:
Okay. Thank you.
Merci. We'll get back to our scheduled orders of the day. We have a two-hour meeting, with five witnesses before us, to discuss gas prices and refinery margins. And this is our study pursuant to Standing Order 108(2).
As I mentioned, we have five witnesses today. First of all, from the Association québécoise des indépendants du pétrole, we have Ms. Sonia Marcotte, president and director general; Monsieur René Blouin, senior adviser; and Monsieur Pierre Crevier, president, Les Pétroles Crevier, and a member of the AQUIP's economic affairs committee. From the Canadian Independent Petroleum Marketers Association, we have Ms. Jane Savage, the president and CEO. And from L'essence à juste prix, we have Monsieur Frédéric Quintal, spokesperson.
I believe there is a five- to seven-minute presentation for each association. That's my understanding. Perhaps we could start with Ms. Marcotte.
Are you presenting on behalf of your organization? Okay, you can begin at any time.
:
Mr. Chairman, members of the Committee, let me begin by introducing the people who are with me today. Mr. Pierre Crevier is the Chairman of the Board of AQUIP and President of Pétroles Crevier. Mr. René Blouin is AQUIP's Senior Consultant. My name is Sonia Marcotte, and I am Chief Executive Officer of the Association québécoise des indépendants du pétrole.
We want to thank the members of this Committee for inviting us to present our position on these important issues. We do so on behalf of the members of AQUIP, which represents oil companies in Quebec.
They operate in the field of importing, distribution and retail sales of fuel, fuel oil and lubricants. Retail sales of Quebec oil companies total over $1 billion annually.
We do not intend to spend much time today talking about the strategic importance of independent oil companies, since it has been shown that their presence and the competition they introduce into the petroleum industry in Quebec, notably through the importation on cargo ships of finished products, provides Quebec consumers with a price advantage estimated at $361 million a year.
Today, we would like to talk primarily about increases in fuel prices that are raising such a hue and cry among consumers. In January of 1999, Montreal consumers were paying around 50¢ for a litre of gas. At that time, Montreal refineries were paying 11.1¢ for a litre of crude oil. They were demanding a refining margin of 4.4¢ before offering their gas for sale at the loading rack. Again, in January of 1999, the retailer's margin in Montreal was 3.6¢ a litre. That margin was not even sufficient to cover all the operating costs of an efficient serve station.
Now, let us look at how this situation has changed. The most recent data available show that, last May, Montreal refineries were paying 44.8¢ for a litre of crude oil. They were demanding a refining margin of 25.7¢ a litre, an increase of 484 p. 100 over January 1999.
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Still in May, the retailers' margin was 4.9¢. Since then, the price at the pump has continued to reach new highs. As we will see, these spectacular increased are the results of the combined increases in the price of crude and refining margins. It is clear that the significant increases in refining profits are no accident. They are the result of a strategy aimed at gradually weakening competition and creating an artificial shortage that drives up the price of fuel.
In recent years, sporadic supply outages have affected independent distributors, and even truckers, who have had trouble properly supplying their fleet. These harbingers indicate that the supply problem is real. It has in fact been exacerbated by the recent closure of a Petro-Canada refinery in Oakville, which is depriving Ontario of more than 100,000 barrels a day of petroleum products. Moreover, it is Quebec's refineries that are diverting a significant portion of their production to fill this void. When we know that a large portion of the production of Quebec refineries already leaves the province, to the point where Quebec's deficit is an estimated 150,000 barrels a day, there is clearly cause for concern.
Canada can contribute to initiating a movement which would make it possible to build new refineries and potentially increase the number of companies involved in refining. In addition to representing a profitable investment, the prospect of new refineries being built in Quebec and elsewhere in Canada would guarantee consumers, and independent oil companies, an uninterrupted supply, while maintaining downward pressure on prices. There is no question that these considerations respond to energy security concerns in Canada.
Finally, the idea of a special tax on excessive refinery profits strikes us as an attractive idea. We propose that revenues generated as a result of this special tax be returned to less well-off consumers. Quebec recently introduced similar measures which were not met with criticism.
Thank you for your attention.
:
First, thank you for the invitation to address this committee on the subject of gasoline prices and refining margins.
I represent independent fuel marketers in Canada. Independent fuel marketers are those who purchase fuel at the wholesale level. Independents do not refine crude oil or produce gasoline; rather, they purchase gasoline, mainly from refiners, and then sell either to a retailer or to the consumer directly via their own gas station.
Increases in gasoline prices are almost always attributable to increasing wholesale prices, not to increasing retail margins. More specifically, the most recent run-up in wholesale prices is a result of record refining margins. Data shows that retail margins in fact have stayed relatively constant over the past several years, but refining margins have generally grown as refining capacity declines and demand for fuels increases.
As an example, comparing May 2007 to one year ago, May 2006, gasoline prices in Canada increased about 6.5¢ per litre to $1.12. This is a Canada average price. In that period crude oil costs actually dropped 6¢ a litre while refining margins expanded by over 13¢ a litre to a record 28.8¢ a litre. It's important to note that this level of refining margin is higher than what we saw in the month of September 2005, when Hurricane Katrina took place.
I'm often asked to explain why the price of gasoline is up again. The overly simplistic answer is that the world wholesale price of gasoline is up, and Canada operates in a global economy. This is all true. As a global player in an unregulated industry, our prices must reflect world prices; otherwise we risk supply shortages. But what this explanation fails to capture is that the wholesale price of gasoline in Canada is not only higher than it should be, but we are vulnerable to fuel shortages and price spikes in Canada, as we saw last winter.
Why do we have some of the highest wholesale prices on the continent, and why are we more vulnerable to fuel shortages? I would like to explain that and then follow with some clear recommendations we have for this committee.
First of all, why is it that we have some of the highest wholesale prices on the continent? First of all, there is too little supply. In several areas, especially Ontario and the Prairies, we import gasoline from outside the country. Both Ontario and the Prairies are landlocked in the winter, preventing large cargoes from coming in to mitigate supply issues.
Second, we have too few suppliers. Only a handful of refiners in Canada—in contrast to the United States, where there are many more—control the wholesale markets, and there is little price competition at the wholesale level. It is a suppliers' market. Contrast this with the retail markets, where there are many retailers competing for Canadians' loyalty and many gas stations on the verge of closing because retail margins are thin.
Third, pipeline and terminal infrastructure in Canada is controlled almost exclusively by this handful of refiners. Unlike the U.S., where common carrier pipelines and terminals are more common, in Canada there is little access to wholesale fuel markets by traders, wholesalers, and independents.
In combination, these three--inadequate refining capacity, few players, and full control of infrastructure, with the exception of one independent terminal in Montreal--have led to high wholesale prices, fuel shortages, and the potential for more fuel shortages, not only in Ontario and the Prairies but where there are no deepwater ports and in every region of Canada.
A fourth reason is that, unlike in the U.S., there's no accountability to the Canadian public of inventories. One could argue that petroleum products produced by refineries are essential products to the people of Canada. Although we are working hard to reduce this dependency on fossil fuels, the fact of the matter is that Canadians are still very dependent on petroleum products. We need heating oil to heat homes, diesel fuel to transport our groceries and goods, and gasoline to take our kids to school, commute to work and run our businesses.
In the U.S., refiners and terminal operators report inventories weekly to the Department of Energy as an accountability measure and an early warning system of potential shortages that can then be mitigated. No such accountability exists in Canada.
The fifth reason, the fifth reality, which came with glaring evidence during the fuel shortage, is the inconsistency of gasoline specifications with bordering states and the legislative inability for ministerial waiver of key specifications to enable importation of gasoline from our neighbouring states.
On paper, Canada and the United States have the same specification for sulphur in gasoline. It is the right specification and it's very low. But what we found during the fuel shortage is that while we were at tank bottoms in Ontario, the U.S. was awash in gasoline that we could not import because of some very slight differences between the way the specification is administered in the two jurisdictions.
Moving on to recommendations, we have five. I'll try to cover them quickly.
First, we must federally mandate cross-border consistency of fuel specifications with adjacent states to ensure the markets flow freely so that during the next fuel shortage, gasoline can be easily imported to relieve the supply and price pressure. At the very least, we must have ministerial capability to easily intervene in the event of a shortage.
Second, we need to investigate alternatives to the structure, ownership, and use of pipelines and terminals, encouraging more market participants and more supply of petroleum products. Pipelines are a federal jurisdiction in Canada.
Third, we would like to see implementation of a federal public accountability system, specifically tracking key inventory levels of essential fuel products on a weekly basis. Not only would this increase accountability, but it would also give us an early warning system that would enable wholesalers, importers, and independents to do what needs to be done to replenish inventories, so that if we get a refinery outage at a time when inventories are low, which is what happened in February 2007 in Ontario, we will be able to mitigate the effects of that refinery outage.
Fourth, we recommend that we rethink the costs versus the benefits of inter-refinery product exchanges. These were justified and approved on the basis of efficiency, but have resulted in lower inventories and higher vulnerability to supply disruptions. They also result in fewer players, reducing competition.
Fifth and finally, we would like to reiterate that to encourage and enhance competition in the retail gasoline business, we request that parliamentarians undertake a much needed modernization of the Competition Act. Without this modernization, little is being done to preserve competition in the retail gasoline industry. We reiterate that in both the wholesale and retail gasoline markets, there is no better instrument to moderate price than through competition.
Thank you for this opportunity.
:
Thank you, Mr. Chairman. I would like to thank Committee members for allowing me to make this presentation today.
This marks the fourth time in four years that I have taken part in the parliamentary process. I have already seen most of you.
I have been an observer of, and stakeholder in, the oil sector since the year 2000. Two years ago, I published a book on the subject, which presents an overview of the period from 2000 to 2005 with respect to what occurred in the oil industry in Canada.
The purpose of today's meeting is to explain recent fluctuations with respect to refining, primarily in April and May of 2007. I will give you a quick overview of the current status of refining margins.
In the 1980s and 1990s, there was a decline in refining capacity, an increase in demand and a common pricing system established for refined products. Starting in 1999, demand increased. Capacity also increased with demand, and since then, demand has been affected by speculation. This is what is known as refining margin fluctuations.
The refining margin system has been in place since June 1, 1985. In Quebec, Esso published this information in the media on Friday, June 21, 1985, and the same announcement was made in Toronto on July 2, 1985. I explain all of this in a documentary that will be released in the fall and which I have been working on now for several months.
Nowadays, oil prices are closely associated with the price of gasoline. No one in the oil industry has rushed to explain to the media the difference between oil listed on the stock exchange and refinery products, which are also listed on the stock exchange. For ordinary Canadians, all of that is still quite vague, ambiguous and confusing when, in actual fact, it is really quite simple. I will give you an example of a raw material on another market, which may be easier to understand. Oranges are listed on the stock exchange, but orange juice is not. There is competition.
I would refer to the important announcement made in June of 1985, because it was sharply criticized in the O'Farrell report. Mr. McTeague, I recall that you worked on that report. It made recommendations to the Conservative government in December of 1985 with a view to preventing the implementation of a new system of public pricing of refined products, ensuring that Petro-Canada, which was a Crown corporation at the time, would not follow the industry's lead.
Unfortunately, however, those recommendations were simply ignored. We are now suffering the full consequences of that, which are associated with the Free Trade Agreement. The pricing of refined products in Canada has to be in step with American pricing on the Nymex Exchange.
Since April and May of 2007, what has the speculative value been solely based on? Well, every Wednesday, the U.S. Department of Energy publishes the inventory levels of crude oil and refined products. If the inventory level does not meet the expectations of analysts, the result is speculation that the price will either rise or fall. Inventories are not in danger; they simply go from 37 to 36 days, and not from two to three days. There is no danger whatsoever, but this is enough to attribute a speculative value to a product that has no value-added for the consumer.
On April 30, on Nymex, the price of a gallon of gas, used as a reference for a litre of gas here in Canada, was $2.44, which is the same price as on August 30, 2005, during a period of high gas consumption, as a result of people travelling on vacation and Hurricane Katrina hitting some 16 refineries in New Orleans. The months of May and August 2007 marked the between season low. Refineries are not producing heating oil at that time and the period of strong demand for the summer holidays has not yet begun. However, the same record price of $2.44 US a gallon was achieved.
Where are we heading? Well, if that is not a demonstration that a crisis is about to occur, nothing is. Compared to the 1980s, the word “crisis” doesn't seem to be part of the vocabulary of government leaders, and that is unfortunate. It probably has something to do with globalization or the development of the wonderful world of communications and public relations.
It may be a good idea to consider more forceful political intervention. Some politicians who are here today have criticized me in the past for raising the spectre that goes along with that kind of terminology. Indeed, such interventions have been made in the past, and they were costly. Let me give you an example. The Auditor General's Report clearly stated that the cost of the imported oil subsidy program between 1974 and 1985 was $5.8 billion.
Some said that this caused the Canadian debt to balloon, and I was criticized as a result. On June 1, 1985, Canada's debt stood at $190 billion, and I do not believe that this factor was responsible at the time for causing it to swell. However, some people may have forgotten to mention that the national oil policy allowed Alberta oil producers to force everybody living west of the Outaouais area to buy their oil at a price that exceeded the world price for some 13 years, from 1960 to 1973.
The Bertrand report analysis, about which oil company supporters neglect to mention that they did not pass the test, shows that in 1980 constant dollars, refineries billed Canadian consumers an extra $5.3 billion. Yet nobody talks about that. In that regard, I mentioned more forceful intervention earlier. The most recent great invention coming out of the Conservative Party was the decision, last year, to cut the GST by 1 per cent. It would seem that is as far as they are prepared to go in terms of giving consumers a break. However, in 2005 alone, between January and August, the before-tax price of the same product fluctuated by 114 per cent. Between 1999 and 2007, it was subject to fluctuations of some 234 per cent.
If those percentages are not adequate proof that there is starting to be a real crisis for consumers… Here is another example. The industry was in crisis when, in March of 1986, the price of oil dropped considerably. The Conservative government decided at the time to eliminate or to cut more quickly than planned an oil and gas tax of a value of some $2 billion, and to force consumers to pay an additional tax of 3¢ on gasoline.
In 1986, we helped the industry, which was in crisis, and yet the only thing done since then is the 1 per cent cut in the GST. In February of 2003, Mr. Manley's budget gave the oil industry a massive tax cut. It allowed provincial royalties to once again be included with expenditures, and lowered the tax rate from 28 per cent to 21 per cent. I did the number crunching for only one item, and I noted that oil royalties in Alberta in 2003, 2004 and 2005, at a tax rate of 21 per cent, meant a tax reduction of $6.5 billion for the oil companies. And yet, the documentation prepared by the Minister of Finance talks about $165 million for that three year period.
If you are having trouble finding ways to come to the aid of consumers, why is it that you are finding it so easy to give huge tax cuts to this industry, which seems to be enjoying incredible increases in profits year over year?
Thank you for your kind attention, Mr. Chairman.
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The 2002 and 2003, and then the response by the government at the time, Chair, just under advisement.
Thank you.
[Translation]
I would like to thank all our witnesses for being with us today. Mr. Quintal came back to one point a number of times.
[English]
But I would like to say that the dynamic continues to change. However, the emphasis you put on the refinery, I think, is timely and important. We have often talked about crude, and the media like to talk about crude, but we all know that we don't put crude in gas tanks.
There's been a lot of discussion about the cost at the gas station level. People like to get worked up over the issue of collusion, but you could probably put the tens of thousands of gasoline station owners inside the SkyDome, or what we call the Rogers Centre now in Toronto, and fill them up. No one talks about the four refineries that control product from region to region in this country.
Given that the bureau has said there is no evidence of anti-competitive activity, and given that the bureau has not taken any time to look at the overall impact of mergers that have predated our concerns to date, I'm wondering....
Ms. Savage, you talked about some of the recommendations that could be considered and that would be helpful in at least attempting not just to restore competition and price, but also to ensure that Ontarians, among others.... I see that in western Canada, my good colleague the chairman is facing prices even higher than those in Ontario. What steps can we take to ensure that Canadians will even have supply, which I think is of greater or paramount concern to consumers? The price is arguable; it's too high. I thank you for making those presentations about the fat margins that are being made, but I'm also deeply concerned, as should every Canadian, about if we have enough supply, particularly in the winter.
So could you talk a little about your recommendation with respect to the tracking of inventory and how you think that would help?
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It's important to understand the price dynamic and how prices are set. First of all, in terms of prices at the pump, we all know that the crude sector is important. We know that the price of crude oil has increased steadily for a number of months now, and even a number of years. The same applies to refinery margins.
However, retail margins in Montreal, for example, have remained relatively constant, at between 4¢ and 6¢. Indeed, we have a document here that you can take a look at, if you're interested. We are seeing that the price of crude oil has increased, that refinery margins have increased, and yet, retail margins have remained stable.
Why have refinery margins increased to such an extent? Well, it's important to look at what is going on in the United States. Prices set in Montreal reflect what is occurring in the United States. And, prices are set on the basis of what is going on there. Back in 1981, for example, in the United States, there were 189 companies operating 324 refineries, while in 2005, there were only 55 companies left and 148 refineries.
So, it is clear that market concentration has occurred. And, if we took an even closer look, we would see that the 15 largest companies in the United State control 85.3 per cent of the refining capacity. That concentration has a direct impact on refinery margins.
The fact is that an artificial shortage is being created because inventories of petroleum products are kept at very low levels—just enough to meet demand, but extremely tight in terms of supply. As soon as something happens, margins shoot up.
Thank you, witnesses, for appearing with us today.
This study is actually somewhat frustrating. I say it's frustrating, and I said the last time--and I want to clarify it a little--that it's kind of like UFOs: everybody believes they're there, but the governments keep telling us they're not. It's the same thing with gas prices.
As we investigate more and more, we have some pretty good explanations for why gas prices are the way they are. When I look at the Toronto Stock Exchange, at last count I see that Shell and Imperial—and I guess they're owned by Exxon and all these others—are still trading; so you can still buy stocks, and they're still reporting back to stockholders. I'm not saying this is my take, but I'm really starting to form somewhat of an opinion. It seems to me these people have just gotten smart and have decided to stop blowing their brains out and have their refineries produce at near capacity. Keep the supplies tight, and as a result, they really don't have to worry too much about glut and subsequent dumping on the markets.
But isn't that just smart business? Is there anything illegal?
You're nodding. Maybe Mr. Quintal would like to make a comment on it afterwards.
Is there anything illegal about that?
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No, the current system fully complies with market rules. There is no problem in that regard. However, the warning contained in the O'Farrell report which, in the fall of 2005, made it clear to the government that Esso's system of publishing the price of its refined products ran the risk of reducing, and possibly even eliminating, competition in the refining sector, was a serious one. Those recommendations were not acknowledged at the time. Now we are suffering the full consequences of that.
Even at the time, the then Minister of Natural Resources, Ms. Pat Carney, was still talking about the price of oil and gasoline in the newspapers. As I already explained, the advent of the new system of publishing the prices of refined products introduced a new element: the refinery margin. That margin did not fluctuate at that time, but began to do so to a considerable degree in 1999, when demand grew and exceeded capacity.
There is some competition when it comes to refining capacity. So, how is it that at a parliamentary committee in Quebec City, some three years ago, Mr. Perez, of the Canadian Petroleum Products Institute, and Mr. Montreuil representing Quebec, stated that a production level below 85 per cent meant a refinery was not profitable, and that in order to make a minimal level of profit, production had to be at about 93 per cent? Suddenly, in April of 2007, approximately six weeks ago, we noted that refining capacity is now 88 per cent. It is no longer 93 per cent, and companies are still making very healthy profits.
I want to start by looking at the concept of a world market, and it actually is a business model that's a free capitalist market. I just heard from Mr. Van Kesteren on this. You have, in this market here, a number of different state companies that set public policy that affect how much they extract. You have OPEC, which is a political body, essentially, that a number of American presidents have either made explicit requests to or rattled the sword, so to speak, to have them contribute more volumes onto the market, sometimes even fewer volumes. As well, the United States has a strategic petroleum reserve, which they've already drawn on, I believe, two times to try to influence the sale of gasoline to be lower. There's debate as to whether that has been successful or not, but they also have increased their capacity now to a billion barrels of refined capacity.
My question to start off is, given all these factors that are out there, where is the accountability that eventually consumers can go back to if there isn't a public policy related to this? I really believe that different governments can set target zones and so forth. Is that happening out there with other countries, and is it affecting the overall world market by government policies related to extraction and refinement?
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There is no doubt that a refinery owner who is producing, say, 100,000 barrels of oil a day and sees that he is making more and more profit by maintaining a stable production… One may wonder why that company would really not be concerned about losing its market share if it's maintaining the same level of production and profits are going up, something which is not happening in other sectors.
We talked about the fact that there are fewer refineries. In Quebec, one of the example of that would be Ultramar, in Saint-Romuald, whose production capacity rose, over the years, from 160,000 to 200,000 barrels a day, then to 216,000 barrels a day into 2003, and increased again by 20,000 barrels. The number of refineries has decreased, but some have increased their capacity, possibly because of technological improvements. Also, on September 3, 2003, Petro-Canada announced the closure of its Oakville refinery, to avoid having to comply with the new sulphur content regulation in Canada. It gave up production of 85,000 barrels a day in exchange for a 15,000 to 20,000 barrel a day increase in production at the Montreal refinery. That represents a deficit of 65,000 barrels a day. I think it's important to remember that particular event. Petro-Canada said at the time that, in order to comply with the new sulphur content regulation, it would be looking at $250 million in conversion costs, whereas dismantling the Oakville refinery and increasing production at Petro-Canada's Montreal refinery cost the same amount of money.
:
Thank you, Mr. McTeague. The trouble is, I have about 20.
First of all, I want to thank you all for coming. I want to thank you all for focusing on the refining margin, because that is where we have most of the questions, I believe.
I'll just limit it perhaps to Ms. Savage. I very much liked your presentation because it was very specific and straightforward. I'll put out a few questions. If you can answer them quickly, I'd appreciate that.
On inadequate refining capacity, my understanding is that we have 19 refineries operating at 95% capacity. The first question would be, how many refineries, ballpark, would we need to address that issue?
For the second question, you talked about too few suppliers in the wholesale market. Again, could we have an estimate on your part as to how many more suppliers we would need?
Then you talked about a very small number of refiners. Is that the same as suppliers, or are you distinguishing there?
Then in terms of inventories, how difficult is it to actually keep a system of inventories as to how much we actually have?
I have many more questions, but perhaps I could get those answered. If we could have some of that information, I believe we have to have it translated, but if we could get these recommendations from you, we will translate them into both official languages for all members.
Could you address those three questions for me?