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37th PARLIAMENT, 2nd SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Wednesday, May 7, 2003

1525

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.))

Mr. Ford Ralph (Vice-President, Wholesale and Retail, Petro-Canada)

1530

1535

The Chair

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance)

Mr. Ford Ralph

Mr. Brian Fitzpatrick

Mr. Ford Ralph

Mr. Brian Fitzpatrick

Mr. Ford Ralph

Mr. Brian Fitzpatrick

Mr. Ford Ralph

Mr. Brian Fitzpatrick

1540

Mr. Ford Ralph

Mr. Brian Fitzpatrick

Mr. Ford Ralph

Mr. Brian Fitzpatrick

Mr. Ford Ralph

Mr. Brian Fitzpatrick

Mr. Ford Ralph

Mr. Brian Fitzpatrick

Mr. Ford Ralph

Mr. Brian Fitzpatrick

Mr. Ford Ralph

Mr. Brian Fitzpatrick

Mr. Ford Ralph

The Chair

1545

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.)

Mr. Ford Ralph

Mr. Dan McTeague

Mr. Ford Ralph

Mr. Dan McTeague

Mr. Ford Ralph

Mr. Dan McTeague

Mr. Ford Ralph

Mr. Dan McTeague

Mr. Ford Ralph

1550

The Chair

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ)

Mr. Ford Ralph

Mr. Paul Crête

Mr. Ford Ralph

Mr. Paul Crête

Mr. Ford Ralph

1555

Mr. Paul Crête

Mr. Ford Ralph

Mr. Paul Crête

Mr. Ford Ralph

Mr. Paul Crête

Mr. Ford Ralph

Mr. Paul Crête

Mr. Ford Ralph

Mr. Paul Crête

The Chair

Mr. Andy Savoy (Tobique—Mactaquac, Lib.)

Mr. Ford Ralph

Mr. Andy Savoy

Mr. Ford Ralph

Mr. Andy Savoy

1600

Mr. Ford Ralph

Mr. Andy Savoy

Mr. Ford Ralph

Mr. Andy Savoy

Mr. Ford Ralph

Mr. Andy Savoy

The Chair

Mr. David Chatters (Athabasca, Canadian Alliance)

Mr. Ford Ralph

Mr. David Chatters

Mr. Ford Ralph

Mr. David Chatters

Mr. Ford Ralph

Mr. David Chatters

1605

Mr. Ford Ralph

Mr. David Chatters

The Chair

Mr. Brent St. Denis (Algoma—Manitoulin, Lib.)

Mr. Ford Ralph

Mr. Brent St. Denis

Mr. Ford Ralph

1610

The Chair

Mr. Paul Crête

Mr. Ford Ralph

Mr. Paul Crête

The Chair

Mr. Ford Ralph

The Chair

Mr. François Trudelle (Director, Product Supply and Operations Optimization, Ultramar Ltd.)

1620

1625

1630

The Chair

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance)

1635

Mr. François Trudelle

Mr. James Rajotte

Mr. François Trudelle

The Chair

Mr. Joseph Volpe (Eglinton—Lawrence, Lib.)

1640

Mr. François Trudelle

Mr. Joseph Volpe

Mr. François Trudelle

Mr. Joseph Volpe

Mr. François Trudelle

Mr. Jean Drolet (General Manager, Retail Development, Ultramar Ltd.)

Mr. Joseph Volpe

Mr. Jean Drolet

Mr. Joseph Volpe

Mr. Jean Drolet

Mr. Joseph Volpe

Mr. Jean Drolet

Mr. Joseph Volpe

1645

Mr. Jean Drolet

Mr. Joseph Volpe

The Chair

Mr. Paul Crête

Mr. François Trudelle

Mr. Paul Crête

Mr. François Trudelle

Mr. Paul Crête

Mr. François Trudelle

Mr. Paul Crête

Mr. François Trudelle

Mr. Paul Crête

Mr. François Trudelle

Mr. Paul Crête

Mr. François Trudelle

Mr. Paul Crête

1650

Mr. François Trudelle

Mr. Paul Crête

Mr. François Trudelle

Mr. Paul Crête

Mr. François Trudelle

Mr. Paul Crête

The Chair

1655

Mr. Terry Blaney (Vice-President, Marketing, Shell Canada Limited)

1700

The Chair

Mr. Dan McTeague

Mr. Terry Blaney

1705

Mr. Dan McTeague

Mr. Terry Blaney

Mr. Dan McTeague

Mr. Terry Blaney

Mr. Dan McTeague

The Chair

Mr. David Chatters

1710

Mr. Terry Blaney

Mr. David Chatters

Mr. Terry Blaney

The Chair

Mr. Brent St. Denis

1715

Mr. Terry Blaney

Mr. Brent St. Denis

Mr. Terry Blaney

Mr. Brent St. Denis

Mr. Terry Blaney

Mr. Brent St. Denis

Mr. Terry Blaney

Mr. Brent St. Denis

The Chair

Mr. Brent St. Denis

Mr. Terry Blaney

1720

The Chair

Mr. Paul Crête

Mr. Terry Blaney

The Chair

Mr. Paul Crête

1725

Mr. Terry Blaney

The Chair

CANADA

Standing Committee on Industry, Science and Technology

NUMBER 042

2nd SESSION

37th PARLIAMENT

EVIDENCE

Wednesday, May 7, 2003

[Recorded by Electronic Apparatus]

¹ (1525)

[English]

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): This meeting is pursuant to Standing Order 108(2), to consider the possible causes of the recent increase in the price of gasoline and the significant negative effects the increase is having on the economy and to recommend appropriate corrective measures to the federal government.

Today we have three witnesses. It will be 45 minutes apiece. We've asked the witnesses to limit their opening remarks to around 10 minutes, and we'll have the rest in questioning. The questioning will be five minutes each, so prepare your questions very succinctly because of the time.

Today we have, from Petro-Canada, Mr. Ford Ralph, vice-president, wholesale and retail; and Mr. Tom Lawson, national pricing manager.

Gentlemen, welcome to the industry committee, and thank you for being here today. I would ask for your opening remarks.

Mr. Ford Ralph (Vice-President, Wholesale and Retail, Petro-Canada): Thank you, Mr. Chair. Good afternoon, ladies and gentlemen.

[Translation]

Good afternoon, ladies and gentlemen.

[English]

My name is Ford Ralph. I'm vice-president of Petro-Canada, responsible for our national retail and wholesale operations. With me is Tom Lawson, our national pricing manager.

¹ (1530)

[Translation]

My name is Ford Ralph. I am the vice-president of Petro-Canada responsible for our national retail and wholesale operations. With me is Tom Lawson, our national pricing manager.

[English]

I do plan to take 10 minutes to make a statement, and then I'll be pleased to respond to the committee's questions.

I'm here this afternoon representing not only Petro-Canada and our 3,800 employees, but also our wholesale and retail associates and their staff. In total, this represents in excess of 20,000 Canadians.

I recently celebrated my 40th year in the petroleum industry—today, in fact—first with Gulf Oil and now with Petro-Canada. Over the past 20 years I've been personally involved in many inquires and studies into our pricing practices.

[Translation]

Today we have been asked to explain the high retail pump prices experienced in the month of March. I will first deal directly with this issue, and then comment on the high level of competition that exists in the petroleum industry in this country.

[English]

It is a fact that the retail price for regular unleaded gasoline in Canada increased from an average of 68.8¢ per litre in 2002 to an all-time high average of 84.2¢ per litre in March 2003.

Why is this? There are two key reasons: rapid increases in crude oil costs and an increase in wholesale prices of gasoline.

During the last 16 months, prices for crude ranged from a low of just over $18 per barrel in January 2002 to a high of almost $38 per barrel in March 2003. At an equivalent rate of approximately one cent per litre in the pre-tax cost of gasoline for every one dollar change in the price of crude oil, this accounts for most of the change in the price at the pumps.

As you heard from Mr. von Finckenstein on Monday and from Minister Rock yesterday, there were a number of factors that contributed to this rapid rise of world crude prices in 2002 and early 2003.

First, speculation that a potential war between the U.S. and Iraq might disrupt crude supplies to the Middle East resulted in an estimated war premium on crude oil of between $6 and $8 U.S. per barrel or 6 to 8 ¢ per litre at the pumps.

The general strike in Venezuela in December 2002 brought crude imports from the U.S.'s third largest supplier to a standstill.

In March 2003, civil unrest in Nigeria caused a disruption in deliveries from the world's sixth largest exporter of crude.

Lastly, an unusually cold winter brought colder than normal temperatures to most of eastern Canada and the eastern United States in January and February 2003. This further increased demand for crude oil inputs from an already strained system, pushing U.S. inventory levels to their limits.

[Translation]

While the price of crude oil is the main component driving the cost of refined gasoline, the wholesale market for refined gasoline is also influenced by supply and demand pressures for finished products on the international market.

[English]

The rise of wholesale prices for refined gasoline has followed the rise of global crude and U.S. commodity prices. The higher than usual retail prices we experienced in March were not unique to Canada; the market factors I've outlined resulted in rapidly increasing prices throughout the United States, indeed throughout most of the world.

We have prepared a 62-page submission to the committee, which I hope you all have copies of. It outlines in the greatest detail our perspectives on this situation.

I'd also like to bring to the committee's attention that we have also prepared a 10-page addendum at the back of this document that explains our views on why there has been a decrease of more than 15 ¢ per litre in the retail price of gasoline over the last month and a half. Simply put, our assertion is that petroleum markets in Canada are competitive and respond to supply and demand factors just as other commodities do.

Petro-Canada complies with legal and ethical business standards, and Canadians are well served by our free market practices.

I'd like to give you four reasons you can feel confident in these statements. The first is that competition is not only alive and well in our industry, but there are actually three levels of competition that drive the price of gas at the pumps.

First, crude oil prices are established in a global market.

The second level of competition is through wholesale gasoline, where prices are also established in international markets. Our refinery prices must be competitive with not only domestic competitors but also with large international competitors.

The third level of competition is at the retail level. On every street corner that we have sites, last year we had over 200,000 price changes at our retail sites—up from 70,000 just three years ago. Why? Because of intense competition in our retail markets. We are continually seeing new and aggressive competitors coming into this market, including grocers and mass merchants. The irony is that gasoline pricing is probably the best example of competitive markets at work.

The second reason I say we're a highly competitive industry is that independent studies tell us so. A study conducted by the Conference Board of Canada, which has been alluded to in testimony over the last couple of days, concluded there is a high level of competition in the gasoline market and that Canadians are well served by our industry.

It's important to note this study was completed by a highly respected independent group and was commissioned and funded by Natural Resources Canada and Industry Canada.

¹ (1535)

[Translation]

My third reason for emphasizing that ours is a competitive market is that we have been upfront with you and with Canadians. We have brought forward detailed information whenever asked to do so.

The study we have prepared for today's session, and my appearance here today, are further evidence of our willingness to be open and transparent about this pricing issue. We are proud of our corporate reputation and we are committed to protecting this reputation by dealing with this issue head on.

[English]

The fourth reason I say we are fair and competitive as an industry is to dispel a misconception that profits indicate a lack of competition in the industry. In fact, over time our increase in profits was achieved through drastic cost reductions and improved efficiencies, not through price increases.

For those of you who still feel that gasoline prices are too high, I'd like to bring forward one final point. Retail gasoline prices in Canada are among the lowest in the world--the second lowest in the industrialized world in fact, according to my information. Unfortunately, we happen to be neighbours with the country with the lowest prices in the industrialized world, the United States.

The difference between our retail gas prices and theirs is due to taxes—not marketing margins, refining margins, or profits, but taxes. Taxes made up 44% of the price of gasoline in the year 2002. By comparison, our downstream profits were less than 2%.

We put a pricing decal on our gasoline pumps every year. I have an example here in my hand. This shows that the largest component of the price paid by Canadians is government taxes. The price reflects well over 20 times as much government tax as company downstream profits.

The facts are clear. Retail gasoline prices are determined by extremely competitive markets. Our company pricing practices comply with all legal requirements and are consistent with our corporate code of conduct. This includes a high level of integrity and ethics.

Canadian consumers are well served by the current free market system that determines gasoline prices. Canadians deserve to know the facts. They deserve to know that the government is looking after their interests not by sensational headlines but by ensuring that we have a healthy petroleum industry in Canada, one that can afford to make the investments necessary to meet Canadian needs in the coming years. Massive investments are required for more environmentally friendly products such as low-sulphur gasoline and ultra-low-sulphur diesel fuel. Investments are also required to meet Canadian fuel demands into the future.

We are confident that committee members will find that the retailing of gasoline in Canada takes place in a truly competitive environment and that the interests of consumers are best served by allowing existing markets to operate freely and competitively.

I thank you for this opportunity to bring forward our perspectives on gasoline pricing.

[Translation]

I thank you for this opportunity to bring forward our perspective on gasoline pricing.

[English]

Thank you, Mr. Chairman.

The Chair: Thank you very much, Mr. Ralph.

We'll now begin questioning, as I mentioned, with a five-minute round, and depending on how much time we have, we might go around two or three times. So make your points right to the point.

Mr. Fitzpatrick.

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance): Sir, do you have any idea how Canadian retail prices stack up with other industrialized countries--where we fit in the picture?

Mr. Ford Ralph: Yes, sir, I do. There is a page on this in our brief. Mr. Lawson can probably look up that page number for you, sir.

Mr. Brian Fitzpatrick: Okay, but would we be on—

Mr. Ford Ralph: We are the second lowest in the industrialized world, according to my information.

Mr. Brian Fitzpatrick: And would the U.S. be lower?

Mr. Ford Ralph: Yes, sir.

Mr. Brian Fitzpatrick: If I heard you correctly, sir, the difference between pricing in the U.S. and Canada is the difference in the tax load on the price of gasoline.

Mr. Ford Ralph: That's correct.

Mr. Brian Fitzpatrick: You mentioned 44%. I'm curious. A question arose in my mind on that. Does the industry get paid anything for calculating and collecting all this tax money for the government?

¹ (1540)

Mr. Ford Ralph: Not to my understanding, sir.

Mr. Brian Fitzpatrick: But on your share, the 56%, I presume there is a fair amount of cost that the industry must recover in that price. It just doesn't go to the bottom line of the industry.

Mr. Ford Ralph: Absolutely not, sir. If you take a look at the components of the price on the pump, 44% is taxes, as I've outlined. Around 37% is the cost of crude oil. We buy crude from many countries around the world, which we refine at our refineries across the country. It costs 17% to refine and distribute and market that product. That leaves us with a profit margin of 2%.

Let me correct a misconception that's widely held by the media and by the public in general, which is the impression people have that oil companies make 10 or 15 or 20 cents a litre. This is absolutely incorrect and unfounded. In the year 2002, we made 1.2 cents per litre. In the first quarter of this year we made 2.6 cents per litre profit--not 10, not 15, not 20 cents per litre; it was 1.2 cents per litre last year and 2.6 cents per litre in the first quarter of this year. There's a widely held misconception about the profitability of the oil business.

Mr. Brian Fitzpatrick: Some of the raw materials or oil that goes through our system would come from our heavy oil projects and so on. Do you have any idea, from the crude oil price standpoint, what a break-even or profitable price level is for that industry, that part of it?

Mr. Ford Ralph: I'm not an expert in the upstream, sir. I would rather not answer that question. I know at Syncrude, where we have an interest and purchase crude oil, costs have gone up several dollars a barrel this year due to operating problems.

I couldn't quote you that number. If you'd like, I'll try to secure that for you and provide it later.

Mr. Brian Fitzpatrick: In a market in which prices are rising it would seem to me that the clear winner in this situation, if there's such a thing, would be government itself; they just grab that 44%. It doesn't matter if there's a 10-cent-a-litre increase; they have 44% of it. Isn't that how it works?

Mr. Ford Ralph: Well, there are two types of taxes: fixed taxes, which do not vary whether the price goes up or down; and ad valorem, or percentage, taxes, which do vary, and from which, as the price goes up, governments do in fact in most instances get a larger revenue.

Mr. Brian Fitzpatrick: A tax that gets me upset is a tax on a tax. Are there any taxes on taxes in the pricing of gasoline?

Mr. Ford Ralph: Yes, there are. I just alluded to ad valorem taxes, where the federal excise tax is then subject to a secondary ad valorem tax. And, yes, there is double taxation in that sense.

Mr. Brian Fitzpatrick: Is GST levied on any of the other taxes?

Mr. Ford Ralph: Yes, it is.

Mr. Brian Fitzpatrick: To meet our energy requirements in the future, I think it's very important that the industry does spend money on research and development. Can you give me any idea what the oil and gas industries are doing in the way of research and development investment? What kinds of projects are they working on?

Mr. Ford Ralph: I could not give you that number out of my head, but I will tell you a little bit about the investments our company is making. Our corporation's capital budget this year is $2.5 billion. Our company is investing $2.5 billion in building our business. We recently invested $135 million in a world-class lubricant manufacturing facility in Mississauga. We export products to over 50 different countries.

I was interested to hear the minister's remarks yesterday, Mr. Chairman, where he was pointing out the fact that the government would like to see various sectors of the economy becoming more competitive internationally. I think there's a grand opportunity for companies such as Petro-Canada to become world-class competitors on a global scale in the energy business.

The lubricants example I just gave you is a small one. It shows that we can absolutely compete with the best in the world. We have the best technology in the world for lubricant manufacturing.

The Chair: Thank you very much.

Thank you very much, Mr. Fitzpatrick, for being so succinct.

Mr. McTeague.

¹ (1545)

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thank you, Mr. Ralph and Mr. Lawson, for being here today. We've looked forward to hearing from you for some time.

It's not the first time we've had discussions on this issue. I'm glad to see my colleagues in the Alliance are interested in the question of taxation.

Let me just ask a question about taxation, given that your company was in essence created by the tax base in this country. When you collect taxes from an independent or from consumers, how long do you keep the taxes for? Are you required to post a bond to keep them for that period of time?

Mr. Ford Ralph: I don't have that information; I'll be glad to provide it to you later.

Mr. Dan McTeague: Very good.

Mr. Ralph, I want to ask your company, in terms of its presence in the market--since you are representing the companies upstream--you are a vertically integrated company. You have indicated that you take your product from a number of places around the world. You also cited in your statistics that Canada enjoys the second lowest excise tax.

I'm interested in this because I think the committee is now aware of the fact that the lowest happens to be the United States, which also happens to be the place where the lowest world prices for crude and other commodities are found, including refined gasoline, which brings me to an interesting point.

Can you tell me if there are many days in Toronto, Edmonton, Calgary, Vancouver, or Montreal, where you have a different price from your competitor at the posted rack level? In other words, why is it that Petro-Can, Esso, Sunoco, and the few other existing integrateds, depending on where we are in the country, seem to have identical wholesale prices on any given day?

Mr. Ford Ralph: We have a whole department that does nothing but establish wholesale and retail prices, and we look at many factors in doing so. One of the primary factors for establishing wholesale gasoline prices is the price of gasoline in international markets.

For example, if we are looking at establishing our wholesale price in Nova Scotia, we take a look at the wholesale price of gasoline in New York harbour, and we also look at our competitors' wholesale prices. If there's a significant difference in our wholesale price, either from the domestic price or the imported price, we will, if we're too high, not sell any significant amounts of products.

Mr. Dan McTeague: Do you sell to independents, Mr. Ralph?

Mr. Ford Ralph: Yes, we do.

Mr. Dan McTeague: Then why would you not lower your price compared to, say, a leader in a given market? In my area, Toronto, for instance, it would arguably be Esso. Why would your differentials be exactly the same as those of Esso?

I'll give you a more specific example. I'm looking at the New York rack price, New York gas, a combination of regular unleaded gasoline, 10,000, of course, which is the standard that we use. I put in the variables of the difference in terms of the Canada-U.S. dollar, taking into account the crack spread between the crude and the rack price. Then I find out on February 20 that Petro-Can, Imperial Oil, Sunoco, and Shell in Toronto are charging 5¢ more than the world market as set in the U.S. The next day I find that it's 4.4¢. It's 2.8¢ on February 24 and 5.2¢ on February 25.

My point is simple. How is it possible, in a world in which you are forced to compete, that competition at the wholesale level not only means identical pricing--a fact that's escaped the attention of the Competition Bureau--but prices that tend to be much higher than the relative market in the United States of America?

Mr. Ford Ralph: Well, sir, I don't think it's escaped the attention of the Competition Bureau. Although I was unable to be here Monday—I didn't realize Mr. von Finckenstein was going to be here Monday; I thought it was to be yesterday, when I did attend—I believe he said wholesale prices fluctuate up and down, as do retail prices and crude oil prices, in a roughly symmetric way, and they are established based on international commodity prices.

Mr. Dan McTeague: But, sir, international commodity prices are arguably, as you've admitted here, established in the United States. Why are you 5¢ more? More importantly, we're selling 40 billion litres of gasoline in this country and you keep a differential on the average of 5¢ over the wholesale, which the public will never see.

It means the transfer of wealth from consumers to your company in the order of billions of dollars. This of course explains the most recent round in terms of money you've not only made at the upstream—which I understand, crude prices—but also money you've made at the downstream, which represents about one-third of the prices, which, by all accounts, are historical for many of your vertically integrated friends.

Mr. Ford Ralph: Mr. Chairman, I don't think the member heard what I said earlier.

The fact of the matter is that Petro-Canada, wholesale and retail, refining and marketing combined, last year made a profit of 1.2¢ per litre. Whether or not on a particular day our wholesale price is 1¢ or 2¢ different from the New York harbour price, I don't believe is relevant here.

Petro-Canada has made reasonable profits over the years. Over the past decade our return on investment has been under 10%, not substantial at all— unacceptable to our shareholders, as a matter of fact. So I would like my evidence to stand here.

¹ (1550)

The Chair: Thank you very much.

Thank you, Mr. McTeague, we'll be back.

Monsieur Crête, you have five minutes.

[Translation]

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): Thank you, Mr. Chairman.

I would like to point out a slip of the pen, which I'm sure is a translation error.

In the conclusion, on page 5, it says:

We are confident that committee members will find that the retailing of gasoline in Canada takes place in a truly confidential environment...

The word “confidential” should be replaced otherwise both you and I will be drawing erroneous conclusions.

To get back to more serious matters, I see in your document that you were called here today to explain the high retail pump prices experienced in the month of March. But that is not what I want to know. I would like you to provide me with details on the profit margins of refineries.

For example, in March 2003, compared to March 2002, there was a 138.5 per cent increase in the refining industry's profits, which means that the profit margin nearly doubled.

Can you explain the following to me. The price of crude oil increased worldwide, which led to healthy competition both here and abroad, but at the same time the refining profit margin increased. After all, those are fixed costs that should be lower rather than higher during a competitive period, when the raw material is more expensive.

Mr. Ford Ralph: I apologize for the translation error.

[English]

Mr. Chairman, I think it's important to understand what “refinery margin” is. A refinery margin is not a profit margin; it's the difference between the cost of crude oil and the rack price of the product. There are expenses that have to be deducted from the refinery margin, such as the wages of the refinery staff, the cost of electricity, natural gas for the refinery, maintenance costs, property taxes, and so forth. So let's look at our profit margins, again for both refining and marketing, after everything is taken into account. In 2002 it was 1.2¢ per litre. In the first quarter of 2003 it was 2.6¢ per litre.

Now, to address the actual margins themselves, the facts are as follows. According to my information, all of Canada's refinery margins for the year 2002 were 8.9¢ per litre. That's the difference between the crude oil cost and the rack price, before all expenses. They rose to 12.4¢ per litre on March 11, an increase of 39%, not 138%. Today, sir, we are back to about a 9¢ margin, which is based on supply and demand and market factors.

Another point I'd like to make, if I may, is this. If refinery margins in Canada are so high, why aren't Canadians paying more for their gasoline than Americans? Mr. von Finckenstein testified Monday that they are not. Furthermore, pages 21 to 23 of our brief indicate that Canadian and U.S. racks are competitive with each other.

Finally, in his testimony to the committee on Monday, Commissioner von Finckenstein stated that the retail prices follow closely wholesale prices both up and down--I alluded to this earlier when I spoke to Mr. McTeague--and the same is true for the relationship between wholesale and crude oil prices.

[Translation]

Mr. Paul Crête: Mr. Ford, my question was not on the difference between the price of crude internationally and the retail price. I was talking about the profit on the refining margin, the additional profit that you have made. Do you have any other way of explaining how you have managed to make such high profits even though you have a captive market, when you would have had to lower your prices to be as competitive as possible, if you had wanted a greater market share? You would not have raised prices when the price of crude was itself rising. That would be against every marketing rule.

Mr. Ford Ralph: I don't agree with your statement that we have a captive market. Here in Canada, we have a primarily competitive market. From the standpoint of our...

Mr. Paul Crête: Can you put anything other than gasoline in your car, sir?

Mr. Ford Ralph: No, I can't.

¹ (1555)

Mr. Paul Crête: Can someone who has oil heating for the winter just use a different product?

Mr. Ford Ralph: No.

Mr. Paul Crête: That means you have a captive market.

Mr. Ford Ralph: No, it is not a captive market. It is a competitive market, because a great deal of product in imported into Canada. There are many competitors on the market.

Mr. Paul Crête: I also asked a question about your profit margin.

Mr. Ford Ralph: May I answer your question, please?

Mr. Paul Crête: Yes.

[English]

Mr. Ford Ralph: I was asked a question about our refining profits. Mr. Chairman, I indicated that for the first quarter of this year our profits were approximately 2.6¢ per litre. By the way, that is about $130 million, which is a lot of money by anybody's standards, I grant you. Of that, approximately three-quarters was profit we made in the refining side of the business; the other quarter was from the marketing side of the business. I believe that answers the question.

I would like to point out to the committee that our company is going to invest in excess of half a billion dollars in refining and marketing in Canada this year. With profits of $130 million in the first quarter, we're investing in excess of half a billion dollars in Canada in our refineries and in our retail facilities, largely, by the way, in the refining side of the business to reduce the sulphur content of our fuels, which is what the Government of Canada is desiring us to do.

So our profits are 2.6¢ per litre. We need a profit to invest in the business. If we don't make a profit, we don't have any money to invest in the business. By the way, gentlemen, if we sold at zero profit last year, the price of gasoline would have come down between 1¢ and 2¢ per litre.

[Translation]

Mr. Paul Crête: Mr. ...

[English]

The Chair: Mr. Crête, I'm sorry.

Mr. Savoy, five minutes. Please be succinct.

Mr. Andy Savoy (Tobique—Mactaquac, Lib.): Thank you very much, Mr. Chair.

Thank you for attending today, gentlemen.

New Brunswick and Ontario are two markets I'd like to discuss. I'm from New Brunswick, and we've seen gas prices stabilize at about 75¢ on average, and in Ontario, from what I understand from my colleagues, it's around 60¢. So there's a 15¢ discrepancy and the taxes in the two jurisdictions only account for about a 2¢ discrepancy. So we don't know where the 13¢ have gone, but apparently they're being paid by the consumers in New Brunswick. Could you explain that phenomenon?

Mr. Ford Ralph: I'll ask Mr. Lawson if he can check out the difference in taxes for you, if I can take a second to do that.

According to my information, it is a 5¢ or 6¢ per litre difference between the two provinces; however, there are other factors here at play. Gasoline is a product where large-volume retailers in large urban centres tend to charge lower prices because they can operate on a smaller margin because they have much higher volume. So it's not an unusual phenomenon to find prices in smaller markets being higher than in larger markets. It's a factor of competition, by and large. In fact, I know the Conference Board commented on this in their report.

Mr. Andy Savoy: So that would dictate that with economies—if you want to call them economies—more consumers in urban areas should have a lower price of gas. So that rule should in general hold true across Canada.

Mr. Ford Ralph: It does, by and large, but there can be exceptions because you can have a price war in any city.

If I could quote something to you from the Conference Board report:

Differences in gasoline prices between cities are generally influenced by thedifferent competitive conditions found at the street level. Varying local marketconditions in each city in Canada can push gasoline prices in directions that reflectintense rivalry among sellers. It takes only one dealer who is determined to increasemarket share at the expense of competitors to upset the balance and bring about asituation where retail prices bear little resemblance to factors like transportationcosts, rack prices or normal margins. Abnormalities can last from days to yearsdepending on local conditions.

Mr. Andy Savoy: So not only do we have a case where it's based on the urban versus rural or less urban, we also have a case where it's based on the whims of the local competition in terms of who is aggressive on pricing, which company locally wants to be aggressive.

Mr. Ford Ralph: I would concur with that.

Mr. Andy Savoy: So if in New Brunswick we saw an aggressive strategy in price and we could get down to 60¢, or 65¢, or 64¢, that would be reasonable then?

º (1600)

Mr. Ford Ralph: If someone were to start a price war, heaven knows where that would bottom out. For example, in Toronto on the weekend the price of gasoline was 49.9¢ per litre. That happened to be below cost.

Mr. Andy Savoy: It's a bit baffling then that it's that much of a discrepancy in terms of the price. Let's say it's 12¢ to 13¢ that we're missing somewhere between Toronto and Moncton, or Saint John, or Fredericton. What about in the case of a comparable-sized market in Ontario, let's say Kingston, Peterborough to Moncton? We should see a very similar pricing scale. Is that correct?

Mr. Ford Ralph: Not necessarily, sir. Prices in every single market are dictated by the competition that's going on in that particular town, on that particular day, at that particular time of day.

Mr. Andy Savoy: So we can't nail down pricing, is what you're saying. It's based on the whim of the individual service station owners?

Mr. Ford Ralph: There's nothing to nail down, sir. This is a competitive market. The prices settle out at a competitive price. There's nothing to nail down.

Mr. Andy Savoy: Thank you, Mr. Chair.

The Chair: Thank you.

Mr. Chatters.

Mr. David Chatters (Athabasca, Canadian Alliance): Thank you, Mr. Chair.

I apologize for being late to get in, but we had a meeting with another energy representative and we had a hard time getting away.

Certainly my first question would be this. Considering that your industry has nothing to do with setting prices for gasoline in the North American market, and on top of that you're supplying this North American market with the second cheapest gasoline in the world, why do you see yourselves being targeted over and over again, with some 19 studies in the last dozen years, searching for collusion in price fixing, which is never found but the process is never ending? Can you explain that to me?

Mr. Ford Ralph: I wish I could, sir. I'm glad you asked the question. As I indicated before, I've been in the business for 40 years. I have been involved in these inquiries for many years, and there's a public misconception about the profit margins of our industry. As I said earlier, most folks seem to think it's 10¢, 15¢, or 20¢ per litre. The fact of the matter is it is 1¢ or 2¢ per litre. Our industry could have done a much better job of getting that message across. We're trying. We're doing our humble bit here with these simple coupons that we put on every pump across Canada, which about 700,000 people visit each day, but the message is not getting across.

We went to a considerable amount of time and expense to put this detailed explanation together for the committee, and I hope you take the time to read it, particularly those of you who have some concerns about the way the marketplace works. We are doing our best here to explain our story to the public, and to the committee, and to the government.

Mr. David Chatters: My other question is, why are your retail service stations so hesitant to advertise on the large billboard on the street the price of their gasoline, tax exempt, so that when the customer fills up and goes to the till and the tax is added in, it doesn't hit him like a sledgehammer how much the government is taking on every litre of gasoline?

Mr. Ford Ralph: I can only speak for our company. This is a public forum. I will say that idea has occurred to us, and we have not implemented it for various reasons, but certainly it would be quite interesting to consumers to see the tax excluded price of gasoline as they're shopping at 100 kilometres per hour, which is the only product I can think of in the world where you can shop at 100 kilometres per hour, by the way.

Mr. David Chatters: Can you just give us one or two of those reasons that you decided not to?

Mr. Ford Ralph: It was very hard to do the tax calculation on the pumps. Let me put it that way. If you went ex-tax, you'd have to figure out a way to do the tax calculation, print a receipt and so forth. It's quite complicated from a technical point of view.

Mr. David Chatters: The other issue, tax-wise of course is that every so often, fairly regularly, I get letters from constituents who suddenly realize that when they fill up with gasoline they are being charged GST on top of the excise tax. That is a tax on a tax. That is another issue the public isn't being made aware of that perhaps they should be. Perhaps the industry has to do a better job, and maybe we have to do a better job as advocates for the industry, of making the public aware of who the real bogeyman is in high prices for gasoline.

º (1605)

Mr. Ford Ralph: As I said, I certainly concur that we could have done a better job of informing the public.

Mr. David Chatters: Thank you.

The Chair: Thank you very much.

Mr. St. Denis.

Mr. Brent St. Denis (Algoma—Manitoulin, Lib.): Thanks, Mr. Chair, and I thank everyone for being here.

I wouldn't want you to think that all of us, certainly on this side, are against oil companies, or in fact against companies making profits. It is important. As with the banking sector, which has to make profits in order for us to have a stable banking sector, likewise we need to have a stable energy sector, whether it is oil and gas, or electricity, or uranium, or what have you.

I agree with Mr. Chatters that explaining to the public is really a major part of what it's about. Being in the business, as parliamentarians, of public relations, explaining things is often very difficult to do.

In my northern Ontario riding--again, your answers will help me explain to my constituents--I can travel from the south part of my riding, which is a large rural riding, and find, over this past winter, a 10¢ difference on a litre, say, from the Espanola area up to the Chapleau and Wawa area, and I don't think all of it would be explained by the cost of transport for that litre of fuel. I suspect, as you suggested, that for the smaller markets volumes do count.

I'm wondering if you could talk a little bit about the micro-market impacts, especially in a large rural area. We all have an interest in a stable energy sector, so your help there would be appreciated.

Mr. Ford Ralph: Thank you for the question. I'll try to answer it as best I can.

I would agree with you that the entire difference is not explained by transportation. If you take a large retail facility in Montreal, Toronto, or Vancouver, they could well sell 12 million litres of gasoline a year. They also would typically have a 1,500- or 2,000-square-foot convenience store behind that facility, and they might have a car wash behind that facility--all of which provides revenue to the retailer.

In many of the urban centres, the ones you cited as an example, the retail facilities are much smaller. They may sell 1 million litres, or 1.5 million litres, or 2 million litres a year. They may not have a large convenience store behind it, and it's unlikely they would have a big car wash behind it. So for those people to make a living, for them to put bread on their table, they ask for a higher profit margin on the gasoline because they need a larger margin on 1.5 million litres than the operator in the major city who is selling 12 million litres—or 20 million litres, for that matter, because there are facilities in Toronto doing that.

So fundamentally here the market again establishes the price. Competition in that market establishes the price. The revenue available from that particular facility helps determine what the price is.

Mr. Brent St. Denis: I wonder if, in a perverse way, in a small market like Chapleau, that partly explains why the two or three service stations would in fact have the same price, because there is certainly a finite consumer base there. There's not a lot of flowthrough traffic as you would have, say, in Toronto. So I'm wondering if, because they need to be assured of a livelihood, again in a perverse way, they don't benefit from undercutting each other.

Where some would argue it's price-fixing, in a counterintuitive way it's to ensure through the marketplace some stability there. I'm trying to understand it.

Mr. Ford Ralph: I hear you, sir, and I think the same principles that apply in Chapleau would apply in Ottawa or Toronto. As I indicated to you earlier, people who purchase gasoline can shop at 100 kilometres per hour.

So let's take a corner. Here's a Petro-Canada facility and here's another service station right across the corner, whatever brand. That facility decides to drop its price one-half cent per litre. Let's just take 70¢, so then 69.5¢ per litre. Somebody is driving down the street at the speed limit in the city. They can see right away the price difference. Many people, a great many people, will change their purchasing behaviour for half a cent a litre, which is interesting because a fill is about 40 litres, so that's about 20¢. People will drive a mile for a half a cent a litre.

So what happens? If our station does not react to that station's half a cent a litre below by dropping our price a half a cent a litre, we can lose a third of our business in a flash. Our operators look across the road. If they see the price drop... we have a pricing centre, and if they phone us we can authorize them in a matter of minutes to drop their price, because if we don't, we're going to lose business to them, just like that. That is why you see the same prices. Quite frankly, we can react in minutes to price changes, and we do.

In the north, I would believe independent dealers, who set their own prices, prevail in those markets. But my belief would be, they see what's going on too, and if they don't have a similar price in the marketplace, they'll lose their business, because people will drive a heck of a distance for a half a cent a litre. That would be my explanation.

º (1610)

The Chair: Thank you very much.

Mr. Crête, you have a minute and a half.

[Translation]

Mr. Paul Crête: I have a short question in two parts; it is the same questions I asked earlier.

Earlier, when I asked you why you had set your refining profit margin at the maximum, you answered by talking about investments. What I wanted to know is this: Why did you not decide to reduce prices to compete with other companies? All the other companies did that.

Of course, the investigations have been going on for 20 years, and we are never satisfied. A study like the one from the Conference Board of Canada comes from a highly respected but non-independent organization, of which I believe you are a member. Would it not be better to have some kind of independent watchdog monitoring gasoline prices, a sort of observer? If we had such an organization, you would no longer have to justify what you do. Someone would be not controlling prices but rather observing prices as a representative of the public sector and of Canadians.

[English]

Mr. Ford Ralph: Mr. Chairman, if I could address the second question first, I will come back to the first one, which I believe I already addressed.

As far as the Conference Board is concerned, the Conference Board is generally viewed as a very objective, independent organization that provides objective analysis. Why else would the federal government have commissioned the Conference Board to do this study, not Petro-Canada?

The commissioner of the Competition Bureau, Mr. von Finckenstein, as you heard on Monday, has updated the report and has supported its findings. He updated the report and supported its findings. Mr. von Finckenstein, I believe, is viewed as independent.

[Translation]

Mr. Paul Crête: Mr. von Finckenstein also recommended that there be an independent study.

[English]

The Chair: Mr. Crête, let him answer the question, because you have taken more than your time.

Mr. Ford Ralph: Third, it is my understanding that the federal government paid more than $750,000 to have the Conference Board study undertaken. Is the member suggesting here that government money was wasted on this? I don't think so.

It was $700,00. Thank you very much, Mr. McTeague, for the correction.

In terms of financing of the Conference Board, yes, we are a member of the Conference Board and in fact our financial contributions to the Conference Board represent one-tenth of 1% of the Conference Board's financing, so I would vigorously dispute any allegation that the Conference Board is simply a mouthpiece for my company or for any other company.

As to your allegation that we set wholesale prices at the maximum, sir, we don't set the wholesale prices at any level. Unless I misunderstood you, I indicated to you that the wholesale and retail profits amounted to 1.2¢ per litre or 2.6¢ per litre, wholesale and retail combined.

The Chair: Mr. Ralph and Mr. Lawson, I want to thank you very much for being with us today. Thank you very much for your detailed report. I enjoyed going through the graphs because they illustrate very clearly a number of items and questions we have had. I'd like also, at the same time, to congratulate you on being 40 years in the business. All the best. Thank you very much.

We will break for one minute.

º (1615)

º (1619)

The Chair: I'll bring the meeting back to order.

This time we have witnesses from Ultramar, Mr. Jean Drolet, general manager, retail development; and François Trudelle, director, product supply and operations optimization; and Jennifer Overend, secretary and director, legal services, risk management.

Welcome to the industry committee. Our procedure today is to have your opening remarks for about 10 minutes and then we will open it to questions for five minutes apiece. Sometimes we go around twice, sometimes three times, sometimes only once, but we will try to make the questioning as succinct as possible.

I would ask you to begin with your report.

Thank you very much.

[Translation]

Mr. François Trudelle (Director, Product Supply and Operations Optimization, Ultramar Ltd.): Thank you for your introduction. I would also like to thank the committee for giving us this opportunity to once more explain the dynamics of prices and what happens in refining and at the retail level. We believe it is important for governments and consumers to be well informed, and that is why I am pleased to be here today to try to help the committee understand the considerations that are taken into account when we set retail gasoline prices.

I have brought a number of documents with me, and I believe that most of you have a copy of everything. I would like to take some time to explain each of the figures, in order to provide some information as well as our view on what is happening in the markets.

First of all, let us take a look at the primary components of the pump price. We have prepared a chart. In the chart, we can see that there are four components making up the pump price. First, there are taxes, over which we have no control as refiners and distributors. According to February 2003 data, taxes accounted for 37.5¢ a litre in Montreal. Another component is the cost of crude, which in February was 32.7¢ a litre in Montreal. This is another component of the pump price, over which we have relatively little control. We are buyers of crude, not producers of crude. Therefore, we are obliged—or have the pleasure—to buy at the market price, and we are affected by market fluctuations.

The third component of the pump price is the refining margin, which is a gross margin. Obviously, we try to recover operating costs and crude shipping costs, as well as make a profit that will enable us to invest in our operations over the years.

As you can see, in February the refining margin was on the order of 9.5¢ a litre in Montreal. Over the past five years, the margin has been much lower. It was approximately US $5.50 a barrel, or approximately 5.5¢ a litre.

The fourth component is what we can call the retail margin, the margin earmarked for gas-station operations and all direct sales to consumers. In February, it was approximately 3.3¢ a litre in Montreal.

Before going any further, I should just point out that, as I said earlier, a number of studies have been conducted in the past. We took part in those studies, and would be pleased to take part in other studies. I would, however, like to take a moment to review the conclusions of a very detailed study conducted recently by the Conference Board of Canada. If we run quickly down the main findings, we see that in 1999—I believe—Canadian consumers were well served by the Canadian gasoline industry. The quick and dramatic increase in world crude oil prices since 1999—there were also fluctuations during 1999—is the primary factor behind the sharp rise in pump prices during that period.

Another finding was that the gasoline industry itself had limited influence over gasoline prices, with crude oil and taxes making up between 80 and 85% of pump prices.

Moreover, the study found that, at the wholesale level, gasoline tended to be considered on a continental basis. Canadian refiners had to remain competitive with US refiners, otherwise they could disappear. In a world market, we have to compete with all refiners internationally, and differences in tax prices between cities and regions stemmed from variable market conditions. Overall, the study concluded that the market was efficient and that Canadian consumers were well served by the Canadian gasoline industry.

Let's come back to the pump price components that I identified at the beginning. As I said, we have no control over taxes. We will not be talking about taxes; that is not why we are here.

We could perhaps talk about crude.

º (1620)

I said earlier that Ultramar Canada was solely a refiner. Since we are not involved in exploration, we have to buy crude at the market price.

The graph you see indicates crude oil prices since 1990, according to the Brent reference. We can see many fluctuations over the years. Prices have been as high as $40 a barrel and as low as $10 a barrel. Price fluctuations are due primarily to shifts in supply and demand. Those shifts can be observed over time. In 1990, production was scaled back because of the Gulf War. In late 1998 and early 1999, prices were extremely low because of crude overproduction. In 1999, prices rose when production by producing countries was reduced. We saw crude prices go up, and they remained fairly high through 2000, dropping slightly at the end of 2001.

Oil-producing countries once again intervened in an effort to stabilize prices. Recently, over the last few months, the war in Iraq, the strike and resulting production downturn in Venezuela and a very cold winter have driven prices up. But over the past few weeks, the price of crude has been dropping very rapidly due to a new equilibrium in supply and demand in different markets.

Now let's talk about factors that influence the price of crude. The chart on the next page shows total commercial inventories for crude oil and finished products, including gasoline, distillates and diesel, in North America over the past five years. In February and March 2003, inventories were at their lowest levels in the past five years; this partly explains the rise in prices. Given the relationship between supply and demand, we just have to accept that prices will rise somewhat when inventories are low.

Now, let us look at the refining margin. This is obviously an important component of gasoline prices. Here, we have the same kind of graph as we had for crude. Between 1990 and today, a period of some 13 years, the refining margin—or rather an approximation of the refining margin as companies like ours see it in eastern Canada and eastern North America, has fluctuated significantly. It has moved from 3¢ a litre to 10 and 12¢ a litre. The refining margin fluctuates every day, according to supply and demand.

With this kind of chart, we see that refining margins are occasionally fairly high, but adjust very quickly. Whenever there is an imbalance between supply and demand, prices rise, but as soon as a balance is restored prices come back to normal. As with many other things, we should not look at a single point in time but rather consider short- and long-term averages. We do not manage our industry our the short term; we have to make investments far in advance to deal with new standards and other things. This means that we consider profitability over a minimum of three to five years, and that is the perspective from which this chart should be considered.

There are of course some peaks, but as we can see, over the past 13 years, the average refining margin has been about US$5.50. Generally, when it is around $4.50 or $4.75, the industry cannot generate any profit. And without that profit, it is difficult for us to operate, supply our customers, invest for the future and invest to ensure compliance with the environmental standards that apply now, and those that will apply over the coming years.

The fourth component of pump prices is the retail margin, as I said earlier. The chart on page 7 provides an overview in fluctuations among various aspects of the market over two years. The blue line right at the top is the pump price, the consumer price. The line at the bottom is the price of crude. The lines between the two represent prices in markets outside Canada, such as New York, and the loading rack price.

º (1625)

This chart shows that there is a great deal of movement and fluctuation, as well as competition in the market. This leads to fluctuations in margins, and as we can see, in general pump prices tend to follow the movements of crude prices and the refining margin.

Still on retail margins, we have prepared a chart showing changes in retail margins in Montreal and Toronto over the past two years, in comparison with the margins of gasoline distributors in Plattsburg in the US. As you can see, Montreal and Toronto are very competitive in comparison with the US. We conclude that consumers are well served by the current market structure, which has reasonable margins, and that prices for Canadian consumers—taxes apart, of course—are actually lower than those in the US.

Obviously, our company and other companies in this sector make a profit. But in our view we should consider not total profit in dollars but return on capital. The petroleum product refining and distribution industry requires a great deal of capital, a great deal of investment. A refinery like ours is worth about one billion dollars. Over the next few years, we will probably have to invest $400 or $500 million to maintain its current competitiveness. So what we should be looking at is not only profit in dollars, or today's margins, but return on capital over a number of years.

The last chart illustrates return on capital for the industry as a whole over the past 12 or 13 years. As you can see, the return generated by oil companies was 7.2% on average, compared with 11.7% for industries overall.

We therefore conclude that the petroleum product refining and distribution industry is not an easy environment. In fact, it is a very difficult environment and the return on investment is not that high. We must therefore strive for economies of scale and seek to be as efficient as possible. This is a challenge we are ready to take up, and have taken up over the years. We have ensured our company's growth, and would be happy to continue on the same course in the coming years.

º (1630)

[English]

The Chair: Thank you very much.

We'll start questioning for five minutes. I've asked you to be succinct because I'll have to cut you off at five minutes.

Mr. Rajotte, set the example.

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Thank you very much, Mr. Chairman.

Thank you, gentlemen, for coming in today and presenting to us.

I think the biggest thing we can learn, as parliamentarians and as citizens, is that we're struck by the gasoline prices we see at the pump all the time. When you actually break it down and see the components in terms of the crude price, the refining margin or wholesale price, the marketing margin, and the pump taxes, the crux of the issue for the committee is the relationship among the different components.

We had a presentation from the competition commissioner this week. He asked questions about the relationship among the wholesale prices, crude oil prices, retail prices, and wholesale prices.

He supported the Conference Board's conclusions that there's a very strong positive relationship between wholesale prices and crude oil prices. There is a very strong positive relationship between retail prices and wholesale prices. There's no asymmetry in retail prices. They decrease in the same manner as they have done in the past month.

I assume I know your answer, but is this your finding as well? Do you support the findings of the competition commissioner?

Further to this, we've heard a lot of interesting questions about why gasoline prices are the same, as if the logical thing to assume is that there should be a price differential between different retail pumps.

I don't quite understand. Isn't it logical to assume, in a very competitive market, that companies would tend toward the same price, rather than have price differentials?

If you look at almost any industry in which there is a competitive market, prices tend to be very similar or the same.

º (1635)

Mr. François Trudelle: I think what we've observed, as a company, through the years is that the consumer is very sensitive to the price of gasoline. If your price is different from your competition's, your sales will go down almost immediately. People will cross a double line and commit something illegal as far as the driving code is concerned to save half a cent a litre. So it's very difficult to differentiate yourself at the pump. If you don't have the same price, you're not going to sell.

So as a company, we came to the conclusion that the only way to maintain our volume and to maintain our position in the marketplace was to match prices posted by the competition. We have been very aggressive on that.

If we see a lower price in areas where we are in business, we set it publicly. We're matching these prices on a day-to-day basis.

That's something the customer wants. He wants a good price. You see, these products—gasoline—in general, are totally interchangeable. So if you don't have the same price, you're not going to sell as much as you would like to sell.

Mr. James Rajotte: Certain reasons have been presented to us as to why the price of crude oil... which was then explained for the increase in retail prices, particularly in March, for the situation in Iraq, for the situation in Venezuela. And you have a chart here about refining margins and then you had certain fluctuations. You said, on average, it's about 5.5¢, and then you said it was basically an issue of supply and demand.

Would it be the same types of factors you have with the crude oil price or would you have different or additional factors?

Mr. François Trudelle: The crude oil market and the finished product market are slightly different markets. They work in parallel, obviously. There's always the refining operation that gets in-between that may change the dynamics a little.

Obviously, when you have very high crude oil prices...people in the refining industry have seen it many times, and we've seen it ourselves. If crude oil is $40 a barrel, you expect that it will come down at some point. We did it, and it looks like other people did the same thing. As the price went up, we decided to buy a little less crude oil to maintain a little less inventory. At some point it's very expensive if you carry a lot of inventory in this business, and you end up with $3 million or $4 million of capital tied up. As the price goes up, it just gets bigger and bigger. So you want to maintain inventory at a slightly lower level as the price goes up. And if you think it's going to be a short-term situation, especially if it's an unexpected disruption, you want to have a little less inventory on the crude oil side.

It tends also to reflect on the product side...a little less inventory also, because, again, as crude oil goes up, your value of inventory is fairly high and you don't want to get caught on the wrong side of it. If something else happens, all of sudden the margin has to go up and you have to bring products to customers in different ways.

This winter was a good example. Everybody looked at the market; it was very comfortable, the war was not happening, and so on. The price of crude oil went down a little.

You can see it on the chart.

But it didn't happen that way. We had cold weather, we had a strike in Venezuela, and all of a sudden demand was strong and everybody was struggling to find products to bring to the market.

When you have these types of situations, the margin has to go up. That's the only way you will bring more product to the market. When we have situations where we need to manufacture more product, we have to use inefficient ways to supply the market, and when it's inefficient, obviously, it means it's more expensive, and that's why your margin goes up. That's what we show, anyway.

The Chair: Thank you very much, Mr. Rajotte.

I'll now go to Mr. Volpe.

Mr. Joseph Volpe (Eglinton—Lawrence, Lib.): Thank you very much, Mr. Chairman.

Gentlemen, thank you very much for appearing.

I'd like to take a little different tack, if you don't mind, in part because this is a political environment. I guess we have the responsibility of translating some of what you say to your political clientele, our commercial clientele. They are one and the same.

If I follow the logic of my colleagues opposite, the major reason there is a price hike or why prices are so high is because the governments, whoever they are--it doesn't have a political stamp--charge so much in taxes. But really, if I hear you carefully, the real reason that prices are what they are is because that's what the market will bear and that you're engaged in an ongoing exercise, and I don't mean anything negative by this, to condition the public to a particular price.

That's part of the education process. If indicating that taxes are an evil thing...then that's part of the conditioning for accepting a particular price. Correct me if I'm wrong on this. If tomorrow governments were to eliminate their taxes, the conditioned price that would be acceptable to the consumer is the one that's out there published today, isn't it?

º (1640)

Mr. François Trudelle: If I understand your question, I think you're trying to say that if taxes were to go down, the prices would not go down.

Am I right in saying that?

Mr. Joseph Volpe: Do you want to answer that question?

Mr. François Trudelle: If you bring taxes down by 10¢, prices will go down by 10¢.

Mr. Joseph Volpe: Consumers in my riding, who aren't all economists, look at the way the market operates and they see one gas station with the attendant with binoculars at the ready looking two blocks down the road. They understand that when that guy drops his price, the other also has to drop his own. We heard from other testimony before yours that a guy is likely to drive 100 miles to get a half-cent rebate.

But he's looking for when the guy goes up half a cent, or a cent, or a cent and a half, because that's the margin we are led to believe they operate under. The moment he sees that price go up, boy, that market becomes really sensitive; it goes up right away. But there's been no delivery of supply, demand hasn't increased, and gas taxes haven't gone up. What happened is the guy just lifted his binoculars to see what the price was down the street.

Mr. François Trudelle: Jean will try to answer your question. He is our specialist on the retail side.

[Translation]

Mr. Jean Drolet (General Manager, Retail Development, Ultramar Ltd.): I think we should point out that this can go one way or another. However, the speed--

[English]

Mr. Joseph Volpe: Yes, I know. I heard about the other direction, but I just want to see how you would explain the upward direction.

[Translation]

Mr. Jean Drolet: Drops in price happen just as quickly, even if the product and inventory was acquired at a higher price. What's important is always to stay competitive. Our goal is always to have unbeatable prices in a particular region. We can do that because we have 400 zones in Quebec and Ontario, and can therefore set different prices in different regions.

[English]

Mr. Joseph Volpe: I used to believe and understand that, economically speaking. In Toronto we had a phenomenon on the weekend where one company decided to drop its prices by essentially about 20¢ per litre. Yes, there were lineups, but I didn't see the other companies rushing to meet that lower price. Eventually, over the course of the weekend, some did, but not to the same extent.

Yes, there was price sensitivity downward, so I gather there must be other items at play. Obviously, there's a certain margin or profit that allows people a cushion. It can't be so sensitive that if it drops half a cent or a cent and a half the guy goes out of business. It can't be that. So there are some other factor at play as well.

[Translation]

Mr. Jean Drolet: That also depends on how long the situation persists. The time factor is very important.

[English]

Mr. Joseph Volpe: I understand that too.

[Translation]

Mr. Jean Drolet: For a day, that is one thing. For a month, that is something else again.

[English]

Mr. Joseph Volpe: Or two or three days.

My understanding of the way the market works with the petroleum companies and gas retailers is that essentially they have one supplier who supplies about 80% to 90% of all the clientele. When we talk about whatever happens on the world stage, we're really talking about what that one supplier is willing to provide to the domestic market.

I'm sure there are all kinds of sensitivities on the world stage. Yes, if there is a problem or crisis, then bang, there's an instantaneous reaction, and it isn't because of the reaction of the supplier to the spot market in Amsterdam.

But the same sensitivity doesn't happen on the reverse side, which is the only thing people object to. They can understand that prices have to go up when there's a crisis, when there's a shortage, or when demand outstrips supply, but it doesn't happen in a split second unless the guy lifts his binoculars to look down the street.

º (1645)

[Translation]

Mr. Jean Drolet: There are many markets, but some are particularly sensitive, and can show a price hike on Monday or Tuesday, generally followed by a significant drop back to the weekend level. Market sensitivity can be observed upward or downward. Some markets, particularly Ottawa, are so sensitive to competition that prices may change three or five times in the same week.

[English]

Mr. Joseph Volpe: ...[Inaudible—Editor]... supplies all of the other stations, doesn't it?

The Chair: Thank you, Mr. Volpe. I'm sorry, I must move on.

Mr. Crête.

[Translation]

Mr. Paul Crête: Thank you, Mr. Chairman.

My question is for Mr. Trudelle or Mr. Drolet. The chart that you provided entitled “NYH 211 refining margin” shows that, at the end of the day, all the oil companies have the same refining margin. Is this correct?

Mr. François Trudelle: It is in fact an indicator for the entire industry.

Mr. Paul Crête: Is it applied in a uniform manner across all the oil companies?

Mr. François Trudelle: Not necessarily. In our case, we use it because we believe it is in line with our activities.

Mr. Paul Crête: But in the first quarter of 2003, all companies applied about the same refining margin.

Mr. François Trudelle: That information is generally available.

Mr. Paul Crête: Is this because there is some agreement among the companies? Is it because there is a procedure in place establishing a refining margin on the basis of what we see here, or according to the margin in Buffalo, depending on the region?

Mr. François Trudelle: There is no agreement among oil companies on refining margins. Specialized companies report on prices as observed in different markets. They make the information available to all stakeholders in the industry, as well as to individuals.

Mr. Paul Crête: As you have already said, your firm does not extract crude oil. Considering that the profit margin is a very important factor, I would like you to explain why you did not, if you wanted to sell more gas, decide to get 15¢ during the peak periods or 10¢ during the other months; you could have agreed to 7¢ or 7.5¢ and, with the difference, you would have made so many sales that your competitors would have paid the price.

Mr. François Trudelle: You have to consider all of the company's activities and the markets. When the margin is high and, as a result, the demand is as well—this is true in our market and in the others also—our production may already be sold. We could increase sales by lowering our prices, but we simply wouldn't have any product to sell. In my opinion, this is the first factor that you need to consider.

Furthermore, you have to remember what we were talking about a little earlier, namely, that we work on the basis of averages. Over a given period of time, you have to be able to achieve a certain profit average in order to obtain an acceptable return on investment.

Mr. Paul Crête: When you look at the graphs on crude oil and the refining margin, you note—and this is very surprising—that they are the same.

If I were to superimpose the “crude oil—Brent reference” graphs over the “NYH 211 Refining Margin” graph, I would see that every time there is an increase in crude prices, your refining margin increases proportionally. Economically speaking, such behaviour is unexplainable, right?

If I wanted to sell a product at the best possible price, even during a given period of time—especially if I was only in the refining sector and not in the crude oil sector, like you—I would tend to drop the price by at least half.

In my opinion, if you were to adopt such an approach over the long term, you would be practically the only ones able to provide people with a price that they would accept.

Mr. François Trudelle: That presupposes that people pay more when prices or the margin are low. However, that is not what happens; we are in an open market where the commodity is imported.

If the margin goes below our profit threshold, we find ourselves in a situation where people will simply import the product; at that point we will no longer be able to sell our production.

Mr. Paul Crête: Why does everyone have the same margin?

º (1650)

Mr. François Trudelle: This is a commodity that is interchangeable on an open, international market.

Mr. Paul Crête: But you cannot buy anything but gas for your car.

Mr. François Trudelle: Generally speaking, gas is a totally interchangeable product. Regardless of whether it comes from one refinery or another...

Mr. Paul Crête: Let's imagine that my car is parked at the street corner and the tank is empty; I need to buy gas. I cannot use coal. Only gas will do. So we're talking about a captive market. Companies can compete amongst themselves, but if they all have the same crude oil margin and the same refining margin, we are facing a major problem.

Mr. François Trudelle: It's a global market. Consequently, when our refining capacity has reached maximum levels and we import product, we have to pay the international market price. We have no other choice: we earn our bread and butter by achieving the refining margin.

Mr. Paul Crête: I would like to ask one final question.

[English]

The Chair: I'm sorry, I have to interfere.

I think everybody understands the rules here. It's unfortunate, but we have to conclude this portion of the meeting and go on to the next portion.

Mr. Trudelle and Mr. Drolet, thank you very much for being with us today. We're always pleased to have people like yourselves inform the committee about what's happening in your business. So thank you very much. Have a good day.

We're going to change panels.

º (1651)

º (1654)

The Chair: We'll now reconvene with our third panel. Today, we have, from Shell Canada Limited, Mr. Terry Blaney, vice-president of marketing, and Ms. Lesley Taylor, manager of public affairs for Shell Canada products.

Welcome to the industry committee.

Mr. Blaney, please lead off.

º (1655)

Mr. Terry Blaney (Vice-President, Marketing, Shell Canada Limited): Mr. Chair, good afternoon.

We're here on behalf of Shell Canada Limited. My name is Terry Blaney, vice-president of marketing. With me is Lesley Taylor, who is from our public affairs team. We're pleased to be here today to present our views on the underlying reasons for the recent increases in Shell Canada's retail gasoline prices during the period of February and March 2003.

My goal today is to explain the market fundamentals that determine Shell Canada's production costs and gasoline pricing decisions. At Shell Canada, we believe that free market mechanisms are working to the benefit of Canadian consumers. We do not believe that short-term fluctuations in gasoline prices have a significant or lasting effect on the economy. Altering public policy would be inappropriate and unnecessary and would not be in the public interest.

Shell Canada is an integrated energy company. Our upstream business has contributed over 60% of our company's earnings over the past five years. Our downstream business has provided less than 40% of those same earnings.

The 2003 first quarter downstream financial results improved significantly over a very weak performance for the same quarter in 2002. On average, our downstream earnings over the last five years have averaged 1.6 cents per litre.

Until the startup of our oil sands synthetic crude facilities last month, Shell Canada has had only minor crude oil production. Our downstream business produces and markets 19% of Canada's refined products. The 275,000 barrels per day of crude oil required to run our three refineries in Canada come from other domestic producers or from offshore.

Shell Canada's gasoline prices are affected by conditions in the international crude markets, the North American refined product markets, and local retail markets. In February and March 2003, the factors resulting in the increases to Shell Canada's gasoline prices were the escalating cost of crude oil; tightness in the North American supply-demand balance for refined products, which led to increases in published rack prices; and increased amounts of taxation collected by various local levels of government.

Gasoline prices increased to historic levels in early 2003. During this period, the combined costs of crude oil and taxes continued to represent about 83% of the final cost to the consumer, consistent with the 2000 Conference Board of Canada study on gasoline pricing. What the consumer experienced at the retail pump during this period can be attributed primarily to the flowthrough of increased crude costs and taxes and, to a much lesser extent, the volatility in either retail or refiner margins.

During the first quarter of 2003, global crude oil production declined 6%, or the equivalent of 5 million barrels per day, as a result of the labour unrest in Venezuela and the uncertainty created by the Iraq conflict. Other producers increased production to partially cover the shortfall, and inventories were drawn down to fully meet demand. Crude inventories dipped below the 10-year historical range in the U.S., resulting in rising crude prices, averaging $32.50 U.S. per barrel, but peaking as high as $39.99 U.S. on February 27, 2003.

Shell Canada's published rack and retail prices increased during this period, reflecting not only higher crude costs but also the increased demands placed on the available gasoline inventory. A colder winter in eastern Canada extended refinery production of heating oil, affecting our capacity to produce more gasoline. Shell's retail prices reflected the flowthrough of these increased costs, as well as local competitive market conditions.

At Shell Canada we account for inventory on the principle of LIFO--last in, first out. This is consistent with U.S. accounting conventions in the market with which we compete, for both crude and refined products.

» (1700)

Shell Canada's published rack and retail prices are calculated daily to reflect our current cost of crude and refined product cargoes. Pump prices the consumer pays include all applicable taxes, so consumers paid higher amounts of GST and provincial and municipal taxes during the February and March 2003 period. Some jurisdictions, such as the province of B.C., also increased local taxes at the pump during this same timeframe.

At Shell Canada we believe short-term price movements do not have a significant negative impact on the economy. The global supply of crude oil and refined products can be tenuous, and occasional supply dislocations can occur, resulting in temporary price effects. North America encountered just such serious supply disruptions through the first quarter of 2003, which resulted in short-term increases to consumer gasoline prices.

As we move through the second quarter, production and inventory levels are recovering, and street prices are lower. We emphasize that Canadians enjoy some of the lowest prices for secure supplies of energy in the world and continued to do so through this period.

Developing conventional and alternative sources to meet Canada's future energy needs in environmentally responsible ways continues to demand significant financial resources and capacity for innovation. Shell Canada believes energy pricing should continue to reflect free market mechanisms. We believe government policy should encourage private investment in profitable growth and continuous improvement, to the benefit of consumers, shareholders, the environment, and society as a whole.

I thank you for your attention. We will be ready to answer any questions you may have.

The Chair: Thank you very much.

Mr. McTeague, five minutes.

Mr. Dan McTeague: Mr. Blaney, thank you for being here today, and Ms. Taylor as well.

I want to put a few things on the record. A number of companies have come forward and praised the value of the Conference Board. At the time the Conference Board entitled a study The Final Fifteen Feet of Hose, we referred to it as the fifteen feet of hose wrapped around every consumer's neck in this country. The concern we had at the time was that it was underfunded, admittedly; it had no opportunity to benchmark and use independent analysis; nor did it consult the independents as to what was occurring in the industry.

I am concerned, obviously, about the reliance by some here on talking about the issue of taxation. As most consumers know, they don't go up on long weekends. More importantly, anything that can be gleaned on the subject of taxes was created by the Liberal committee on gasoline pricing, including the one that precipitated a federal election, in which the committee recognized the need to remove GST from other taxes.

At the time, of course, we were relying on other anecdotal evidence, for instance from the New Brunswick Select Committee on Gasoline Pricing, which was concerned that when taxes dropped by 2¢ a litre, the industry did not respond with a corresponding decrease for several months and of course pocketed the money.

We are also concerned about the increase of 1.5¢ a litre that took place in 1996 to fight a deficit that no longer existed. We said it should be eliminated. At the same time, for approximately three months the industry not only kept the 1.5¢ increase but added several cents to its bottom line.

My concern here is not so much with whether you keep identical prices and rack prices, but I note today that Shell's rack price in Toronto is in the vicinity of 30.9¢. If that is the case and all the other companies are following suit, then I'm going to accept that the wholesale price of crude today is 30.9¢ in Toronto .

If I add the federal and provincial taxes for my colleagues here in the Alliance of 10¢ for the federal excise tax and 14.7¢ for the Ontario tax, that gives me a total of 55.6¢ a litre.

I then go to what CPPI has accepted as an average margin needed by retailers to operate gasoline stations in Toronto with all these large numbers--3.5¢ a litre, which gives me 59.1¢. I multiply that 3.5¢ by 1.07, which is for the GST, and add of course the resulting 4.137¢, which gives me a total of 63.2¢ a litre.

Apart from the fact that the Competition Bureau has admitted there's some need to change the Competition Act--it obviously doesn't have a problem with the Conference Board--how is it possible that gas stations like yours in my riding today are charging 69.9¢ a litre, in other words a 6.7¢-a-litre differential?

Mr. Terry Blaney: Mr. Chair, there were a number of comments made in the question. With regard to the Conference Board of Canada, my understanding is that independents were indeed invited to attend and to participate in the Conference Board study entitled The Final Fifteen Feet of Hose, and my assumption is the ultimate report did report the views, basically, of all constituents.

To address the other matters that have been referenced, and in particular the disparity or seeming disparity between retail and wholesale or rack prices in the market, there are a variety of forces at work, both in the context of the retail market and in what drives the rack price in any one of the major communities. What we end up seeing in a market like Toronto, on average, over a period of time, is that the margins we receive are substantially less than the reference that's being made at today's price.

Inevitably, in markets that are highly efficient--

» (1705)

Mr. Dan McTeague: Mr. Blaney, are you making money today at the retail and wholesale levels in Toronto, yes or no? At 69.9¢ a litre—these are your own facts I'm giving you—are you making money today at the pumps?

Mr. Terry Blaney: We are obviously making a gross margin, and one has to factor in all the associated variable and fixed costs to be deducted from that price.

Mr. Dan McTeague: If the Competition Bureau and you believe there is so much competition in this industry, why is someone not challenging 6.7¢ a litre? If that were conducted--forget the downstream--for a period of one whole year, at 40 billion litres being sold in this country, we're not talking chump change; we're talking about a transfer of wealth.

I'm interested in what you have to say with respect to the committee, the former report by the Conference Board. Independents have told us clearly they were not in any way, shape, or form consulted at great length. Indeed, the very stickers the companies you are associated with through the industry use--MJ Ervin--are indeed benchmarkers that have a direct relationship with the industry.

What I'm concerned with is, of course, the 1986 Competition Act, which was written by the very people who are running your industry.

So the question is, sir, over the period of time where you've had 5¢-, 6¢-, 7¢-, and 8¢-a-litre margins at the expense of consumers, how is it possible, in this circumstance, that one wouldn't conclude that as a result of the war situation there was some profiteering by the oil companies at the expense of our economy?

Mr. Terry Blaney: Upon reflection, I wanted to try to address the original question in a bit more detailed way.

There was a reference around what it costs to run a retail business. I believe what was being quoted was the cost associated with running a retail site. There are a variety of additional costs—asset-related costs, distribution, other variable costs associated with things like merchant fees for the assumption of credit cards and the like—that all end up in a cost structure that's substantially higher than the 3¢ that was quoted.

Mr. Dan McTeague: You're a member of CPPI. For the record, Mr. Chair, that's their—

The Chair: No, I'm sorry, Mr. McTeague, you've taken more than your time.

Mr. Chatters.

Mr. David Chatters: Thank you, Mr. Chair.

Thank you for coming to testify for us.

It's certainly an interesting direction Mr. McTeague's going in with this, but I would recognize—and I don't understand why he wouldn't—that because the rack price today is a certain price, and your retail price is a certain price in his market, it doesn't mean the gasoline in the tank below the pump or the gasoline refined weeks ago at the refinery was purchased at that rack price or produced at that rack price. So there are variables, as there are variables in the retail station if it's 40 below zero—your costs of maintaining, heating, and lighting your service station vary to that rate too. I think that's a bit of an unfair accusation, quite frankly.

But there have been a lot of accusations made over the last number of months, particularly against companies like yours—the fully vertically integrated companies—of using that integration in the marketplace to their advantage by refining gasoline and selling it to your own retail service stations at a discounted price, therefore giving your retail stations an advantage over the independents.

Is it possible to do that? Do you have the flexibility, considering everybody's buying crude at the same price and everybody's refining costs are essentially the same, and therefore everybody's rack price on a given day has to be very similar? The only way you could do what is being suggested is if you were taking a loss on your refining margin or your crude margin to give your retail an advantage in the marketplace.

Is it possible to do that?

» (1710)

Mr. Terry Blaney: From the standpoint of the way we operate the business in Shell, there is a great degree of autonomy within the marketing and the refining divisions. Both of us have the opportunity and exercise it to establish our respective prices based on market forces.

The refining side of our business looks at what's happening in terms of the refining dynamics—local supply envelopes, available inventories, daily liftings, competitive postings on rack prices—to establish what they see as being the refiners' rack price for the day.

Likewise, from the standpoint of the way we operate the retail or the commercial branded businesses, we too are looking at the market forces establishing the ultimate selling price to consumers, and there is no attempt to cross-subsidize or subsidize by virtue of integration one business versus another. They are intended to stand alone. Our decisions on how we operate the business and what kind of investment it can generate for the future are determined on the standpoint of individual businesses.

So in that context our retail business looks very similar in terms of a model to what an independent could do.

Mr. David Chatters: I guess the other issue, or the other myth, if you will, particularly about the large vertically integrated companies, is the idea that they are collecting excessive profits and are thereby gouging the consumer.

I'd like you to comment a little bit about how your business works in exploration and development, the upstream end, if you will. In some of the other sectors, either the retail sector or the refining sector, the margins are better and more profitable.

What about the necessity to invest in the upstream end to guarantee that you have a supply to feed the downstream end in the future?

I think consumers need to understand that you need profits or you won't drill another oil well or build another tar sands plant. I think consumers have to understand that.

Mr. Terry Blaney: I would agree. I would like to call attention to it.

Unfortunately, you have not had a great deal of time to absorb the materials in the chart pack. The intention of trying to provide the material was to demonstrate that indeed over the course of the last five years the upstream side of our business has generated in excess of 60% of the profit that Shell Canada has enjoyed.

Unfortunately, when the headlines hit on quarterly earnings, the inference is that all of it has come at the expense of the consumer. In fact, it's being driven by different facets within our business.

There's no question that the ability for an organization to be able to fund undertakings, such as the oil sands plant that cost $5.7 billion, requires that a fair amount of cash and profitability be generated. I would also hasten to say that the costs associated with investing within the downstream business are equally significant for us to rejuvenate our retail networks and to be able to meet the environmental requirements for the future.

I would highlight, for a moment, that we have completed two gasoline hydro-treating units at two of our refineries at a cost of $150 million. We have some fairly large projects coming forward for ultra-low sulfur diesel in the near term as well.

There is significant investment happening really in both sectors of our business and being generated, obviously, from the cashflow generated from the two respective divisions.

The Chair: Thank you very much, Mr. Chatters.

Mr. St. Denis.

Mr. Brent St. Denis: Thank you, Mr. Chair.

Thank you both for being with us today.

As a previous witness mentioned, I have a large rural riding in northern Ontario. There is typically quite a large difference between the north end of my riding, in Wawa or Manitouwadge, and the south end, in Espanola or Manitoulin Island. Sometimes it is as much as 10¢ a litre.

Is there an industry standard for the cost to transport gas by bulk truck from a refinery to its ultimate destination?

How much of the price differential would be explained by transporting it to Chapleau, for example? Is there a “so much per kilometre” standard when you do your own planning?

I wonder if there's an answer to that.

» (1715)

Mr. Terry Blaney: Yes. I think you could think of it in terms of concentric circles emanating from terminals or supply sources. Distribution costs are very much a function of distance. Most locations today are taking large loads, so distance would be the primary factor around freight.

Mr. Brent St. Denis: Do you have a zero figure of how much per kilometre?

Mr. Terry Blaney: I could only give you our distribution costs across the country on average. Orders of magnitude are in eight-tenths to nine-tenths of a cent per litre range. It would vary from very low numbers in large urban centres to multiples of that in more remote regions.

Mr. Brent St. Denis: Is that 0.8¢ to 0.9¢ per litre per kilometre?

Mr. Terry Blaney: No. That would be on average for the total of what's being delivered on a load.

Mr. Brent St. Denis: I see. It certainly wouldn't explain a 10¢ differential on a 300-kilometre haul from Sault Ste. Marie to Chapleau, for example, would it?

Mr. Terry Blaney: No.

Distribution costs to more remote areas are definitely a factor, but not a primary factor. Smaller, more distant markets are probably more a function of the actual local competition itself, and also there's the standpoint of average throughputs that one would see in the market.

For our business, the retail business has a high amount of fixed costs. Obviously, the more litres you can push through a site, the lower your unit cost is going to be, and that reflects itself in terms of lower margins and lower prices to the consumer.

If you end up in small markets with small throughputs, or small average throughputs, you will see a price differential relative to what you would see in larger centres. The amount of competition, the extent to which there are many competitors in a market versus few, will also determine the volatility that goes on in one market versus another.

So there's a host of things, not simply just distribution, that will drive those differences.

Mr. Brent St. Denis: Thank you.

Do I have time for a short question?

The Chair: Yes, you do.

Mr. Brent St. Denis: Again, we try to explain to our constituents as best we can what's going on. We have the same problem in politics that sometimes you folks have in your industry in explaining sometimes complex issues.

One of the other issues is that being in a border area—the Sault Ste. Marie border crossing is adjacent to the region I represent—Canadians typically think it's cheaper to go to northern Michigan, but northern Michigan is at the very north end of the U.S. economy. There's a perception that people can buy gas in northern Michigan cheaper than they can in northern Ontario.

Is it possible to explain whether that's true or not, with and without the taxes? We have to explain our taxes, as the provinces do, so we're responsible for that. But I was wondering if you could comment on the differential at retail between the U.S. and Canadian gas prices.

Mr. Terry Blaney: Probably the easiest way to try to demonstrate that would be chart 6 in the pack that shows the comparison. These again are national averages, but they do highlight in red the Canadian ex-tax average pump price. This is during the month of March 2003. We have consistently seen similar data in prior months. Our intent in trying to demonstrate this is that even at this point, when prices hit their zenith and crude oil was at the top, Canadians still enjoyed, on an ex-tax basis, the lowest prices available in any of the developed countries around the world. Obviously, when you factor taxes in, Canada is still significantly advantaged to most of the other countries.

The U.S., on average, does enjoy lower tax rates.

I can't comment on specifics in terms of Sault Ste. Marie and what happens on one side of the border versus another, but essentially this would be a demonstration around the efficiency of our system.

I'd also hasten to add that in the context of Canada, despite the fact we have a smaller population, a much wider geography to deal with, with longer supply lines, and a refining system that doesn't enjoy the same levels of efficiency as our American counterparts, we're still able to deliver to Canadian consumers, on an ex-tax basis, prices that are comparable to or better than anywhere else in the developed world.

» (1720)

The Chair: Thank you very much.

Monsieur Crête, you have at least four minutes.

[Translation]

Mr. Paul Crête: Thank you, Mr.Chairman. I am very pleased to see that, in your documents, you use the term “war premium”, but who benefited from this premium remains to be seen.

However, the tables you provided make no mention to the refining margin. Are we to understand that your refining margin is just about the same as that of the New York Harbour 211, which I have here and am showing to you?

[English]

Mr. Terry Blaney: Maybe the best way to try to explain that is with one of the other charts in the pack, chart 3.

What I've tried to highlight here—and this is, again, a Canadian average, rather than trying to pick out one market versus another—is to show what actually took place, because I think there are some perceptions around the speed with which crude prices ended up reflecting through to consumers on the street.

On the left hand chart, what you see is the average retail pump price as it's been sold to consumers through the period October to April. My purpose in starting with the month of October was really just to set a bit of context around where we were before the period of destabilization really began.

The Venezuelan strike started in the month of December and obviously carried through the period. Then, obviously, there was the Iraq conflict, the war premium or the speculations starting around February and culminating in March.

The important thing to highlight is what's on the right hand chart. I've colour-coded the various elements of it, and these are baselined against October 2002.

So what this is showing is that, for instance, in November, crude prices dropped by the order of magnitude of 2.5¢ a litre, and in fact the consumer saw that reflected in the street price on average, where street prices dropped in the order of magnitude of 2¢ litre. As we moved into December and January, we started to see crude prices increasing. Those prices did not show themselves in terms of actual street price increases to the consumer. They were still around the 74¢- or 75¢-a-litre range.

So the buildup of this is that we did see the Venezuelan issue and speculation about where Iraq was going to impact, but what's of significance is the green wedge you see below the line. That is a reduction happening in the refiners' margin through that period. Then in February, that reduction basically disappeared and in March became slightly ahead of what we had in the month of October.

The story, really, is that we had these issues around global supply on crude oil taking place and it wasn't really until we got into the February timeframe when the onset of the extended cold weather on the east coast manifested itself over and above the crude supply issues... That is what would have caused the increase in refiners' margins through that period. There was a literal scrambling of supply in order to meet both the heating oil and the gasoline demands that were brought on by the additional cold weather.

The Chair: Mr. Crête, you have one more question, and then I have to go to Mr. Volpe.

[Translation]

Mr. Paul Crête: The Conference Board study talked about the competitive advantage resulting from the fact that the American price, because of the way things were organized, had a downward impact on Canadian prices.

However, since this report was released, it appears that 95 per cent of refinery facility uses taking place in the United States. So the effect has been reversed. This phenomenon was confirmed by the owner of Valero.

Every time a refinery is shut down, regardless of what the reason may be, this has an impact on the price in Canada. Do you plan to regulate Canadian oil companies so that they no longer base themselves on the American reference price, as they do at the present time? Given this new situation, would it not be advisable to no longer base yourself solely on that price?

» (1725)

[English]

Mr. Terry Blaney: I think this leads to a host of speculation on what could and couldn't happen. I think in the context of any of the work we've either been involved in or are aware of, we've consistently come away with the view that regulation ends up being to the detriment of the consumer over time as opposed to their benefit.

The reality is we are in a global market; we are dealing with commodities. If you look to impose a regulatory framework on something as critical as pricing, you run the risk of challenging the ability for Canada to maintain its own self-sufficiency, because opportunities to invest are based on where the available opportunities are. If you regulate Canadian markets to the detriment of what else is happening outside of Canada, you would see a flow of investment dollars, whether for the upstream or the downstream side of the business, to where it would be more attractive.

The Chair: Thank you very much.

That concludes our hearings for today.

Mr. Blaney, Ms. Taylor, thank you very much for being with us. We really appreciate the graphs and your explanations to help us understand your business.

This meeting is adjourned until we meet again.