. When a dealer decides what price to set for gasoline today, that dealer looks at two things. One is what it cost to buy the load of fuel that he has in his tanks today, now. The other is, looking down the street, the competitors' prices. He has a decision to make. If that load is more expensive than the previous one was, unless he makes a retail price change, he will lower his rack-to-retail margin, perhaps down to a level that is uncomfortable for him. It might be comfortable for other dealers, though, I might add, because within a city dealers have varying throughputs that can give them less of a margin need. They can sell more convenience goods, which means they have less of a margin need.

So the level of comfort varies from one dealer to the other even within the same market.

Going back to that dealer, he's going to have to decide whether to keep his price the same--because if he raises it the guys around him might not follow--or bite the bullet and raise the price and hope to heck that the other competitors will if they are feeling the same pain. It has very little to do with accounting, and I really would disagree with Mr. Labonté on that mark.

[The Chair, Conservative, David Sweet]

That is the end of your time, Mr. McColeman.

We now move to Mr. Regan for seven minutes.

[Geoff Regan, Liberal, Halifax West, NS]

Thank you very much, Mr. Chairman.

Mr. Chairman, we have been hearing quite a bit from the government over the past while about the fragile state of the economy. We have heard that phrase over and over again. Maybe we should be talking about the fragile state of the Canadian consumer, particularly in view of the kind of impact we're seeing from rising prices of food and fuel. That has a particular impact on people with a low income who pay a high proportion of their income for those items.

There was actually a Canadian Press story today suggesting that the consumer sector was a drag on the economy in the first quarter of this year. In fact April's data suggested that consumers in Canada aren't ready or able to add much punch to the economy in the second quarter. So we should remain concerned about their impact on the economy.

We also know that higher gas prices are taking a higher proportion of people's disposable income. So in view of that, the question is, if the economy is a main priority for the government, then why is holding one day of hearings the only action they are taking to deal with this issue? I think this is simply window dressing, and I think we ought to face that to start off with.

Let me turn to Mr. Corey with a question.

At previous hearings this committee has held on this subject, it was told that one measure that might help would be a system to monitor inventories across the country. The previous Liberal government actually initiated a system of that sort, but the Conservative government abandoned it. I don't know why they abandoned it, and I'd like to know if they're planning to replace it. You'd think if they were serious about this problem they would be. What can you tell me about that, please?

[Jeff Labonté]

Excuse me for one second while I just reference....

[Geoff Regan, Liberal, Halifax West, NS]

Pardon me, I was looking at Mr. Labonté and saying Mr. Corey, so whichever of you wishes to answer is fine.

[Jeff Labonté]

I will answer the question through giving you where things situate themselves.

In the early 1990s NRCan gathered petroleum data directly and developed expertise in the markets, but these things were at one point moved out of the department as we had the opportunity to access expertise in the private sector that did the same kind of work. So NRCan began doing so in establishing the information aspects. We didn't continue the work of the OPPI, but we continued to produce the Fuel Focus report and the updated information on the website weekly. And we actually use the data, partly from Michael's company but others as well, that provide us information, as well as information that comes to us from the industry, which is provided to us confidentially, so that we can look at the different trends and patterns.

While we don't have a specific office as it was titled in 2005, a number of those functions and activities continue to be done at NRCan and are part of the analysis that we provide and the monitoring and regular tracking of things that we do.