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.