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37th PARLIAMENT, 2nd SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Monday, May 12, 2003

1530

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

Mr. René Blouin (Chief Executive Officer, Association québécoise des indépendants du pétrole)

Mr. Pierre Crevier (President, Les Pétroles Crevier; Member, Association québecoise des indépendants du pétrole)

1535

Ms. Sonia Marcotte (Economist, Director of the Economics and Legal Affairs Committee, Association québécoise des indépendants du pétrole)

Mr. René Blouin

The Chair

Mr. Simon Smith (Vice-President, Fuels Marketing, Products and Chemicals Division, Imperial Oil Limited)

1540

1545

The Chair

Mr. Jean-Pierre Benoît (Director, Coalition pour la défense des consommateurs de carburant du Saguenay-Lac-St-Jean)

Mr. Claude Girard (President, Coalition pour la défense des consommateurs de carburant du Saguenay-Lac-St-Jean)

1550

1555

The Chair

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance)

The Chair

1600

Mr. Michael Ervin (President of MJ Ervin and Associates, As Individual)

1605

The Chair

Mr. David Chatters (Athabasca, Canadian Alliance)

1610

Mr. Claude Girard

Mr. René Blouin

1615

Mr. David Chatters

Mr. Michael Ervin

1620

The Chair

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

Mr. Michael Ervin

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

1625

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

1630

The Chair

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

Mr. Simon Smith

Mr. Paul Crête

Mr. Simon Smith

Mr. Paul Crête

Mr. Simon Smith

Mr. Paul Crête

Mr. Simon Smith

Mr. Paul Crête

Mr. Simon Smith

Mr. Paul Crête

Mr. Simon Smith

Mr. Paul Crête

Mr. René Blouin

1635

The Chair

Mr. Paul Crête

Mr. René Blouin

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

Mr. Simon Smith

1640

Mr. Larry Bagnell

Mr. Simon Smith

Mr. Larry Bagnell

Mr. Simon Smith

Mr. Larry Bagnell

Mr. Michael Ervin

Mr. Simon Smith

Mr. Larry Bagnell

Mr. Simon Smith

Mr. Larry Bagnell

Mr. Simon Smith

Mr. Larry Bagnell

1645

Mr. René Blouin

Mr. Larry Bagnell

Mr. Pierre Crevier

Mr. Larry Bagnell

Mr. René Blouin

Mr. Larry Bagnell

The Chair

Mr. Larry Bagnell

The Chair

Mr. Claude Girard

1650

The Chair

Mr. Brian Masse (Windsor West, NDP)

Mr. Simon Smith

Mr. Brian Masse

Mr. Simon Smith

Mr. Brian Masse

Mr. Michael Ervin

Mr. Brian Masse

1655

Mr. Simon Smith

Mr. Brian Masse

Mr. Simon Smith

Mr. Brian Masse

Mr. Simon Smith

Mr. Brian Masse

Mr. Simon Smith

Mr. Brian Masse

Mr. Michael Ervin

1700

Mr. Brian Masse

Mr. Simon Smith

The Chair

Ms. Jocelyne Girard-Bujold (Jonquière, BQ)

Mr. Claude Girard

1705

The Chair

Mr. Serge Marcil (Beauharnois—Salaberry, Lib.)

Mr. Simon Smith

Mr. Serge Marcil

Mr. Pierre Crevier

1710

Mr. Serge Marcil

Mr. Pierre Crevier

Mr. Serge Marcil

Mr. René Blouin

Mr. Serge Marcil

The Chair

Mr. Dan McTeague

The Chair

Mr. Dan McTeague

The Chair

Mr. James Rajotte

Mr. René Blouin

1715

Mr. James Rajotte

Mr. René Blouin

Mr. James Rajotte

Mr. René Blouin

Mr. James Rajotte

Mr. Pierre Crevier

1720

Mr. René Blouin

Mr. Simon Smith

The Chair

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

1725

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

Mr. Simon Smith

Mr. Dan McTeague

The Chair

Mr. Simon Smith

Mr. René Blouin

The Chair

CANADA

Standing Committee on Industry, Science and Technology

NUMBER 043

2nd SESSION

37th PARLIAMENT

EVIDENCE

Monday, May 12, 2003

[Recorded by Electronic Apparatus]

¹ (1530)

[English]

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

Today we have four different groups of witnesses: Sonia Marcotte, René Blouin, and Pierre Crevier; Simon Smith; Claude Girard and Jean-Pierre Benoît; and Michael J. Ervin.

We're asking everybody to give us presentations of up to and no more than 10 minutes. I will probably have to warn you around nine minutes. The rest will be open for questions and answers.

We'll go down the witness sheet as shown. Will all three of you be speaking? So you're going to split the time. Okay, thank you very much.

Monsieur Blouin.

[Translation]

Mr. René Blouin (Chief Executive Officer, Association québécoise des indépendants du pétrole): My name is René Blouin and with me are Pierre Crevier, President of Pétroles Crevier and member of the AQUIP's Economic Affairs Committee, and Sonia Marcotte, Economist, Director of the AQUIP's Economic and Legal Affairs Committee.

We are going to give you a summary of the brief we submitted to the committee. We have copies of that brief for those who would like to have one. Here are the subjects we cover.

First, let's take a look at competition. In Quebec, the presence of independent distributors and retailers ensures competition in the distribution and sale of petroleum products.

This document clearly shows that if the independents were to disappear, as a result of predatory selling, Quebec consumers would have to spend $336 million more annually to buy the 13.4 billion litres of petroleum products they need.

The reality is that the lack of true competition in the crude oil industry and the concentration of refineries in the hands of a few major oil companies already have penalized the consumer heavily. We have to prevent things from getting worse by maintaining a diversity of companies in the distribution and retail sale of petroleum products, which is good for consumers. Only the presence of a critical mass of independent companies guarantees a diversity of companies and fosters the necessary competition for the proper functioning of free trade.

Mr. Pierre Crevier (President, Les Pétroles Crevier; Member, Association québecoise des indépendants du pétrole): The number of gas stations in Quebec compares well with the United States. Quebec has 58.5 gas stations for every 100,000 residents compared with 59.2 for our neighbours to the south. For the same number of residents, there is about the same number of gas stations in Quebec as in the US. In this context, it can therefore not be said that there are too many gas stations in Quebec. The rationalization that is occurring gradually in Quebec must avoid harmful excesses. It is the normal market forces that should govern rationalization, by taking into account the population density of each market. Any attempt to use marketing tactics based on predatory sales is not at all part of an honest effort to rationalize and may result in excessive market concentration, which is harmful to the consumer.

We have to remain vigilant and not forget that the independents in Quebec provide a near-essential service to people in sparsely populated areas, who would otherwise be denied fuel supplies and forced to travel many kilometres to get gas or diesel. There is a reason those service stations are there. Their disappearance would lead to a waste of time and energy for consumers and increase the amount of harmful emissions from cars, which governments are trying to limit. We have to avoid accentuating the isolation of communities that are denied services to which they are entitled. If we really want to stand up for the regions, we cannot ignore the inherent danger of denying near-essential services.

The last report from the United States Senate on how the oil market works was published in April 2002. Entitled “Gas Prices: How are They Really Set?”, the report warns that the concentration of the oil market is a great threat to the consumer. The report is well documented and members of the committee could refer to it more in their studies, since it deals with the same topics.

In the refining sector, the example of the American northeast dramatically illustrates how large mergers of colossal oil companies hinder competition and drive up prices. By controlling production and maintaining low inventories of oil products, the refineries successfully create an artificial scarcity that makes prices jump. We must learn quickly from this situation, which penalizes all consumers of petroleum products. Market concentration does not bode well for the future.

¹ (1535)

Ms. Sonia Marcotte (Economist, Director of the Economics and Legal Affairs Committee, Association québécoise des indépendants du pétrole): The crude oil cartel that multinational oil companies profit from, and the concentration of the refining industry, limit competition, penalize consumers and result in massive profit increases for the major oil companies. Only the distribution and retail sector is left out of this inflationary spiral, and it is the only sector that has remained stable. This is no coincidence: it is the independents that guarantee the presence of a variety of companies, which is conducive to true competition and advantageous to consumers. The disappearance of independents would lead to a concentration of companies and increases in retail markups, as is the case in the refining sector.

In the US, more than half the States have decided to take action by passing legislation. The Quebec National Assembly unanimously did the same in 1996. The Régie de l'énergie Act is based on American legislation and sets out to ensure competition in the oil market, which is better for consumers. Like the House of Commons, the Quebec National Assembly has taken an interest in the price of gas and its effect on the economy. The report by the committee that examined these issues concluded that the increases in gas prices stemmed from increases in crude oil and refinery margins and that retail markups were not to blame.

Mr. René Blouin: Finally, Mr. Chairman, members of Parliament, we give you our recommendations, as requested.

AQUIP proposes that the committee recommend to the Government of Canada that it form a group of independent experts, whose mandate it would be to review the necessary means for deconcentration of the oil industry in Canada. The group of experts will look at the history of concentration in the oil industry in Canada and propose the best ways to defeat this reality that hurts Canadian consumers. The group of experts will make any other recommendation to better protect consumers from increases in gas prices.

[English]

The Chair: Thank you very much.

Mr. Smith.

Mr. Simon Smith (Vice-President, Fuels Marketing, Products and Chemicals Division, Imperial Oil Limited): Good afternoon, Mr. Chairman. I'm Simon Smith, the vice-president and general manager of fuels marketing for Imperial Oil. I appreciate and my company appreciates being given the opportunity to address the committee this afternoon.

I'll start my comments by making a number of summary comments around the charts that follow in the package. It's our view that Canadians are well served by the current market system. We also believe that the volatility and uniformity we see in pricing is a direct result of very fierce competition at different levels within the industry.

Canadians enjoy some of the lowest gasoline prices in the world, particularly versus the United States, in spite of lower productivity and lower efficiency. Differences in gasoline prices from one area to another are more a function of the relative productivity of the service stations in that area than any other factor.

Crude oil and taxes make up about 85% of the average price of a litre of regular gasoline. I've been in the business for over 20 years, both here in Canada and in Europe, and during that time there have been at least 30 formal studies of the industry at all different levels. They've all come to the same conclusion that competition is alive and well.

It's our view that more and more Canadians appear to understand this reality, but obviously some Canadians still struggle, particularly when prices rise like they did earlier this year.

If we turn to the next slide, I'd like to show a trend in gasoline prices over time. This chart looks at gasoline prices since 1983, indexed in that year at 100, and then in real terms from 1983 to the present. The yellow line shows the gasoline price in Canada excluding tax, and it shows that since that time, at a fairly steady rate, the real price of gasoline to Canadian consumers has declined.

If we look at the entire period in total, there's a decline of roughly 30%, excluding tax. That is really a function of an industry that's very competitive; that's becoming more and more efficient, day in and day out; and that needs to be that way to remain profitable for its stakeholders and its shareholders.

The red line shows the change in taxes on the same basis, again using 1983 as an indexed year at 100. It then plots the tax effect on the price of gasoline only, over that same timeframe. As you can see in the same timeframe, it's the tax impact that has made a material change in the value and price of gasoline to Canadian consumers. Over that time, there's been an increase of roughly 40%.

On the next slide there are some price comparisons of gasoline among a number of developed countries in the world. I know this chart was shown to the committee earlier, but you'll note here that excluding taxes, Canadians enjoy one of the lowest gasoline prices in the developed world.

The vertical axis shows Canadian cents per litre. The countries across the bottom include the U.K., Germany, Italy, France, Japan, Spain, Canada and the U.S. The red bars show the average prices for gasoline in those countries for the 12 months prior to January 2003. They show the tax load on average over that 12-month period in the white part of the bar. Then the absolute price is shown at the top of the bar in yellow.

You can see clearly that Canadians enjoy, in an absolute sense, apart from the United States, a very low price for gasoline in total. I think it's more important to note that Canadians pay a lower price, excluding tax, than many of these countries. It's lower than the U.S. over this period, significantly lower than Spain and Japan, lower than Italy, and only marginally higher than the U.K. and France.

I think it's more important to stand back and look at this chart. In particular, I draw your attention to the fact that a number of countries here have a number of different factors in common. The U.S., Canada, France, Germany, and the U.K. all enjoy some of the lowest prices for gasoline in the world, and those markets have a number of things in common.

First and foremost, the market is not regulated, from a price point of view. It is basically a free market in all the different levels of competition. Secondly, there are many competitors, including major integrated refiners and marketers, multinational companies, independents, and non-conventional competitors, including grocery chains and hypermarkets. In all those markets, the barriers to entry are not significantly high. They encourage competition and result in average prices that are among the lowest in the developed world.

¹ (1540)

The next slide looks at the relationship between gasoline pricing and service station productivity, or the millions of litres that are sold on an annual basis in that particular service station. This data is from an MJ Ervin study in 1997, and it basically shows that productivity is the main driver of pricing differences among the various geographies in Canada.

There are fixed costs when a service station opens for business--i.e., the taxes, maintenance, lighting, employee salaries, etc.--and they need to cover those costs in order to break even. If we look at the break-even points in a number of different markets in Canada and compare them against productivity, you'll see a direct relationship.

The graph on the chart shows margin in cents per litre on the vertical axis, and throughput or productivity in millions of litres of sales per year on the horizontal axis. We've done a simple calculation using two examples: the Gaspé region of Canada, and the Toronto market. The fixed costs for running a service station in the Gaspé area in 1997 were $150,000 a year. A typical station in that period sold about one million litres per year, and to cover its fixed costs, open the doors, and make no profit it needed a margin of roughly 15¢ per litre.

If we look at the Toronto market, it was at the other end of the extreme. It was much more expensive to run a retail service station in Toronto. On a fixed-cost basis it was about $275,000, but the productivity in that market was five and a half times that in the Gaspé area of Canada. As a result, the break-even point for a service station in Toronto was in the 5¢ per litre range.

On the chart we've also plotted a number of different regions in the country on the relationship between productivity and margins. You can see that the curve has a pretty standard relationship throughout the country.

The next slide shows a comparison between the U.S. and Canada. It goes into more detail. This comparison shows a four-week average of total prices in both Canada and the United States, taken in the first week of February 2003. It shows the crude oil cost component in Canadian cents per litre. It shows the total margin for both the refiner and the marketer for that period of time, and then it shows the tax load in both of those countries.

During this period--and the data from 2002 would show the same relationship--the total refining and marketing margin in Canada was actually below that of the United States, despite the fact that, on average and in total, the retail network in the U.S. has a productivity advantage of close to double that of the Canadian network. U.S. refiners also have about a 30% to 40% advantage, in terms of economies of scale. Despite that fact, the total margins in Canada were lower than in the United States, again reflecting the fact that we have a very competitive and efficient market.

The last slide I'll cover shows the relationship between the various prices in the Toronto market and how those prices at the retail level follow international benchmarks. This slide tracks prices in cents per litre Canadian over 2001-02 for regular unleaded gasoline. It starts with a New York Harbour cargo price at the bottom of the slide in dark blue. The New York Harbour is one of the largest most liquid markets for gasoline in the world, with thousands and thousands of transactions done on a regular basis. It's a very liquid market for transactions.

Above that it shows the wholesale price for gasoline in Toronto at the average loading racks of companies, both major refiners and markets, as well as terminal operators in that market. You can see that the red rack price follows the New York Harbour price fairly closely. There's a fairly direct relationship. That just reflects the reality that our customers have options at the wholesale level.

In the Toronto market, for example, they have options to buy from one of five local domestic refiners and marketers. They also have the option to import product either by marine, when the seaway is open, or by truck from Buffalo and Detroit. In many respects, on the wholesale price for gasoline in Toronto, we are a price taker. If our prices are not competitive versus Buffalo, Detroit, or the marine option up the St. Lawrence, trucks and ships will move. As a result, we need to ensure that we're competitive against that very large international market.

Above that price is a green line that shows the average weekly pump price in Toronto for the same period. The yellow line shows the daily average pump price in Toronto for the same period. You'll notice there's a lot of volatility on that day-to-day price, as competitors try to steal customers, day in and day out, and reposition themselves competitively with their retail pump price. On average, that retail pump price does follow the wholesale value of gasoline, allowing for a reasonable margin for those retailers to earn above the wholesale value of gasoline. At times, retail will sell below that rack price; at other times they'll realize a good margin. But over time the relationship is fairly consistent.

¹ (1545)

This type of free market, with the free movement of goods, petroleum products, and prices tied to international benchmarks, serves Canadians best. That's why today the facts speak for themselves. Canadians pay one of the lowest prices for gasoline in the developed world, excluding tax.

Thank you very much for your time. That concludes my remarks.

The Chair: Thank you very much.

Next is Mr. Claude Girard.

Mr. Jean-Pierre Benoît (Director, Coalition pour la défense des consommateurs de carburant du Saguenay-Lac-St-Jean): I will start first.

The Chair: Go right ahead.

[Translation]

Mr. Jean-Pierre Benoît: First of all, allow me to thank you for the time we have been given. My name is Jean-Pierre Benoît and I am Director of Lumber Transportation for the Corporation des camionneurs en vrac, for the Saguenay—Lac-St-Jean area. At my side is Mr. Claude Girard, Director of the Corporation des camionneurs en vrac.

We are representing here today members of the Coalition pour la défense des consommateurs de carburants pour la région du Saguenay—Lac-St-Jean. We are supported by a large majority of the public as well as by the FTQ, CSN, CSD, CSQ, FSSA, UPA, the Chambers of Commerce, bulk haulers and also by a large number of municipalities. I will leave it to you to figure out how many people that might be.

Our goal is to inform you and make members of your committee aware of the prevailing situation in the Saguenay—Lac-St-Jean area. I will leave it to my colleague, Mr. Girard, to continue with a listing of various observations.

Mr. Claude Girard (President, Coalition pour la défense des consommateurs de carburant du Saguenay-Lac-St-Jean): I would also like to thank you for the time you have given us.

It is, of course, obvious that the successive fuel price hikes affect all of Canada. The committee should look into the possible causes of repeated increases in the price of fuel in recent years, not just the possible causes of the recent increase in the price of gasoline.

Fuel prices have shot up regularly in the past five years. Oddly, pump prices always go up before the summer or Christmas holidays. You never see the price of heating oil go up in summer time, only during winter cold snaps.

We also note the following invariable fact: after major increases, fuel prices always settle higher than they were before the increase. This is how it has played out in Saguenay—Lac-St-Jean. The average price for one litre of gasoline has gone from 55 ¢ to 70¢, a difference of 15¢ per litre of gasoline. For an area like ours, which consumes 1.5 million litres of fuel per day, that represents $225,000 per day or $82 million annually.

Think what that means in terms of money taken out of the pockets of consumers all across Canada. Think too about the impact on transportation and production costs, and the consequent unavoidable increase in the price of goods and services.

The oil companies and their distributors take the lion's share. The Saguenay—Lac-St-Jean region is characterized, in terms of the gasoline market, by the following features: the volume of sales is dropping whereas it is going up elsewhere in Quebec; the number of gas stations is decreasing much more slowly than elsewhere in Quebec; it is the only region in Quebec where the average volume per gas station is going down; the sites with the greatest sales volumes belong to the major oil companies; and it is those high volume sites that dictate the prices.

The main factors affecting the price of gasoline in any given region are the total volume, the number of gas stations, the average volume per gas station, the type of gas station, the operating costs, the state of competition and the level of taxes. These factors affecting the price of gasoline in any given region are the same from one region to the next. However, pump prices are generally higher in Saguenay—Lac-St-Jean, despite a tax rebate of 4.6¢ per litre.

Consumer demand in Saguenay—Lac-St-Jean is not unresponsive to retail prices. Price differences in absolute dollars within the region and their fluctuations over time should not be so close to zero in a competitive market. The oil companies and retailers do not justify the upward movement in the price of their products. As owners of the high volume sites, the major oil companies increase their profit margins and exert control over the setting of pump prices.

The oil companies should not be allowed to sell directly to consumers. What's more, when gasoline is distributed by a local retailer, the retailer's profit margin, which is between 4¢ and 10¢ per litre on average, remains in the region and goes back into the local economy. Yet consumers have virtually no way of telling corporate sites apart from retail sites.

Because the area is so large, the situation is serious in Saguenay—Lac-St-Jean. The local population greatly needs fuel. There are huge distances to be covered, and there is no efficient public transit system. We are seeking to achieve three main goals: first, we want guaranteed, fair and reasonable gasoline prices for consumers, particularly in the Saguenay—Lac-St-Jean area; second, we want the federal government to recognize the essential nature of oil products like gasoline and heating oil; third, we want legislation that provides for a distribution market with strict, appropriate and above all consumer-friendly consumer practices.

In the past, there have been inquiries into the control exerted by the major oil companies. Obviously, those inquiries did not yield the desired results, despite the fact that everyone knows there are irregularities in the practices of the oil industry's giants. It has become an open secret for anyone who takes the time to look at the extraordinary increase in the profits of the major oil companies in recent years. It is therefore imperative that our political representatives bite the bullet, that effective steps be taken immediately and that a genuine inquiry be conducted forthwith by a totally independent body.

For the Saguenay—Lac-St-Jean area more specifically, a number of indicators suggest that there is a price-fixing agreement in place. The difference between the highest price and the lowest price is virtually nil in Saguenay—Lac-St-Jean, contrary to what occurs in markets where there is true competition. The uniformity of prices posted in this area by retailers under various oil company banners suggest that there is a price-fixing agreement in place.

¹ (1550)

The statistics published by the Régie de l'énergie indicate the following. In Saguenay—Lac-St-Jean, there are 1.4 gas stations per thousand residents, whereas the national average is 0.68. The average weekly range between highest and lowest posted prices at gas stations shows that in Saguenay—Lac-St-Jean, this average weekly range is 1.48¢, whereas it is 4.97¢ in other parts of Quebec. The average fluctuation of price differentials in Saguenay—Lac-St-Jean is 0.71%, whereas it is 1.3% everywhere else in Quebec. The average fluctuation in average price by region is 0.58% in Saguenay—Lac-St-Jean and 1.18% for all regions of Quebec put together. The differential between the retail price and the minimum regulated price set by the Régie de l'énergie is three times higher in Saguenay—Lac-St-Jean than in the Montreal area, i.e., 12¢ per litre as compared to 4¢.

There is no smoke without fire. The coalition is of the view that there is a strong possibility of a price-fixing arrangement. In addition, the oil companies' fuel exchange at the Ultramar refinery in Saint-Romuald is also highly questionable, because the result is that all points of service in Saguenay—Lac-St-Jean, or nearly all of them, are served by this refinery.

Let's talk about the main problem. It is said that the bigger the lie, the easier it is to swallow. When the temperature is used as an excuse, or the need to make as much money in oil as in other industries, that's stretching things to the point of becoming ridiculous. The most disgusting part is that there are people who will defend such nonsense, whereas we have all figured out that the oil companies took advantage of the war to rack up huge profits.

The major oil companies wield such extraordinary power that the public has no alternative but to turn to elected representatives to have them use the power of government to curb the domination and appetite of these giants.

The Competition Act is not up to the task and should be amended to become an effective tool that serves the public transparently. In the current context, it is clear that fuel price-fixing arrangements are possible. Even if that were not the case, the mere existence of such a possibility more than warrants political intervention.

Gasoline and heating oil are clearly essential goods for all Canadians, particularly in an area like ours. However, the Government of Canada does not acknowledge this. Those in power should admit that. Governments have to legislate to prevent anyone from fixing prices. Politicians must stop hiding behind market forces, free competition and globalization. It is too easy for them to say there is nothing they can do.

It would also be desirable for this legislation to include a system for establishing operating costs specific to a region like Saguenay—Lac-St-Jean. This tool would make it possible to adjust prices, through tax rebates or by other means, so that the development of outlying regions like ours would not be disadvantaged relative to the major centres. The consumer has absolutely no power over pump prices. The consumer has no bargaining power whatsoever and cannot even judge whether the price is reasonable or unreasonable.

In conclusion, the Coalition pour la défense des consommateurs de carburant sets out in its brief the following seven conclusions and underlines the importance of intervening as quickly as possible.

1. Given the control they have over prices, the oil companies should not be allowed to sell and distribute their products directly to consumers.

2. In the alternative, enable the consumer to readily identify if the distribution site belongs to or is managed by an oil company, so that consumers can choose to encourage the local economy.

3. Launch an immediate inquiry into the practices of the oil companies, by a totally independent body.

4. Revise and adjust the Competition Act to make it an effective and transparent tool serving the Canadian public.

5. Recognize that gasoline and heating oil are essential goods for all Canadians, particularly in areas like Saguenay—Lac-St-Jean.

6. Enact legislation preventing people from fixing prices and requiring them to explain, with supporting evidence, any increase in pump prices as well as any refusal to lower prices despite a drop in supply prices.

7. See to the implementation of a system for establishing operating costs specific to a region like Saguenay—Lac-St-Jean, which would make it possible to set a fair price and adjust prices through tax rebates, so that outlying regions would not be at a disadvantage in terms of their development.

¹ (1555)

The members of the Coalition pour la défense des consommateurs de carburant would like to thank the members of the Standing Committee on Industry, Science and Technology.

[English]

The Chair: Thank you very much.

Mr. Ervin.

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Just on a point of order, I understand that the witnesses who just presented, as well as Mr. Ervin, have presentations in one language only. I'd like to seek the consent of the committee to allow them to be presented to the members of the committee so they are available. I'll make do with my poor French if other members will make do with their not-so-good English. Is that fair to everyone?

The Chair: Is that okay? We have one in French only and one in English only. That's agreed, so we'll distribute both.

Mr. Ervin.

º (1600)

Mr. Michael Ervin (President of MJ Ervin and Associates, As Individual): Good afternoon. My name is Michael Ervin and I am president of MJ Ervin & Associates. We're a Calgary-based consulting firm specializing in the downstream petroleum sector. Our clients span the range of industry, government, and consumer groups. Amongst other things, we undertake to monitor and report on pump prices and other petroleum-related commodity prices.

My firm is not a direct stakeholder in the petroleum industry, and as such I have been invited here today--I thank the committee very much for that--to attempt to offer an objective and unbiased view; in other words, to explain and not to defend the industry.

I will start by taking a look at the sharp rise in gasoline prices that occurred over the last four months; the key drivers behind the pricing activity; and the consequent impact on the downstream industry. I will then go on to talk about the changing landscape of the retail petroleum business in Canada, with a particular focus on the growing presence of big-box markets and the implications of this change on both the industry and consumers. I feel this discussion is highly relevant, given the perceptions that gave rise to these hearings.

Geopolitical tensions in the Middle East, a labour strike in Venezuela, and consequent uncertainty regarding the adequacy of crude oil supplies drove world crude prices sharply higher this winter. Crude prices started to increase around the middle of November, and climbed more or less steadily through the middle of March, peaking at almost U.S. $38 per barrel on March 12. Crude prices tumbled very shortly after the U.S. invaded Iraq, with the growing confidence that the war would be short-lived and that crude supplies from the Middle East would not be adversely affected. The surge and subsequent sharp decline in crude prices was reflected in petroleum product prices across North America.

An examination of gasoline prices in Canada over the last five months reveals that wholesale rack prices mirrored the crude price trend, and that consumer pump prices in turn reflected the changes in rack prices. One does not observe from this data any systemic lead in rack and pump prices as crude prices increased, nor does the data support any lag in these prices as the crude prices then declined. The Canada average rack price rose around 14¢ per litre between the beginning of December and the middle of March. Pump prices climbed 14.5¢ per litre during the same period, peaking at a record high of 84¢ per litre on March 11.

While pump prices, and to a lesser extend wholesale prices, receive a great deal of attention, to fully understand the impact of this price run-up on the downstream industry we need to examine what happened to margins during this timeframe. In spite of the sharp rise in pump prices, marketing margins--in other words, the rack-to-retail spread--did not increase. The Canada average marketing margin for the period December 2002 through April 2003 was 4.8¢ per litre, more or less the same as the average of the past two years.

While marketing margins did not rise through this period of higher prices, they remained extremely volatile on a weekly basis, as local retailers and branded marketers attempted to react to volatile wholesale costs, and at the same time remain cognizant of pump prices posted by their competitors. Thus the volatility inherent in the weekly margins is evidence of a highly competitive market, in our view.

Refining margins, or the crude-to-rack spread, on the other hand did experience some upward movement during the same period of rising prices. The average refining margin over the last three months was 3¢ per litre higher than last year during the same period. These higher margins were a reflection of extremely low gasoline inventories in the United States.

For the most part, finished gasoline inventories in the U.S. during the latter part of 2002 and the first three months of 2003 were at their lowest levels of the past several years. The gasoline inventory position in the U.S. was primarily a consequence of low crude oil inventories. However, refiners also tend to minimize inventories when prices are high, in an attempt to protect their exposure to a sudden drop in price. The low inventory position put further upward pressure on wholesale prices, which in turn influenced refining margins.

The traditional public perception is that refiner marketers deliberately engage in pricing behaviour intended to disadvantage non-refiner marketers. Based on what I have just demonstrated, however, that does not appear to be the case. Given the changing competitive forces in retail marketing in Canada, it will likely not be the case in the future, for reasons I'd now like to elaborate on.

º (1605)

For years, the retail petroleum marketplace has been characterized by three major players: the so-called major and regional refiner marketers, and the non-refiner marketers, often referred to as independents. Some non-refiner marketers have argued that refiner marketers are competitively advantaged in their ability to cross-subsidize their retail gasoline business with their refining business. In this context, the refiner marketer was traditionally viewed as the adversary of the independent. Now there's a new adversary on the block--the non-traditional marketer, also known as big box marketers or hypermarkets. These marketers pose a significant challenge to the traditional gas bar, from both a margin and a volume perspective.

Over the past two years, we have seen a number of non-traditional marketers enter the Canadian marketplace, with a promise of more to come. How significant might this threat be? In Europe, the hypermarket share of the market grew from less than 10% in 1990 to an astonishing 27% in 2000.

While it can be argued that the playing field in Europe is radically different from that in North America, this does not change the fact that these marketers will continue to assume more presence in North America. In the United States, for example, hypermarkets are expected to grow from 1,400 sites in 2002 to 7,000 sites in 2005--or a doubling of market share from 8.1% to 16.1%. Relying on high traffic counts and relatively strong in-store revenues, big box marketers are in a position of effectively cross-subsidizing their gasoline sales with their store sales.

Recent experiences in Canada have dispelled the long-held notion that a marketer has to be in a position of dominance to effect a change in the market. Over the past year and a half, we have seen a number of examples in Calgary, Lethbridge, Kamloops, and Dryden, to name a few, where these non-traditional marketers have taken down prices in an entire large city market, with only one site having being introduced. So what does this mean?

For the consumer, it means more competition and lower prices, which is good for the consumer. For the conventional marketer, however, the future is not quite so bright. For these marketers, petroleum revenues are likely to further decline as gasoline demand shifts away from traditional gas bars toward big box outlets, and already thin marketing margins are going to be further squeezed as big box marketers use price as a key lever. Ultimately, declining gasoline market share will lead to closures of inefficient marketers from major oil companies, as well as the so-called “mom and pop” outlets. Finally, there will continue to be a public preoccupation with gas prices, because at the end of the day, gas will continue to be a non-involvement purchase, in other words, where price is the main basis of comparison.

Based on our objective data, we have seen that the Canadian consumer has been and will continue to be well served by a competitive retail petroleum industry. In fact, the level of competition is likely to heat up as non-traditional marketers continue to grow their presence. This new adversary will benefit consumers, but conversely will pose a challenge to the conventional marketer. If they haven't already, conventional marketers must recognize that gasoline is rapidly becoming just another ancillary product; one that big box marketers may even choose to treat as a loss leader. There is a dichotomy in this industry, where policy makers expect low gasoline prices, but at the same time they expect an assurance that small inefficient gas stations will not be pushed out of business.

I suggest that the consumer has been well served by the existing model, and the growth of the big box marketer will provide a future assurance of brand diversity, where non-refiner marketers are very much the competitive equals of their big oil counterparts. However, a truly competitive market for gasoline and convenience goods must allow for the exit of marginally viable outlets if consumer interest is truly going to be served.

Thank you very much for the opportunity to speak here today.

The Chair: Thank you very much. We'll begin with questioning for about eight minutes apiece.

Mr. Chatters.

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

So much information has been presented to us in one lump here that it's kind of hard to decide where to start. From both the association of Quebec independents and the consumers' association, we've repeatedly heard accusations of price fixing and predatory pricing. The consumers' association, in particular, has made outright accusations of illegal activity by the majors, and has said there is evidence of such behaviour. Of course, that's what we're here to look at. I would ask where that evidence is. This committee needs to see that evidence, if it does exist, to be part of this study in determining our recommendations.

Over the last 12 years there have been over 19 studies of gasoline pricing, none of which has found evidence of what you're accusing the industry of. If you really believe the evidence is there, bring it forward and let's have a look at it. Your comments were in direct contrast to the information presented by both by MJ Ervin and Imperial Oil that gasoline prices, tax-exempt, are lower today than they were five years ago. Somebody is not telling us the truth here.

I guess I'm just asking for a response to those comments, mainly from the independents and the consumers' association.

º (1610)

[Translation]

Mr. Claude Girard: I don't know who is lying. However, when I go to fill my car up, I don't pay 55¢ per litre, I pay 70¢. There has definitely been an increase somewhere. If I'm told that prices have gone down, I have a serious problem with that.

I used to be a gasoline retailer in the Saguenay—Lac-St-Jean area, and when it was time to increase the price of gasoline, I received a telephone call and was told to increase the price by 1¢, 2¢, 3¢ or 5¢. And when it was time to drop the price, I received another call and was told to drop the price by 2¢, 3¢ or 5¢.

They call the shots. That's how it goes, and we had better follow orders. Because if there are 25,000 litres of gasoline in the reservoir when the price goes up by 3¢, the retailer makes a profit of $750, and if the price goes down, the retailer has to absorb the loss.

In addition, if a retailer increases the price of his gasoline, then in just a few hours at most, all retailers will have followed suit and it will be settled; that is for sure. That is the way things work. When it is time to lower the price, you have no choice but to lower it, because you know that it is going to go down everywhere. If you do not lower your price, consumers will go elsewhere. That is the way it goes. That was my experience, and that is still the way it goes.

If you are telling me that there is no price-fixing arrangement when that is the way things work, there is a serious problem.

Mr. René Blouin: Sir, if I may, I would like to add that, in our opinion, an additional investigation—and you are right to say so—by the Competition Bureau will not shed new light on the issue.

You know very well, and the commissioner for competition told us last week, that he is in charge of implementing an act which contains criminal provisions with regard to price fixing and maintenance. However, we never accused the multinationals of engaging in criminal behaviour. They are not criminals.

But in the last 20 years, a worrying trend has emerged, which worries Americans and the U.S. Senate, whereby the number of multinationals has decreased to the point where there are now only a few players left, and they don't have to consult their counterparts to know where they are going. All they need to do is limit production, thus artificially reducing supply, which leads to higher refining margins and increased profits.

I hope you realize that—and this information is contained in the U.S. Senate report—20 years ago, 189 companies in the United States controlled the refining market. Today, there are only 65 such companies left, and of those 65, the 15 biggest control 80% of the market.

Everyone knows how big the American market is, and there are only 15 companies that dominate the U.S. market in every part of that country. You can even count on the fingers of one hand the producers who control the oil market. And guess what? They're no dummies either. They have all adopted the same business model, which is to limit production to keep inventories low, thus ensuring high prices. That's what we're witnessing. This has happened over time because of concentration, which has been an ongoing trend in this business. That's why it is not easy to bring about change through recommendations.

You can't change the situation by banging on a magic drum. This situation has evolved gradually and systematically. It represents a well-thought-out strategy which is not illegal. The plan was rigorously carried out and it is not easy to go back to the time when there was competition by creating new competitors. That's why we feel an independent expert committee should thoroughly study this issue and make recommendations to government which would lead to change.

In conclusion, if this committee, as we said at the end of our recommendations, cannot find a concrete way to increase the number of competitors in Canada, perhaps it could come up with the idea of a watchdog entity which could devise a profit redistribution formula, whereby excessive profits are taxed, when prices are too high and profits excessive, as was the case during the first trimester for the huge multinationals operating in Canada. The money would be paid to consumers to compensate them for the high gas taxes which they are already paying. This is a formula. I'm not saying we should go that route, but it's an idea.

º (1615)

[English]

Mr. David Chatters: That's a truly frightening prospect that if you make a profit in this country it's unreasonable, and you should tax it back and give it back. That's a really socialist idea.

To Mr. Ervin, I've thought for some time that part of this issue of tight supplies, and of course the following accusation of manipulation of the market, had more to do with a lack of refining capacity in this country, particularly in the winter when you need to produce diesel fuel, heating fuel, and gasoline, than with any efforts to deliberately tighten the supplies. Maybe you could comment on that.

Mr. Michael Ervin: Over the last 10 years, the relationship between the refining margin and industry refinery utilization has been a very interesting one. In the first part of the 1990s, industry utilization rates of refineries were in the order of 75%, with the consequent closures of refineries in both Canada and the United States. That speaks to why there is a diminished number of refiners in North America. Too many refineries chasing too little business at the time led to a number of closures of refineries.

Increased demand in the 1990s actually brought utilization rates up to 95% plus, and led to a consequent diminishing of the refiner margin over that same period of time. In fact, if you look at combined refiner and marketing margins from 1990 to 2000, the markup on gasoline from the crude price to the pump price declined roughly 7.5¢ per litre, as a result of refinery and gas station rationalizations, as well as increasing reliance on revenues from the back court--the convenience store side of the business.

We're in an interesting situation now, with refinery and utilization rates so high and so close to capacity that at times over the last couple of years we have seen the demand hit that cap of capacity. When that happens we actually see an increase in margins, as opposed to a beneficial decrease from the high utilization rates. So we get into a real supply and demand kind of scenario, where margins increase when demand exceeds supply. We've seen that kind of spike happen on several occasions--a few years ago with diesel prices, and more recently with gasoline prices--as a result of that kind of scenario.

Paradoxically, no refinery in North America is proposing to build a new refinery to ease that crunch, simply because there is so much uncertainty over the future of demand going forward, as a result of the prospects of hybrid cars, fuel cells, and the possibility that demand may decrease through consumer preferences.

º (1620)

The Chair: Thank you very much.

Mr. McTeague.

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Mr. Ervin, I'm interested in your comments, because in any industry any economist will tell you that if you have margins that are so fat that they allow Mr. Smith's company to make $139 million in the downstream in a period of 12 weeks--over $10 million a week.... If there were true competition in this industry, you would certainly have many people entering that market, or attempting to enter that market.

I have an interesting point. I'm going to ask you a question, Mr. Ervin, and I have one for Simon.

Mr. Ervin, you are here as an individual--I see it's written here--yet our committee in 1998 was well aware of the fact that--and I think you've admitted this before--while you work for certain groups, you are also hired by several oil companies. Is that correct?

Mr. Michael Ervin: They are certainly among my clients. That's correct.

Mr. Dan McTeague: That's interesting, because we are concerned as a committee...and I think one of the recommendations that's come here from AQIP is very important. It suggests to us that in order to have an independent view of the industry we should have people who are not necessarily aligned with one side or another. That, of course, was the flaw of the conference board, in that it was relying on methodologies.

Mr. Smith, I'm interested in your comparison between Buffalo and Toronto. I looked today at crude prices. Brent and Light Sweet are in the vicinity of $25 to $27.50. With the Canadian dollar exchange rate at $1.39 and New York gas selling for about $0.8140, I come out with a price for crude in Canadian dollars of approximately $22.91--say $22 to $23. Throw in your 2¢ for transportation, and I see a U.S. gas refined price of about 29¢ to 30¢ a litre Canadian. I note, however, that your rack price today, posted in Toronto as it has been since last week, is about 32.2¢ a litre, which puts you about 2.5¢ to 3¢ above the U.S. base.

I've noticed since February there's been a consistency by your company...and I say “your company” because you tend to be the leader in my community in Toronto. In fact, as a real symptom of competition, it's interesting that all the major competitors in Toronto at the wholesale level follow identical prices within a microsecond. There's very little differentiation at the rack price, which of course the public doesn't see.

I'm interested in your explanation--and this may also go to Mr. Ervin. How is it possible in your methodologies to compare Toronto with Buffalo? Toronto has a population of about 4 million to 5 million; and Buffalo has a population of maybe 500,000 to 700,000. For instance, Mr. Ervin compared Plattsburg, with a population of maybe 200,000 to 300,000, to Montreal, with a population of 2 million.

Is this, gentlemen, like the proverbial tail wagging the dog? More importantly, you can't import benzene-filled product from Buffalo into Toronto without certain conversions. So to use this as a notional benchmark, why are you suddenly using world crude prices for your product but not using world prices when it comes to gasoline, as evidenced today? How is it possible for you to sell gasoline for 59.9¢ a litre when, by my calculations, without any retail margin whatsoever, Mr. Smith, I'm looking at 60.9¢ a litre, all taxes in?

Mr. Simon Smith: There are a couple of responses. I think it's important to look at prices at the rack level over time.

Mr. Dan McTeague: I'm asking you today, Mr. Smith, how is it possible?

Mr. Simon Smith: There'll be differences today, but if I look at data published by the Government of Ontario that tracks Buffalo rack versus Toronto rack, they move fairly closely in tandem. If you don't believe Buffalo is a liquid market, our experience has been that when prices in Toronto are out of sync with Buffalo, product moves in both directions. There are refiners and marketers in Buffalo that can make Canadian-spec gasoline quite easily meet the benzene specs and all the sulphur specs. Other markets like Detroit, which is a very large market, will also be important factors in southern Ontario.

So on the rack prices, there's a direct relationship, and our customers are very nimble. If they do not find our offer competitive, they will look at those options to import--

º (1625)

Mr. Dan McTeague: How is it possible for someone to bring a tankful of gasoline with benzene in it from a smaller market? You can perhaps have a different way to provide the product. Why aren't they here, when they could make $10 million a week if they had the same scale as you have, in order to get to $139 million in 10 weeks?

Mr. Simon Smith: It's because today those prices are basically in equilibrium. There's no incentive to truck, as long as our rack prices are in equilibrium.

No one talks about the first quarter last year, when we lost $37 million in the same period. If you look at our profitability in the downstream business over the last 10 years, we have not made extraordinary returns on the capital employed. One quarter in ten weeks does not make a year, nor did the first quarter last year make a year when we lost $37 million.

Mr. Dan McTeague: Our committee is also quite aware of the fact that a good, successful, dominant player maintains their competitive advantage and their foothold in the marketplace by not driving prices extraordinarily high. However, I'm suggesting to you and signalling to you that while crude prices went through the roof, your company--which led the rack-posted price, which I can read on Platts almost any day I want--since the beginning of February has had a differential with New York of anywhere from 3¢ to 5¢ a litre.

How does your company explain to the public the ability to take advantage of a volatile situation around the world?

Mr. Simon Smith: Well, I don't believe we're taking advantage of a volatile situation. If you look at prices in New York Harbour and read the price this morning in the paper, that'll typically be a cargo price. It's not one truck pulling up at the rack to buy gasoline. It's not available instantaneously in Toronto, with terms of sale and credit. So there are differences between those markets. All we are doing is making sure our offer is competitive versus our customers' alternatives, be they the five other refineries that can sell gasoline, or their ability to import by truck or by marine when the seaway's open.

Mr. Dan McTeague: But you've swallowed yourself whole, Mr. Smith. You've suggested, in the case of Buffalo, that the relative market there, where I would bring in a tankful, might have a competitive effect on the bottom line. Then you say to me you'd be buying large amounts in New York. That sounds to this committee like double-speak.

Mr. Simon Smith: Buffalo trades above New York as well, because of the logistics costs from New York to Buffalo--

Mr. Dan McTeague: Buffalo, sir, is not the relative market. You do not import anything from Buffalo, do you? Has your company taken any gasoline from Buffalo in the past year?

Mr. Simon Smith: Not in the last year, no.

Mr. Dan McTeague: Has it done it in the past five years?

Mr. Simon Smith: I don't believe we have.

Mr. Dan McTeague: Then as a market leader in Toronto and the largest market in the country, how can you suggest that Buffalo is such a vicious, important, competitive market that you have to rely on them, when you don't even bring product in from that part of the world?

Mr. Simon Smith: I would point out, if you go back in time, that when the price between Buffalo and Toronto has been out of sync there's been a lot of truck movement across the border in both directions. That happened in the past when arbitrage existed. With Detroit it is the same thing. There are lots of other markets that can affect that, including marine imports into the Great Lakes.

Mr. Dan McTeague: Your company has different environmental standards--vapour recovery, spill containment, benzine qualifications--all these things I know off the top of my head. You know full well it would be a practical impossibility, as evidenced by the fact your company is not in port, to bring that product in. Why are you pointing south of the border to the United States, and strictly to Buffalo, when the relative market for crude is in New York? Why is your company not respecting the dictates of the world market, as it relates to gasoline as it is sold today?

You can talk about Buffalo and say they use two or three companies, or they're serving 100,000 people. We, on this side of the committee, certainly believe that if your company has the identical prices as all three other refiners or producers in our market, that is not a symbol of competition. In fact, this argument that you are putting forward along with Mr. Irvin--who is perhaps an associate or is contracted to your company, because the sound rings vaguely familiar--is the exact same argument you made in 1998, so I don't blame you for doing it.

We're concerned that there's no effective and vigilant oversight sufficient to protect consumers against the $139 million profit you made, at the expense of our economy, in 10 weeks. If there were any industry that could do that, I think you would agree there would be entrants in the market lined up a mile deep.

Mr. Simon Smith: I have two comments. I'll come back to my first comment. We weren't around the table here last year when we lost $37 million in the same period of time. If you go back and look at the return on capital employed over the last 10 years, there haven't been extraordinary profits in the refining and marketing side of the business.

I'd also point out that independent terminal operators in Buffalo can move product up that pipeline. It's available; it's there; it's feasible. There are lots of other options. I didn't say just Buffalo. There are options that come in by marine from Detroit and other places.

I'd also point out that at the end of the day there are various different ways in which our competitors can have products. Our wholesale prices are not different from others, because if my price tomorrow is not competitive at the rack level, my wholesale customers will go next door. It happens every single day. That's why it has to be competitive at the retail and wholesale levels. Customers will move very fast for even one-tenth or two-tenths of a cent per litre. That hasn't changed, and it's not going to change tomorrow.

º (1630)

The Chair: Thank you very much.

Monsieur Crête.

[Translation]

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): I think we have shown today that there is a lack of transparency in this business. Indeed, everyone is represented here, including consumers, the multinationals and the distributors, and we realize that one aspect of this business is not currently regulated, but that it should be.

I have a big problem with something. Mr. Smith, in the first three months of 2003, did your company ever think of selling its gas at a lower price, thus pocketing fewer profits, a move which would have allowed it to grab a bigger share of the market? Why didn't any of the companies decide to do this?

Mr. Simon Smith: For the simple reason that drivers will buy their gas elsewhere if our competitors' prices are lower. Take a look at what happened in Toronto two weeks ago. We announced a special price of 49.5¢ a litre for the weekend, that is, for two days. Thirty minutes later, Petro-Canada had lowered its price, because it would otherwise have lost most of its business.

Mr. Paul Crête: But that does not answer my question. When the price of crude increased, profit margins went up significantly. You could have made a normal marketing choice, which would have been having one business take the biggest margin, while another had less, to balance the situation. But why did everyone suddenly do the same thing at the same time?

Mr. Simon Smith: Our prices are set depending on market competition. It's true that profits were higher during that period. At the time, many more factors affected the market. If you look at a 12-month period...

Mr. Paul Crête: I'm not interested in that period, but this one. If there had been competition, one competitor would have opted for 2¢ only and another for 4¢; the product could have been sold at the high end, or something along those lines, but none of the companies made that choice. How do you explain that?

Mr. Simon Smith: That's true, but we can't advertise different prices. If we do so, the competition reacts immediately.

Mr. Paul Crête: Yes, but if the competition reacts, that's a good thing. It means that the product would have been sold at the lowest price. We would not have paid the war premium. What you are saying is that if a company had decided to take that approach, we would have not had to pay the war premium.

Mr. Simon Smith: What has happened since February?

Mr. Paul Crête: Since February, the committee adopted a motion and people have begun paying close attention to the price of gas.

Mr. Simon Smith: The international market changed. The price of gas has fallen significantly. The information is out there for anyone who is interested.

Mr. Paul Crête: In that case, I would like you to tell us what you think of—this may be a useful discussion—the brief presented by the Association québécoise des Indépendants du Pétrole. Their reply was as follows, and I quote:

By controlling production and maintaining low inventories of oil products, refiners artificially held back supply which caused prices to rise.

Do you agree with that statement, in particular in light of what Mr. Ervin said, which is that we have reached our maximum refining capacity?

Mr. Simon Smith: I don't agree with that statement. Of course, we had an extremely cold winter. It's important for every company not to lose the capital invested in inventory. It's very expensive. We try to predict regular demand. But the winter was extremely cold and demand increased. We did everything we could to make sure that none of our clients went without during that difficult period, and inventories fell. That's to be expected. If you look at distribution across all sectors, you'll note that everyone is trying to reduce their investment in inventory because it is expensive.

Mr. Paul Crête: I'd like to get Mr. Blouin's reaction to that keeping in mind that Mr. Perez, the spokesman for the Canadian Petroleum Products Institute stated in an article dated 26 April, and I quote:

The profit margins on refinery operations have improved during the last few months, noted Mr. Perez, but this is just playing catch up because they had been very low in 2002, at under 1¢ per litre.

I'd like you to put all that together and react to one or the other.

Mr. René Blouin: Basically, what Mr. Smith is saying doesn't contradict what we're saying also. He's explaining that when demand is higher, the prices go up. It's the state of the inventories that make the price go up higher than before.

I was surprise at what the press reported about the reaction of the president of the Canadian Petroleum Products Institute, the institute representing Canada's major multinationals. He was making comments about this committee and said that one really did have to play catch-up from time to time because the multinational oil companies' refining margins in 2002 were 1¢ a litre. Let's get serious in this debate. Refining margins in 2002 were not 1¢ per litre if you take the data published by the neighbour to my left whose firm's role it is to publish those data for all of Canada. For Montreal, it was 17.2¢ per litre; Toronto, 8.4¢; for Canada in general it was 8.9¢ per litre. In 2002 the refining margins for Montreal were 9.1¢ per litre and 10.3¢ for Toronto. Note that it's always higher in Toronto than in Montreal. It was 10.4¢ for Canada as a whole.

Now let's look at the retail margins. It was said before that where you were dealing in major markets with major volume, it was to consumers' advantage because it brought margins down. Let's compare Montreal and Toronto. In Toronto, there are gas stations with volumes far higher than what you have in Montreal. What does that get the consumer? In 2002, in Montreal, you get a 3¢ retail margin compared to 4.6¢ in Toronto. So it's more expensive for Toronto consumers. In 2003, it's 3.9¢ for Montreal and 5.8¢ in Toronto. So it's more expensive for the Toronto consumers.

If you take the total margin, retail and refining combined, you wind up in 2003 with a total margin of 13¢ for Montreal and 16.1¢ for Toronto. This means that despite the fact that there are practically no more independents left in the Toronto region, and despite the fact that volume was very high—which, according to the major oil companies' official line is a guarantee of productivity, efficacy and good prices for consumers—the Toronto consumers wound up with a price per litre that was 3¢ higher before taxes. That is a lot of money for the consumers. For Toronto consumers, it's about $75 million more per year that they have to pay for their gas.

º (1635)

[English]

The Chair: One more question.

[Translation]

Mr. Paul Crête: Mr. Blouin, in your recommendation you say that you'd like to see a committee made up of independent experts. Don't you think it would be relevant to have consumer representatives on this panel of independent experts? Our problem with this industry is that there are people who have been trying for a very long time to demonstrate in all kinds of ways that everything is fine and dandy, but people are not convinced. The Competition Commissioner himself came here to tell us we'd need an independent investigation because it's not the Department of Natural Resources that deals with this question anymore. We're in a context where no one is being considered at that level.

Mr. René Blouin: Basically, what makes people independent? It's the fact that they don't have any contracts with the multinationals or with us, for that matter. I think we'd have to see to it that the experts chosen have no business ties with the major oil corporations nor even with us and that they will bring with them a guarantee of integrity. Their reputation has to rest on a solid base. If they come from diverse fields, I think that will provide us with a guarantee that whatever recommendations they might come up with, based on a specific mandate, will be acceptable.

[English]

The Chair: Mr. Bagnell.

Mr. Larry Bagnell (Yukon, Lib.): Thank you, Mr. Chair.

Thank you all for coming. This is very interesting. I'm glad we have a wide spectrum so we can have some back and forth. I just want to ask you a couple of questions about the charts.

On the last chart, the Canada and the U.S. fuel facts, are the refineries in Canada and the U.S. independent, or can this commodity go back and forth easily--be transferable--for these prices?

Mr. Simon Smith: Do you mean the movement of products?

º (1640)

Mr. Larry Bagnell: Yes.

Mr. Simon Smith: It's not difficult today for somebody in either Canada or the United States, particularly in the eastern part of this country or on the west coast, to access product from Canada, the U.S., Rotterdam, or Europe. If there are arbitrage opportunities, the products will move. They'll find a way to ensure that the specifications are harmonized.

As I said earlier, if you go and look at many of the markets in the U.S. today, you can find conventional gas in the U.S. at most major rack points that can meet the Canadian specs. That changes from time to time as regulations change, but on average they exist today.

Mr. Larry Bagnell: If you go back two charts to the country comparisons, it basically shows we have one of the lowest prices in the world, but when you add the taxes it actually makes it better. Of the countries on this chart, we are the second-lowest. So the taxes are not a major problem.

Mr. Simon Smith: That's right.

Mr. Larry Bagnell: In summary, the charts you've provided, what Mr. Ervin has provided, and all these studies we've had all basically show that prices at the pump move pretty steadily and are pretty well correlated with crude prices, so there's no obvious gouging at either the refinery level or at the station level, where the consumer buys the gas. The price moves fairly quickly in correlation with the crude price at those two levels. Is that basically what both you and Mr. Ervin show?

Mr. Michael Ervin: I wouldn't suggest that crude prices and pump prices move in lockstep. Most certainly there is a seasonality to pump prices that speaks to the supply and demand variances for gasoline, for example. In the spring and summer, refining margins seasonally tend to increase by one or two cents per litre, as demand for gasoline increases and North American inventories of gasoline are depleted.

So although, in a long-term sense, there is a relationship between crude prices and pump prices, that's not the only influence. Seasonality of demand and consequent variability in inventory of gasoline influence wholesale prices. Furthermore, local competition can cause fluctuations in pump prices that belie the underpinning crude price variations.

Mr. Simon Smith: You'll notice we've actually plotted New York Harbour gasoline on that chart, not crude oil. I believe it's more appropriate to look at the relationship among the products. That's really where the relationship is stronger.

Mr. Larry Bagnell: So if you were to add crude to this chart--

Mr. Simon Smith: It would show some of the seasonality around refining margins that Mr. Ervin talked about. With publicly available information, you can plot the data across North America going back ten years.

Mr. Larry Bagnell: Then any differences within Canada at the local stations across the country are based, as Mr. Irvin said, I think....in the second-last chart, the cost of running the operation in that part of the country, the fixed costs, which are....

Mr. Simon Smith: The throughput is the most important factor.

Mr. Larry Bagnell: My question is for the other two groups. I think Mr. Girard basically said--going back to what Mr. Chatters said--there's evidence of price fixing and it's clear that there's price fixing, which is basically a crime. Yet all the evidence from all the various studies we've presented and done over the years has suggested that there couldn't be because everything fluctuates with crude. Once you get past crude, of course, we'll have another discussion; it's sort of out of our control anyway. The pricing is all explainable and there aren't any excess margins. On all the facts we've presented, unfortunately I don't have any charts or graphs from your two groups.

You gave the example where the refinery phoned you and said it was going to cost you more and you should put your prices up. You would have lost money because they already knew that crude had gone up. They would have had to pay more and you'd have had to pay more. It was probably a good courtesy to you so you wouldn't lose money.

Maybe the other two groups could comment, seeing as all the other statistical and financial evidence we've been given shows that there is no price fixing.

º (1645)

[Translation]

Mr. René Blouin: I would invite you to look at the last page of the brief. If you want to see where the increases in gas prices come from, you have the retailer's margin in yellow and that has not changed much during this whole period since January 1999. Then you have the refiner's margin which has increased considerably. You also have the cost of crude which, of course, is one of the factors that led to the profits we're talking about because the multinationals are involved in that market.

You have a table explaining what makes the price of gas increase for the consumer. To have a better understanding of why we have reached this point, if we tie all that in with the quote on page 18 of our brief, which is a statement made by the president of Valero—Valero is the owner of Ultramar which operates in Canada especially in Quebec and the eastern provinces—you'll see that in the latest annual report of his company, the 2001 report, he explains that it's the concentration of the refining market that has allowed him to increase his refining margins. I'll quote you what he told his shareholders after market concentration—he says it very clearly—since 1981:

I firmly believe we have entered a new era marked by generally higher refining margins where periods of weak refining margins will be less severe and of a shorter duration.

All that because he believes that even more refineries are going to disappear in the United States and this concentration means that the margins for his shareholders and his company will always be stronger and greater and that the low margins are going to become very rare.

So that's what concentration does. We can't blame the president of Valero nor the other people in the other multinationals for being happy about that. But concentration is not synonymous with great competition and that's why, over time, the whole thing weighs more heavily on consumers. That's why, from time to time, public opinion rebels and wants to understand what is going on. The president of Valero has given us that explanation.

[English]

Mr. Larry Bagnell: So if I look at your chart, from May 1999 to May 2002 it looks like the refining price margin stayed almost the same. Are you saying that from May 2002 until now there has been this dramatic increase?

Mr. Pierre Crevier: From when until when?

Mr. Larry Bagnell: If you look at from May 1999 to May 2002, the refinery margin looks virtually the same, or very close.

[Translation]

Mr. René Blouin: Yes, but look at the trend. Of course you'll always be able to find a month where it's just about the same, a bit higher or a bit lower, but the trend is undeniable. The trend is an increase in margins at the refining levels and a continued, solidified upward trend. That is exactly what the president of Valero has explained and I think he's right in saying it. Concentration and control of inventory leads to more comfortable refining margins for those who do the refining. That's normal.

[English]

Mr. Larry Bagnell: So your biggest--

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

Mr. Larry Bagnell: They want to respond to my question.

The Chair: Is there another very short response?

[Translation]

Mr. Claude Girard: I was informed for my own good. When I was an Esso retailer, it was for my own good, of course. It was in the interest of everyone and that is how it works.

When we talk about price fixing, I think that everyone is very much aware of it and that everyone has seen that within a short period of time all the prices are the same. There is no competition. If that is not price fixing, I do not know what it is. You get a directive from regional head office telling you what the new price is. That is what happens. I said half a day, but that is generous, because it is often less than that. All of a sudden, everyone is selling gas at the same price. Can anyone challenge me on that? If there are four gas stations at an intersection, within about one second all four will be showing the same price. Yes, it was for my own good.

I have nothing against oil companies, in the sense that they are there to make money. My colleague and I are the only ones here that have no links to oil companies. We are not paid by them or by anyone else. We are here on a volunteer basis. Fortunately, you are paying for our air fare, and I thank you for that because we would have come anyway, even if we had to empty our bank accounts. It is very important for a region such as ours, where the development potential is directly affected. We are talking about something like $82 million a year for a population of 300,000. That works out to approximately $300 per person per year. That is a huge amount.

We are trying to develop our region, which is losing its young people. We are trying to build up the economy. Efforts are underway, and suddenly these efforts are undermined by this drain on our economy that prevents us from developing our region. It is terrible.

I have nothing against oil companies trying to make money in the capitalist system. But I think that Canada is not an entirely capitalist country. I think that there is a social dimension somewhere that is very important to us. I think that that exists as well and that we need to take it into account. To the extent that this situation hampers development and creates exorbitant profits, something must be done to turn things around, because the appetite for money is very difficult to control. This makes me sound like a socialist.

º (1650)

[English]

The Chair: I'm sorry, I must move on. Mr. Bagnell's short question became four minutes.

Mr. Masse.

Mr. Brian Masse (Windsor West, NDP): Thank you, Mr. Chair.

I'll start with a question from a constituent. Mr. Smith--and maybe Mr. Ervin will have some insight on this--I know that Suncor Energy provides the same price for self-serve and full-serve for persons with disabilities at their pumps. Do your corporations provide the same, and if not, why?

Mr. Simon Smith: That's a good question. I do not believe we offer that service today at the sites that are full service and self service, but it's certainly something worth considering. I know that at our self-serve sites we try to have a practice where customers who have disabilities can get served by having someone in the store come out and help them. We certainly try to execute that. I'm not aware, personally, of any complaints from customers with disabilities who visit our stations, but I really can't say any more than that.

Mr. Brian Masse: Since one retailer is doing it, and with your comments earlier about having set the prices in line and if you don't you're basically out of that market, wouldn't it make sense for every retailer to do that now that Suncor Energy is doing that?

Mr. Simon Smith: It certainly has an impact on business. You're exactly right. We should be providing that service if customers are clearly demanding it. It's something we'll give some thought to.

Mr. Brian Masse: I hope that happens.

Mr. Ervin, do you have any thoughts on that? You represent a number of different organizations.

Mr. Michael Ervin: In many markets, full-serve gasoline is actually sold at the same price as self-serve as a competitive measure, so it's not an issue in those markets, in any event.

There's also is a trend toward what are called split-serve gas stations, where you can drive up to one set of pumps and pump your own gas, or to another set of pumps at the same station and be served. Some companies may or may not have a policy whereby people with disabilities get the self-serve price, even at the full-service bay. We don't track that particular metric.

Mr. Brian Masse: By 2010, potentially 20% to 25% of our population will have some type of disability, and some will require mobility assistance. So I hope this will be examined. I understand there is some issue about this particular situation, and there is resistance among some companies to meet Suncor's challenge.

On the price fluctuations related to supply and demand, is a lack of infrastructure or a lack of product driving the price up? What is the predominant reason for that, as opposed to sales and volume, which should potentially drive the price down because you're making more by supplying more product to the market? What's happening there to create that situation?

Following that, I disagree with the notion that people don't think there's some type of network going on. How does a Petro-Canada on one block know that the supply is short from Esso in another part of the city, and thus their prices end up changing within a matter of moments, either up or down, at any given time? Maybe you can address that.

º (1655)

Mr. Simon Smith: I'll make a couple of comments. We sell a product that is unique, in the sense that its price sits up on a 20-metre high sign that's visible from a long way off. We know, from research, talking to customers, and watching their behaviour, that even within a radius of several kilometres if there is even a two-tenths or half-cent difference in price, you can see the impact on the forecourt immediately. So the first thing the operative at that station will ask is, “Why have the customers gone away?”.

That retailer will then do a price survey, much like any retailer in hard goods or grocery, who surveys the products of competitors on a regular basis and then makes the decision to change the price to be competitive.

Mr. Brian Masse: But if it's supply and demand, wouldn't there--

Mr. Simon Smith: That's not supply and demand; it's just basic competition for the customer's business. Somebody says, “I'm going to get an advantage and drop my price half a cent. I'll get more business”. That's the nature of day-to-day competition.

Mr. Brian Masse: Okay, but I thought there was still an issue of supply and demand. I can understand how that would work for price reductions, but for price increases, who knows how much is in the ground when you're driving around? It seems really ironic that if the price at one station goes up, the price everywhere else goes up by the next day.

I suspect if there is some difference between when you buy the product, put it on the market, and get it out there, some stations might actually have some cheaper gas still around and would be able to offer maybe three or four days of cheap prices, as opposed to within hours....

Mr. Simon Smith: I understand. I think most of the industry has moved to a LIFO basis of accounting, which means we can all understand every single day what the value of gasoline is this morning, on-line, live, whether it's the New York Harbour price or the rack prices in North America. So it's very evident and transparent when the value of gasoline increases. If that increase becomes significant, then individual retailers have to make a decision whether or not to put their prices up. Everyone will look at that data on a regular basis and make their decision.

The fact that prices go up and down and there's a significant amount of volatility in the marketplace--in both directions--says to me you have a very competitive market. People are fighting for customers' business and market share.

Mr. Brian Masse: But I guess it leaves the consumer somewhat vulnerable. If you bought gas really cheap and somebody else's became really expensive later on, you'd still have your product around, so you could really make a good return on it.

Mr. Simon Smith: I understand.

Mr. Brian Masse: I guess I'll just throw it out to everybody really quickly. I still don't believe the public has confidence that there's real accountability; that when the prices go up and down it actually reflects close to those things that happened three or four months back when a war happened, there was an accident and xamount of oil went into the ocean and the supply was lower, Argentina was going through an election, or whatever it might be.

What can we do to set up a system so Canadian consumers have confidence? What would you suggest? I still think that transparency is lacking.

Mr. Michael Ervin: One really critical part of the transparency is the fact that there are pump price signs. That certainly doesn't tell the whole story because consumers don't see, and in many cases don't care to see, what the underlying wholesale prices or crude prices are doing. The wholesale prices, the so-called rack prices, are really the most important driver of pump prices from the wholesale point of view, but they're still balanced against what the competition is doing based on the pump prices posted down the street. I really don't know how to bring more transparency to that.

In the last 10 years there's been more general transparency around the whole issue of pump pricing and commodity prices, through the efforts of industry associations such as AQIP and the CPPI, and through a number of their efforts. The kind of information available to the consumer is vast compared to what it was 10 years ago.

» (1700)

Mr. Brian Masse: It's just not easy for people. When the war with Iraq began, the prices went up at the beginning and then down later. To be quite frank, people just want to know that they're not going to be ripped off three months from now. That's all they're looking for. How do we create a system so people know that?

Mr. Simon Smith: I think we have to continue to show the data and try to educate consumers about what is happening. We have to make sure they understand that different components make up the price of gas at the pumps, and how significant they are--that crude and taxes are 85% of the price. We have a policy of posting that on our pumps. We have a policy of working with various media that report on how gasoline prices work, to show them the data that says prices went up in February of this year, but they came back down significantly. Of course, customers forget that because it doesn't hurt them in the pocketbook. When it goes up it hurts all of us, so they remember that.

But if you look at the data over time, particularly here, prices have recently come down at the wholesale level some 20¢ a litre. Of course, that doesn't get picked up in the media very easily, but the data is there.

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

I will go to Madam Bujold. She wants to ask one question, because one of our group has to leave to catch a flight. Then I'll go to Mr. Marcil.

[Translation]

Ms. Jocelyne Girard-Bujold (Jonquière, BQ): Thank you, Mr. Chairman. I very much appreciate your giving me the floor.

We have before us the Gasoline Consumers' Advocacy Coalition from Saguenay—Lac-Saint-Jean. These people are from my region, from my riding, and they have managed to apply pressure to achieve and maintain acceptable prices for consumers. This coalition has come here to share its conclusions with us. These conclusions open up possibilities for the committee.

I would like Mr. Girard, the coalition's president, to elaborate on his views for us. You have given us seven conclusions and told us that a completely independent entity should investigate immediately. You also said that the government should indicate that heating oil and gasoline are essential commodities. You also said that legislation is needed to prevent anyone from fixing prices and to require documented explanations about this aspect. I would like you to elaborate about that. You said that we had to be assertive. I would like you to really explain your views on this issue.

Mr. Claude Girard: In fact, and we said so in our brief, we feel really powerless. We really feel like we are being had. We are told that it was cold this year. Yes, it was cold. We live in North America. I think it has been cold before; it is nothing new.

We are told there are fewer refineries. With the amount of money the oil companies are making, why don't they build some more? There are all kinds of things like that, which are not clear. Eventually, things get stretched so far that they no longer make sense.

There is one issue, among others, that is important. When we talk about price-fixing arrangements, what are we talking about? We are talking about collusion. When prices are agreed on, we are talking about collusion. That is how it works. You don't get up in the morning and check the Internet to see what the price of crude is and how much it is selling for on the New York market. That's not true. That's not the way it works in real life. Gas stations get their information by telephone, and prices go up or down instantaneously.

There is one part of our discussion that I feel strongly about, and that is point 7, where we talk about seeing to the implementation of a system for establishing operating costs specific to a region like Saguenay—Lac-Saint-Jean, which would make it possible to set a fair price and to adjust prices through tax rebates. Take something like Hydro-Quebec, for example. We know that in the Magdalen Islands, for example, it costs about 7¢ a kilowatt to produce electricity. But they pay the same price as everywhere in Quebec, about 5¢ per kilowatt. We think that this would be very important, especially for the development of regions like ours. We may be far from the market, but we should not have to pay all of the transportation costs. Nor should we have to suffer for being a large region that needs a lot of gas stations, with lower volumes. There should be a system to help offset all of that. We mentioned tax adjustments, but it could be anything. We never really felt the effect of the Quebec road tax rebate. Someone else must have got their hands on it.

Finally, I would like to say that the coalition has stood firm for the past three years. In the 10 years before that, from 1990 to 2000, we always paid the highest price for gasoline. In the past three years, we have either had the lowest prices or among the lowest prices in Quebec. When you stand firm and stick together, and become watchdogs and monitor the market, you can force prices down. I can tell you that no gas stations have gone under in our area. They are all still open and operating.

» (1705)

[English]

The Chair: Mr. Marcil.

[Translation]

Mr. Serge Marcil (Beauharnois—Salaberry, Lib.): Thank you, Mr. Chairman.

I have trouble understanding how the oil market works in Canada. The Government of Canada has invested billions of dollars in western Canada to develop the oil sands. The huge Toronto market is supplied by western Canada. So people are in a captive market. It is Canadian oil.

When you compare prices on the Toronto market and the Montreal market, you find that gasoline is always more expensive in Toronto. And yet it is Canadian oil, in which the Government of Canada has invested huge amounts of money in terms of research; that is something that the Government of Canada never did in Quebec for the development of electricity, because Quebec always financed that itself.

I look at the market for eastern Canada, for Montreal and the eastern provinces, where there is an open market in that oil companies and independents can buy oil almost anywhere in the world. That is the difference.

Why is there a price difference between Toronto and eastern Canada? I'm asking you, Mr. Smith, as the representative of a major oil company. Why is it always more expensive in Toronto, despite the high volumes, which would normally lead to lower prices? They have huge volumes compared to Montreal and they always pay 2¢ more per litre, even though they are supplied with Canadian product.

Mr. Simon Smith: First of all, refineries in Ontario have really changed over the past few years. Ten years ago, it was true that most of the oil used in Ontario came from the Canadian west. But that is no longer the case today. A large portion of the oil comes from the international market, via Montreal, and is now used in our refineries in Ontario. Some of this oil still does come from the Canadian west, but less and less so, because the crude oils that come from Syncrude or Cold Lake are not really compatible with the type of refineries that we have in Ontario. We have to provide special equipment. So most of the oil that comes from Syncrude and a good portion of the oil that comes from Cold Lake is sold to Chicago. So there's a major change that is occurring in this sector.

As regards the retail price of gas, it is true that, in certain markets, there may be periods that can last 12, 18 or 24 months where the margins and the prices are different in each market. For instance, three years ago, in Vancouver, the margins and the gas prices were very low and duty free. So there was a type of price war. When Olco came to Vancouver, the margins very low, but that lasted 18 months, and then they came back up to a reasonable level.

So, in the long term, namely in 5 or 10 years, I am convinced that the major markets, assuming that the service stations have the same productivity yields and the same market regulations applied, will have similar margins.

Take for example the four or five countries we referred to today. These data pertain to 12 months and there is no major difference between these countries. In the medium term, I do not believe that there will be a major difference between the markets...

Mr. Serge Marcil: Mr. Blouin, if I were to ask you the same question, you or your colleague, what would you answer?

Mr. Pierre Crevier: The Toronto or Montreal refineries are supplied by both the international market and the western market, at least that is the case for the Toronto refineries, as Mr. Smith said.

The crude price does not determine the rack price. The rack price, whether we're talking about Montreal or Toronto, is the price that is assessed in accordance with the independents' opportunity to acquire a product from the best possible market. Montreal is competitive because we have direct access to the finished product delivered by cargo ship, which is less available to Toronto independents. That's what makes the difference in terms of the selling price.

» (1710)

Mr. Serge Marcil: Why can the independents in Toronto not have access to the product in the same way?

Mr. Pierre Crevier: Because Toronto's supply, which comes by pipeline from New York to Buffalo or by truck from Buffalo to Toronto, costs more than Montreal's supply, which comes by cargo ship.

Mr. Serge Marcil: Is the volume high enough to allow the association of independents to open a refinery?

Mr. René Blouin: First, one of the main reasons Quebec consumers enjoy good prices, as Mr. Crevier has just explained, is the fact that there are independent importers. If there are no longer enough independents in Quebec who are supplied by these importers, there will no longer be any independent importers and once that happens, the prices will increase by 2.5¢ a litre in Montreal.

Furthermore, the refiners are part of what is increasingly a very select private club, and they do not accept just anyone into their club. If you have a lot of money to lose, I would suggest you buy a refinery. You will find that in the sector in which you purchased your finery, prices could collapse for a few years, until you are drained dry, and then, the prices will recover.

That means there will be very strong competition to see that those with limited financial means who are not part of the large corporations, will not be able to play in this league, and that is well known. These are known as psychological barriers to getting into the market, and that is why these people do not get into these markets.

There were incidents in Quebec where things did happen in this way. For example, one importer wanted to import product to Quebec and as soon as he opened his import terminal, he discovered that the Quebec refinery immediately reduced its prices below his. Six months later, he had to close down his business, and take a loss of millions of dollars. That is how it works.

Mr. Serge Marcil: Do I have any time left, Mr. Chairman?

[English]

The Chair: A short one.

Mr. Dan McTeague: Chair, it's your discretion.

The Chair: Since I deviated, I'll deviate once more. You can ask a short question, and then I'll switch over.

Mr. Dan McTeague: I'm willing to pose a question after the honourable member.

The Chair: Okay, do that.

James.

Mr. James Rajotte: Thank you Mr. Chair.

Thank you very much for coming in today. My colleague raised the issue of a difference in prices. We have some information here from MJ Ervin & Associates, which I certainly regard as a credible authority. I know some colleagues don't share that view.

But if you look at January of each year from 2000 to 2003, the Alberta average is 35.8, the Quebec average is 36.1; Alberta is 42.5, Quebec is 41.2; Alberta is 31.2, Quebec is 30.4; Alberta is 45.7, and Quebec is 44.5--and this is excluding all provincial and federal taxes. It seems to me we're dealing with a North American market here if we exclude taxes.

But I want to touch on what Mr. Blouin said regarding refining margins, and just correct me if I have this statement wrong. I thought you said that refining margins have increased due to increased concentration in the industries. Am I quoting you correctly here?

Mr. René Blouin: Yes, you are. For example, if you take Mr. Ervin's data,

[Translation]

You will see from Mr. Ervin's data that the refining margins in recent years, beginning in 1999, were 5.5¢ on average. In 2003, the figure was 9.1¢ on average. So you see immediately that the refining margins doubled during that time. This is the concentration effect.

Once again, I never claimed that there was anything illegal or criminal being done; that is not so. However, the concentration itself causes these inflationary effects, and I think that is what should be dealt with.

» (1715)

[English]

Mr. James Rajotte: In going through your figures and the chart Mr. Ervin provided, you're saying the increased concentration caused an increase in refining margins. But if you look specifically at his chart on page 7 of his presentation, the margins increased--and they may increase over time--but they also decreased substantively, particularly from May 2001 to July 2001. So why did they decrease? If you're seeing increased concentration, even if you want to look at the chart you provided on the last page, they decreased at points in time.

[Translation]

Mr. René Blouin: As I just said, there are almost constant increases from year to year. I showed the difference between the figures of 5.5¢ and 9.2¢. In addition, from one month to the next, there may be less significant margins. At the moment, the margins are high: the figure was 9¢ a litre in Montreal, but about two months ago, the figure was 15¢.

So there will be variations from one month to another, because it sometimes happens that inventories are somewhat larger or smaller at certain times. But they are always tight, and that is what I'm trying to explain to you. As the president of Valero said quite rightly, the margins will always be high, and it will become increasingly rare for them to be low, as happens some months. High margins are going to become increasingly common.

[English]

Mr. James Rajotte: With respect, sir, you say there's a link between the month to month movement in the refining margins, and then you link it to inventory that changes. But you state very clearly in your presentation that the major oil companies control production and inventories. So if that is true, they would not have month to month fluctuations in their margins. You cannot have one and the other.

[Translation]

Mr. René Blouin: The figures ranging from 5.5¢ to 9.1¢ that I gave you are annual averages. The monthly averages are in the table shown on the last page of our brief. As you can see, in some months, there are lower refining margins, because the inventories are a little higher at that time.

Let me give you an example. About five years ago, refiners in the northeastern US always kept their inventories for about 90 days, or three months ahead of time. Now, there are far fewer of them. There are three main ones, and their new policy is to keep inventories for the next 20 days. So the inventories are always smaller.

And when the weather is colder or when the demand increases... For example, we will soon be into the summer, with vacations and all of that. As happens every year, there will be an increase in demand, but the low inventories will mean that the prices will increase once again. That happens, because the refiners always keep tight inventories—never enough to be out, because they always want to be able to sell their product—and this means that the shareholders are always getting attractive, significant margins. However, this policy is much harder on consumers.

[English]

Mr. James Rajotte: Your points do not make sense. You state in your presentation:

By controlling production and maintaining low inventories of oil products, the refineries successfully create an artificial scarcity that makes prices jump.

If this is true and the concentration is causing the refining margins to go up, you will simply not see month to month fluctuations in refining profits.

[Translation]

Mr. Pierre Crevier: You can see them nonetheless. As Mr. Ervin said earlier, the seasonal phenomenon also has an impact on prices. Demand for gas is not constant throughout the year. That is why in some months, there may be an impact on inventories, and the profits on gas are not regular as regards refining. The same goes for heating oil during the winter. The inventories drop lower in the winter, and this has an impact on the refining margins.

» (1720)

Mr. René Blouin: This cannot be linear, as you suggest. There will always be monthly fluctuations. However, what counts for these companies is that at the end of each year the margins are always higher, and this is what we have been seeing since 1999.

Mr. Simon Smith: I would like to make a comment. The year 2002 was a terrible one for refiners. The President of Valero made a comment at the end of 2001, which was a good year for North American refiners, but the exact opposite was true of 2002. Take a look at the profits and refining margins for the first quarter of 2002 compared to the first quarter of 2003. The refining margins in New York were not far from $3 a barrel. So this operation lost money for three consecutive months.

Mr. René Blouin: For three consecutive months?

Mr. Simon Smith: Yes, for 2002 generally. What happened in 1999? Refining profits in North America were very low, and the same was true in 2002.

So we should not take selective information for a three-month period and say that the margins were extraordinary, because if this were true, people would be building refineries to make huge profits. However, if we look at the years...

[English]

The Chair: I'm sorry, I'm going to have to conclude this section and move to our next witness.

Mr. McTeague

Mr. Dan McTeague: Mr. Smith, I don't want you to think I'm simply targeting you. I'm interested in some of the things you have to say; they're very intriguing to this committee.

You'll also note we've made progress in the area of competition, just to make sure the ability to detect problems--not with your industry per se but with others--is indeed brought up to speed. There's obviously a wide recognition by this committee that there are deficiencies in the Competition Act. Many of them are due to the fact that the original act was written, in many respects, by people representing large or important companies in this country. Of course, your company in particular was very well represented by Bill Rowley and company--the group of 20, 1986.

I'm interested in what you said about losing money. I can see from year to year you would lose money, but as has been suggested earlier, no one's leaving the market. More importantly, I have yet to see an industry improve its service stations, notwithstanding the lack of margin at the retail level, as your industry has. It certainly must cost a lot of money to put in a $2 million site in my riding and not be able to at least find a way to pay for that. So I understand there may be losses and there may be increases incurred, but as a routine, the consolidation of your industry has been substantial.

On the market power you have in Toronto--and it's a very simple question--by volume, what percentage of gasoline are you selling to the Toronto market today, sir?

Mr. Simon Smith: In the Greater Toronto Area market under the Esso brand, it's roughly 22% to 23% of market share.

Mr. Dan McTeague: Does that include independents you sell to?

Mr. Simon Smith: No. That's Esso branded only.

Mr. Dan McTeague: So you are still a dominant player in Toronto.

Mr. Simon Smith: We are the market leader in Toronto. We have the highest market share.

Mr. Dan McTeague: On your great fear of the big-box stores, I haven't seen that evidenced anywhere in Ontario, certainly not in Toronto. I understand there was a contractual relationship with one big-box store--I call them Canadian Tire--and they're doing fairly well in managing the product.

Is it also true that you supply the product to many of these big-box stores?

Mr. Simon Smith: We have supply arrangements with many of the independent retailers. That's true.

Mr. Dan McTeague: So they would obviously have a notion of what the rack price is.

Mr. Simon Smith: Absolutely.

Mr. Dan McTeague: Does your rack price differ from your own branded stations, corporation stations, to what you sell to your retail competitors?

Mr. Simon Smith: We basically run the business as three independent entities. That means that on the refining side we evaluate the profitability of our refineries versus the international market or imported product. We don't do anything different for the retail side under the Esso brand versus a sale to a wholesale domestic competitor, or a sale by export to the U.S. Our goal, of course, is to find the best net back to that product and hopefully place it in the most profitable market.

I will make one other comment, because you made reference to some of the big box stores not being in Toronto. Loblaws opened a store at Dupont and Davenport. It's been open for about six months, and like Wal-Mart in the west, it's a very fierce competitor. It's going to obviously make its place felt in that marketplace.

Mr. Dan McTeague: One would have to question whether or not, on that very point, a company would be willing to sell, for a sustained period of time, gasoline provided by their competitor, and be able to recover that by volume of sales in other areas. It means there's fat somewhere down the line, and I tend to believe that probably isn't the case. I have a background in the grocery industry, as well.

I want to ask a few more questions. We have no terminals, except for Montank in Hamilton, and I'm not even sure how that's working. Earlier, along with Mr. Ervin, you alluded to being able to bring a tanker full of gasoline in from wherever you wanted, assuming there were one or two independents left who could buy nine zillion litres of gasoline. But where would these terminals park if the independents relied almost exclusively on you or the three other integrated companies in the Toronto area for product?

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Mr. Simon Smith: There are actually five refiners that can supply product in the Toronto area, not three.

Mr. Dan McTeague: No, I'm sorry. There are five refiners, in terms of Shell--

Mr. Simon Smith: They have rack prices to competitors in the Toronto area.

Mr. Dan McTeague: Correct, but if I don't want to deal with my own competitor to get supplied, how do I do that in Toronto?

Mr. Simon Smith: You can truck product in from the east. You can truck product in from the U.S. border, or you can barge a large lot of gas into Montank in Hamilton. That's an independent terminal. It exists. It's open.

Mr. Dan McTeague: It's very small.

Mr. Simon Smith: It's taken gasoline before.

Mr. Dan McTeague: On that subject, if I'm dealing with a different standard and specification of gasoline from what is provided conventionally in the United States, wouldn't the price be much higher?

Mr. Simon Smith: No, because if you look at the conventional quality in the U.S. or European quality in Rotterdam, in many regards it's more severe than Canadian specs. It may not be in some things like benzene, but in others it is. So it's not difficult for somebody to put together a cargo lot, either in northwest Europe, New York, or anywhere else in the Atlantic basin, and have that product very easily meet Canadian specs.

Mr. Dan McTeague: Mr. Smith, why was it then that two years ago your company, through CPPI, was emphatic in demanding that people understand there was a differentiation in price when it came to lower sulphur? The argument you made back then, which I agreed with, was if your product wasn't available in the United States with certain standards and specifications, ultimately the price would be higher.

If the standards and specifications are different from the current ones in the United States, how do you assume that the price will be the same in Rotterdam, or wherever, as the spot price here in Canada? Certainly they wouldn't come here to deliver to five stations. You'd need to have some significant economy of scale to do that.

Mr. Simon Smith: Sure, but you have sophisticated buyers. You talk about companies like Canadian Tire, Wal-Mart, and Loblaws. These are very sophisticated buyers. If our offer to those customers is not competitive, I can guarantee you they'll look hard elsewhere to find options.

Mr. Dan McTeague: Do you share product across the country with the four or five other integrated companies you've mentioned?

Mr. Simon Smith: We have different exchange agreements across the country.

Mr. Dan McTeague: Correct. So in one area you will not be the leader, and in another one will be the leader.

Mr. Simon Smith: It has nothing to do with being the leader; it has to do with minimizing logistics costs and trying to make sure we have lower logistics costs in areas that would otherwise be more expensive for us to supply product.

Mr. Dan McTeague: Correct. Thank you.

The Chair: I'm going to cut you off because the chair is taking the last 40 seconds.

We had a lot of discussion today concerning the margins on the refining side. It looks to me, if the data is presented properly, like there's competition in the retail area, and in the distribution rack price area. But at the refinery level, why aren't we getting more competitors into the market if that's a high margin and profitability area? I'd like to get a quick answer from both of you.

Mr. Simon Smith: I think it's just not true that there have been high profits and high margins in the refining business in North America or northwest Europe--the Atlantic basin--over the last 10 years.

I've plotted some data that I can leave it with you, if you like. If you go back to 1992 and look at the refining margins for gasoline in New York Harbour versus WTI-Brent, they have not moved very much. A lot of refineries have gone out of business, and other refineries have become more efficient and effective and compete for that level of profit that's acceptable.

[Translation]

Mr. René Blouin: First of all, the refining margins in recent years have increased substantially. Why are there no new competitors? In our opinion, and based on the concrete examples we know of in Quebec, there are some very considerable entry barriers. Someone who wants to risk getting into this league, which we might describe as the major league, will suffer an absolutely overwhelming financial impact from these multinationals and will not be able to stay in business very long. People know that, and that is why they are not getting into this area.

[English]

The Chair: Thank you very much to both of you for staying with us.

I think Mr. Crête has a couple more questions to ask you informally, but I have to adjourn the meeting.

The meeting is adjourned.