Industry Committee on June 22nd, 2011

[Geoff Regan, Liberal, Halifax West, NS]

I guess the concern is that this kind of information isn't available to the public.

This leads me to Mr. Ervin, who said “Gasoline is subject to supply and demand variables of its own”, which is an important basis for our discussion today, obviously. You talked about the need for more comprehensive data, particularly about fuel prices, but surely we need the data behind that. Isn't an inventory monitoring system an important part of the data that ought to be available to the public so that people can assess what's happening?

[Michael Ervin]

That would be a useful metric; however, there is a vast wealth of data that is accessible in the States that really paint, by and large, the picture of inventory ebbs and flows for North America, although it doesn't include Canadian data. That would be an enhancement to what already is a wealth of inventory information from the States. I'd be very supportive of seeing that happen in the interests of then having a full North American picture of inventory, as opposed to just a picture of what's happening in the United States right now.

[Geoff Regan, Liberal, Halifax West, NS]

Okay.

Let me turn to Mr. MacEwen, as we have only a few minutes, unfortunately. Seven minutes is a very short period in which to ask questions.

One of the things you were asked about was the long weekends in summer. As lay persons, we often have the impression that every long weekend in July we see it happening. Are we mistaken? Are you telling us that we are deluded in that and we are imagining it? Does it not happen?

Mr. Ervin is anxious to answer that for you and get you off the hook maybe, which is fair.

Go ahead, and then Mr. MacEwen.

[Michael Ervin]

As it happens, we are in the midst of doing the study of that very subject, and although I don't have formal data to present, our preliminary findings are that in the course of looking at the past five years' worth of long weekends, looking at the price before and the price after, and looking at price changes in the weeks immediately preceding and following those long weekends, the difference is negligible. It is close to zero. In other words, there are no objective data that bear out the myth that pump prices rise before long weekends.

[Geoff Regan, Liberal, Halifax West, NS]

So we shouldn't worry that in a week's time we are going to see a rise in pump prices again.

[Michael Ervin]

If I had a coin I could flip it and we could decide who is the winner, but my postulation is that I would be the winner half the time and you would be perhaps the other half of the time.

[Allan MacEwen]

My comment on that is that as retailers, we follow the wholesale prices. We do not make any extra margin on long weekends.

[Geoff Regan, Liberal, Halifax West, NS]

That's fair enough. Okay.

We saw that the Conservative government lowered taxes for the largest corporations in the country by 1.5% on January 1, and it's going to do it again by 1.5% next year. Meanwhile, Joe Smith or Jacques LeBlanc is paying more at the pumps. Whenever they fill up their gas tank they're paying more federal tax. So the big guy gets a break, and the little guy is getting hit every time, by more and more. Is that good for consumers? Is it good for the economy?

Does anyone want to answer that?

[David Collins]

Personally, in our company, and those of us around, we see it. I see it now at one step removed, but lower-income Canadians are really struggling with high gas prices. I think what ends up happening is that for those with lower incomes, the bottom 20% of income earners, they're spending.... In the United States, a study in the Wall Street Journal showed that 8.8% of their after-tax income was spent on fuel. That's too much. Especially when you have a high inflationary environment in food and fuel, it really slams them hard.

We see it. Luckily in the Maritimes we're small, and everybody's a lot closer, but people borrowing money to get gas to get to the hospital and things like that do go on. We operate cash-and-carry furnace oil, for gosh sake, and people on fixed incomes come and buy 20 litres of heating oil at a time. That exploded by 50% this past year.

It's troubling to see. I don't think our low-income supports are reflecting food and fuel inflation enough to support them in their daily lives. I don't know how to do that; I just go out and buy and sell gas. But if you could do something to help them, that would be great.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Collins. That's all the time we have now.

We're moving to a second round of five minutes.

Mr. Braid.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you very much, Mr. Chair.

Thank you to all the representatives for being here this afternoon.

I'd like to start with a question for the entire panel and have as many panel members as possible attempt to bring some clarity to this question. It's the question that I hear the most from my constituents when I talk to them about this issue.

We've heard from many of you about the various factors involved in the fluctuation of gas prices. Why is it that when factors cause the price at the pump to go up, the price goes up immediately, but when various factors cause the price to go down, it's a painfully slow process before that lower price is finally reflected at the pump?

[Michael Ervin]

I think your question illustrates something I spoke of, and that is the comparison that so often is made is the comparison to crude oil prices, not to wholesale rack prices. If you actually looked at pump price changes in relation to changes at wholesale gasoline, as opposed to crude oil, you'd find that there is far more of a rationale to the changes at the pump.

But specifically, we do see pump prices tending to go up in large amounts, and when they come down, they tend to float down in small amounts. Although that would appear to consumers to be anti-competitive, if you look at the underlying mechanism as to why that's happening, it's actually indicative of a very competitive market. I'll explain why as briefly as I can.

When wholesale prices are rising, dealers are very reluctant to pass that along until they get to the point, as Mr. MacEwen has said, where sometimes they're actually selling below cost. Somebody cries uncle, the price goes up, and it goes up by a large amount in order to get back to that level of margin.

Incidentally, in our data analysis, that increase, that restoration, does not go up higher than the historical in order to recover the loss. It generally only restores to the level of margin the market is accustomed to. When wholesale prices are going down, dealers are much faster to respond to that decrease, and they'll pass that decrease along more instantaneously, faster, and in smaller increments to basically follow that wholesale price down.

So again, what appears to be bad competition, based on comparing to crude prices, is actually highly competitive when you look at the underlying mechanism--using wholesale gasoline as the comparator, which is what dealers use in order to make their decisions.

[Allan MacEwen]

I don't think I can explain it much better.

To go back to one of my initial comments, it's hyper-competitive. There's one thing I will explain. To go back to Mr. Lake's question, you get four stations at one corner and let's say they're all selling at $1 even. One guy goes down to 99.9¢ and it's minutes before everybody else is at 99.9¢. It goes a tenth of a cent at a time and we all follow that. We'd like to be selling at $1, but the guy across the street is selling at 99.9¢, so it goes down slowly. In some markets what happens is this. Let's pick a price of $1. That dollar is based on wholesale gasoline. At midnight tonight my cost of gasoline is going to change. I know now it's going up. So tomorrow morning, when my stations open up in this market, ideally my price is going to be 2¢, I think, plus tax higher tomorrow than today. That's what I want to happen. But if one of the guys on the corner doesn't go up the full 2¢ plus tax and he only goes up 1.5¢ plus tax, then I won't get what I want.

[The Chair, Conservative, David Sweet]

Is anyone else going to weigh in?

[David Collins]

I actually have a final question, if I could.

[The Chair, Conservative, David Sweet]

The time has really elapsed. The full five minutes are gone.

We'll have to save that until the next round, unfortunately, with the time that we have.

We'll now move to Mr. Julian for five minutes.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Thank you, Mr. Chair.

I'll be asking two questions and my colleague Madame LeBlanc will be asking one, and then we'll put it out to our guests to respond.

I must say, Mr. Chair, that I'm quite disappointed with the answers so far today. Right across the country, from the lower mainland to Atlantic Canada, Montreal, and Toronto, we have Canadian families who have been very, very, hard hit by the high price of gasoline. They need it to get to work, yet they don't have options. I don't think they have had, so far in this hearing, an adequate explanation of why the prices are so high. They're concerned about the spiking when crude oil prices go up, but we're talking about old stock still in the system. They're concerned about the stickiness. When the prices go down internationally, the prices at the retail level don't come down. They're concerned about the fact that the prices go up far higher than is justified by international variations.

I want to quote from a study that was done last month:

At the price of $1.34 a litre being reported in the media in Toronto today, the industry is making an excess profit of 25 cents per litre, based on normal production costs, today's crude oil price, today's exchange rates, and taking into account all taxes.

I haven't heard an explanation of that discrepancy, which is taking money out of the pockets of ordinary Canadian families who are struggling to make ends meet.

That is my question that I would like to put out. I'd like to ask Mr. Corey and Mr. Labonté why the government has not yet implemented the recommendations from this committee. They date back to 2003. They very clearly called for a petroleum monitoring agency.

I'll now turn things over to Madame LeBlanc to ask our third question.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

My question sort of deals with the same concerns voiced by my colleague, Mr. Julian. Consumers are at the bottom of the ladder and they are greatly affected by the fluctuating price of gasoline. In addition, all of that has an impact on travel, transport, the cost of public transportation and production costs in farming, since food prices are also affected. The basic needs of consumers and Canadians are affected, including the need to travel to work and the need to feed themselves. All transportation costs will go up. It's that kind of thing.

After hearing the presentations, I realize that Canada has no power because there are many external factors. So how can we explain to Canadians the fluctuating price of gas? What tools do we have?

[Mark Corey]

Mr. Chair, perhaps I can tackle this first.

As I said, our department's responsibility is to analyze the market. Major factors are at play in setting the oil price. Our analysis is based on the work of people like Michael Ervin and others. We have to ensure that the market is truly competitive and that it works.

Again, our principal role is in information; it's the provision of information so that people can see what's happening in the marketplace.

I believe, Mr. Chair, you are having someone from the Competition Bureau here as well.

[The Chair, Conservative, David Sweet]

That's correct.

[Mark Corey]

The Competition Bureau's job is to make sure there is a competitive market and that there is not price-fixing. I believe they've done six studies on that, so again I think that is a question you would put to them.

On the bigger questions of tax policy, again, that's not our responsibility. It's the Department of Finance, the Minister of Finance, and it would be better to put the bigger taxation questions to them. We do not deal with those big issues ourselves.

[The Chair, Conservative, David Sweet]

Mr. MacEwen or Mr. Collins, do you have a comment?

[David Collins]

I heard talk that referenced old stocks. I don't think that most Canadians understand how efficient the retailing of petroleum is--how efficient we are as retailers.

If you take Walmart as being the gold standard of retailers, their top-line gross profit is 16% of the sale. They flip their inventories roughly once a month, sometimes a bit less. Allan and I get 5%, and we flip our inventories every 48 hours. The result is we do not have any slack. We hit the rack, we buy the product, and we get what we can on the street. And that's essentially what we get. What we find is that we end up at 5% and it's sufficiently competitive.

Since 1991, in my province we've gone from 940 stations down to 380. If it's so easy and we're making so much money then we would have more stations, not fewer. So how do you understand it? It's hard for most consumers to understand that if you don't carry the inventory and you buy at a higher price, you'll obviously look to raise the price to make a margin out of it. It's a level of competition in inventory flipping and low price margins.

There's a reason Walmart doesn't sell gas in Canada: they can't make money doing it.

[The Chair, Conservative, David Sweet]

Mr. Collins, I'm sorry, the time has run out. I wanted to get as much of that answer in as I could.

We'll now go on to Madam Gallant for five minutes.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you, Mr. Chairman.

To the witnesses, I know that the calls to my office spiked around the same time that the lines on the Canadian Petroleum Products Institute spiked in May. Because that was a fairly recent point in time, it would be very helpful to use that timeframe as an example--the spike in May--to explain why it spiked. Bearing in mind the geopolitical aspects, supply and demand, what OPEC may have been doing, and futures, can you tell us why then there was such a surge in price?

I open that up to everyone.