:
Thank you very much, Mr. Chairman and members of the committee, for inviting us here today to participate in your study into gasoline prices and refining margins.
As you mentioned, Mr. Chair, I'm accompanied today by Richard Taylor, who's deputy commissioner for the civil matters branch.
As do all of you, I understand the importance of gasoline to Canadians in our everyday lives, as well as to the economy in general. None of us wants to pay high prices, whether for gasoline or any other product, and I think it would be fair to say that we as Canadians are all particularly sensitive to gasoline prices, as we see them displayed on the street corner every day.
Before I address some of the specifics of this topic, I think it's important that there be a clear understanding of what the bureau's overall mandate is. We seek to ensure an efficient and competitive marketplace by enforcing the Competition Act and by advocating that regulators rely on market forces to the greatest extent possible.
We don't advocate competition for its own sake. We advocate competition because the market and the robust competition that supports it, rather than government regulation, are the most effective means by which to enhance consumer welfare.
On the enforcement side, the bureau receives a large number of complaints every year. We look at whether a complaint raises any issue under the Competition Act and at the severity of the violation. Where there is sufficient evidence of a violation of the act, the bureau routinely investigates and takes enforcement action.
[Translation]
The act includes criminal provisions against price fixing and price maintenance, and non-criminal or ''civil'' provisions dealing with mergers and abuse of dominant position, among others.
In the course of our enforcement work, when authorized by the courts, we routinely use the investigative tools available to us, including: the power to subpoena documents and require oral testimony; the power to search and seize evidence; and the ability to wiretap.
But often, our work does not require these particular powers. Instead, we use research and other investigative tools to explore issues and factors that may be inhibiting market competitiveness. These tools are the basis for our outreach work to inform market participants about the Competition Act, competition issues and competition generally. And they provide the foundation for our efforts to fulfil our mandate to act as an informed advocate for competition.
[English]
I'd like to very briefly deal with the issue of refineries.
As with anything else within our mandate, the bureau is concerned with potential violations of the Competition Act. High prices, or in this case high refining margins, are not of themselves indications that there has been a violation of the act. There has already been much discussion in Parliament, in the media, and elsewhere as to the various factors, whether in other parts of the world or in North America, that might have contributed to the current situation. I would defer to my colleagues at Natural Resources Canada who are appearing after us. They are probably better placed to have that discussion on the specifics of the factors.
What the bureau is concerned about with respect to the gasoline refining industry over any other industry or sector of the economy is one thing: has there been a violation of the Competition Act?
From our perspective, the issue would be whether refiners come together to constrain capacity. We would take very seriously any reduction in refining capacity that was due to anti-competitive behaviour. To date, we have seen no evidence of this, and there are also some reports that a number of companies are proposing to build new refineries in the near future.
[Translation]
I would also like to point to the work of the US Federal Trade Commission, which has concluded that the amount of refinery capacity is not the result of anti-competitive conduct. In its post-Katrina report, it states, and I quote, that:
The evidence suggested that the rate of capacity growth was a response to competitive market forces that made further investment in refining capacity unprofitable.
This in no way means that, in the future, the bureau may not reach a different conclusion. As I said earlier, we are continuously monitoring this industry for evidence of violations of the act. I would stress however, that in order for the bureau to act, we need evidence to demonstrate that there has been abuse of dominance or price fixing. Members of the public can bring us evidence and we also have an immunity program which has proved quite successful.
Let me repeat that should the bureau find evidence of anti-competitive behaviour, whether in the gasoline or in any other sector, it will take appropriate action.
[English]
High prices are a concern to the bureau when they are the result of violations of the Competition Act. When we find evidence that firms have conspired to increase prices, we take appropriate action. Let me now turn to what the Competition Bureau does with respect to the gasoline sector. The Competition Bureau actively follows wholesale and retail gasoline prices to determine whether they are the result of market forces or anti-competitive acts. When there are price spikes, we will look even more closely. In fact, historically this has been the market the bureau has followed most closely. We have put more resources toward monitoring this market for anti-competitive acts than any other. We will continue to do so and we will take further action under the Competition Act when appropriate.
As I'm sure you're aware, the bureau has investigated the gasoline sector over the years, and in six major investigations has found no evidence to indicate that periodic price increases were the result of a national conspiracy or abuse of dominant position by firms in the market. On the other hand, bureau investigations have led to 13 criminal trials related to gasoline or heating oil prices; eight of these trials resulted in convictions. As I said, where evidence exists, we act.
I should note that the Competition Bureau receives complaints from consumers about price gouging. While price increases are not easy for consumers, high prices in and of themselves do not constitute a violation of the act any more than low prices do.
In a market economy, it is generally accepted that under most circumstances government should not determine what is an appropriate profit margin: it is certainly not within our power under the Competition Act to do so. In a market economy, businesses are generally free to set their own prices at whatever levels the market will bear. Simply because prices go up does not mean that there has been a violation of the Competition Act or that we should regulate.
Individual gasoline suppliers taking advantage of tight supply to increase their prices would not raise issues, because charging high prices at times of actual or anticipated excess demand is not contrary to the act.
[Translation]
This can include entering into a consent prohibition order with the parties in question or, when appropriate, by pursuing criminal charges under the conspiracy provisions of the Competition Act. When we find evidence that prices are high because of an abuse of dominance, we likewise have a range of options, which can include entering into a consent agreement with the parties in question or applying to the Competition Tribunal for an order to stop the conduct.
It should be noted that the federal government has no jurisdiction over the direct regulation of retail gasoline prices. Except in the event of a national emergency, only the provinces have the authority to regulate gasoline prices.
As you know, four provinces have opted to set maximum gasoline prices—and the evidence in all four cases demonstrates that market forces, not regulation, lead to lower prices.
[English]
I reviewed all this because I believe it is important that there be a clear understanding of the role of the Competition Bureau. We do not set prices, nor do we have an opinion on appropriate profit margins, regardless of the industry. Our role is to ensure that all industries follow the rules of the game as set out in the Competition Act. Where we find evidence of violations of our act, we respond with vigour.
That said, I want to touch on another related topic. I am a firm believer that an informed consumer is an empowered consumer. In the gasoline context, there's information out there to help consumers. The Competition Bureau has some information on its website to assist consumers in understanding this market. For more details, I would recommend the fuel-focused website maintained by Natural Resources Canada. It provides clear and timely information on fuel prices and markets, as well as ways to manage energy costs. Current and factual information on price changes will help Canadians understand how the global petroleum markets affect their lives.
In addition, industry could and should do more to help consumers understand and take advantage of pricing patterns. Consumers could benefit from additional information documenting local retail price cycles, information that consumers could use to plan purchases. A good example of this is Shell Australia's website, which provides tips for consumers to find the best time to purchase gasoline.
I would now be pleased to answer any questions you may have.
Thank you very much, Mr. Chairman.
:
I think it's important, and I'm going to try not to use up your six minutes, although I would like to provide a fairly comprehensive answer to this question, because it does come up fairly frequently, and I'd like to try to be as clear as I can about the types of behaviour that we might be looking at and where we believe the act is sufficiently strong and where we believe it is not.
The complaints that we often receive from consumers—and many of those that are directed to MPs and are sent on to us to look at as well—frequently deal with price gouging and not price fixing. Price gouging refers to a rapid rise in price in response to a scarcity of supplies. That's how we generally see price gouging, and it's often what people believe they're experiencing in the gas industry. A good example of clear price gouging would arise, for example, in the context of the ice storm, when the price of generators skyrocketed. There's a scarce commodity, and many consumers are interested in purchasing it.
This is an issue that can arise, as well, in the oil and gas industry, and you'll certainly be hearing from the NRCan representatives on how those prices might move in response to scarcity in the supply of gasoline, which we have been experiencing this fall.
In terms of our ability to deal with price gouging, these are not teeth that we think are missing from our act. We don't believe it is appropriate to have prohibitions against price gouging contained in the Competition Act, and there are a couple of reasons for this.
First of all, we believe that trying to control those sorts of price movements can frustrate the operation of market forces and might indeed be contrary to the aims of the Competition Act, because frequently the rise in prices is a response to actual or anticipated shortages by suppliers.
More importantly, having jurisdiction to wade into issues of price gouging would require us to determine either the proper rate of return to a company or what a specific reasonable price would be. Our view is that it would be difficult, if not impossible, for us to carry that out. It would be work that would be difficult, if not impossible, for us. It's certainly akin to the regulation of an industry, so it would also raise issues about whether this would fall to the provinces rather than to the federal government; the federal government has jurisdiction in times of national emergencies to regulate prices, but not to regulate prices for commodities on a day-to-day basis.
Some provinces have actually decided that they should regulate rates; they do it to smooth out rates, as opposed to determining what a reasonable price is. Certainly it does that, and consumers appreciate it, but it does not lead to lower prices in the marketplace. Indeed, a recent study published in Nova Scotia a couple of months ago indicated that their regulation of gas prices has led to slightly higher, rather than lower, prices. Then you would have to take into account the cost of regulation as well, and that comes out of taxpayers' dollars.
These are a number of matters for you to consider, but our net view on price gouging in particular is that this is not something that is missing from the Competition Act, nor would it be appropriate to include something like it in the Competition Act.
I'll just identify for you what the other issues might be for us. There are other aspects in our act dealing with, for example, abuse of dominant position or price fixing. In this connection this committee, in fact, in 2002 suggested that some changes could take place, and that those changes might assist us in being more flexible in intervening in the gasoline market as well as in a number of other markets. If you're interested in our perspective on those, I'd be happy to add, but I suspect your constituents are mostly concerned about the price gouging issue.
:
All right. On your first question in respect to the shortage of gas and the increase in price, we actually see it as a normal response in the marketplace. When there's a shortage of supply, the price goes up. It's supply and demand.
On the concern about trying to introduce controls on price gouging, if it's indeed price gouging—and I don't know if it's price gouging, because it's a very difficult definition—we think it's interference in the marketplace and sends the wrong signals.
It doesn't mean it's easy for consumers. It's extremely difficult. It's why I said in my comments that we would welcome the role of NRCan, which is doing a very good job in this area right now, and also the industry to give consumers more information so that they can understand the cycling of gas prices in the market.
Again, we follow this market very closely, looking for anti-competitive acts. NRCan follows it even more closely than we do, and we see these cycles. Tuesday evening may be a little less expensive than a Friday. We often hear the question on why the price of gas goes up on a Friday. If you've read economics 101, it's kind of obvious. People tend to travel on the weekends. There's a greater demand for gas on the weekends. It's not surprising that gas prices go up on the weekend.
One can sense a cycle in these prices. We think it's helpful for consumers to be better armed so they can identify the cycles and make purchasing decisions in the marketplace that reflect the supply and demand.
In terms of the four elements, I will again turn the mike over to Richard, who is very conversant in this area.
I would also say that you would probably get more help and details from the NRCan folks who will be following us, but we certainly have quite a strong awareness of how those price parts move.
Richard.
:
No, no. In every region you have one player who'll set the price and the others simply follow in a micro-second, as you know, Mr. Taylor.
Bloomberg, I would suggest, you may perhaps also want to look at. I'm not exactly sure how you get your information. It's far more vast than my poor little computer here. Platts might be the other means of doing this.
This brought us to a resolution on this committee some years ago as to being able to provide an independent, transparent oil monitoring agency that would not only look at the relative prices, as you in Ontario do and others do with respect to border cities, but in fact looking at wholesale prices, rack to refinery, tank terminals or refinery racks, comparing one to the other.
I want to ask you this. If Toronto has, for instance, a wholesale price established on Friday of 65.3¢, Ottawa 65.2¢, and there is no variation in the wholesale market, where and how would you propose we restore competition in this industry so that Canadians can once again be assured that we're being provided competitively priced gasoline--and our impact from the United States.
You've talked about utilization rates being very high, 95% to 98%. One would argue that the number of mergers that have taken place under the watchful eye of this Competition Act, made in 1986, left us in a situation where we are seeing the potential for hazards that cause Canadians to have to pay and reach deeper into their pockets for months on end. How do you propose to break up that monopoly in price that we see at four o'clock every day, which consumers pay and which everybody thinks, miraculously, they know what the price is going to be the next day because we can predict all the other values to a t?
Could you explain why a barrel of oil cost $73 and a litre of gasoline cost $1.06 a year ago, and why gasoline costs $1.15 a litre today, whereas a barrel of oil only costs $61? I find it difficult to understand how this is possible. I understand why oil is at this price and I will tell you why. There are two reasons for this.
Just now, you spoke about the abuse of dominance. How can we have fair competition if, in Halifax, Esso is doing the refining for all the oil companies; Irving is doing the same in New Brunswick; Ultramar is doing the same in Quebec and in Montreal, Petro-Canada and Shell are doing the same. How can we have fair competition when the same refiner is supplying everyone? I do not see how there can be fair competition in a market where the same refinery is supplying everyone.
Then, you said that for refining costs, we cannot have.... You spoke of a price for refining.
In the magazine Les Affaires, it says that ExxonMobil made a whopping $9.3 billion in the first three months, as compared to $8.4 billion last year. Nevertheless, the sales figures for the biggest oil company in the world went down by 2%. Now although the figures went down, the profits rose nonetheless by 10%. Do you know why? Since ExxonMobil's revenue went down, how come the giant still made a bigger profit? We have to take a look at profit margins. Thus, the price of oil was brought down from $73 to $61 a barrel, but in order to make the same profit, the price of refining was raised. It is easy to do this, and all the oil companies benefit from it, because there is a refiner in each province. Therefore, a refiner that makes a 14¢ profit can decide to make a 27¢ profit on the next day because the price of a barrel of oil went down.
Do you really think that this is not a dominant position?
:
Good afternoon. I am here today to provide the committee with a brief overview of federal taxation as it applies to petroleum products, including gasoline.
[English]
Federal taxation of petroleum products consists of two elements. First, there is the federal excise tax levied at a fixed rate on certain petroleum products. Second, the goods and services tax, or GST, is applied on a general basis to petroleum products in a manner similar to most goods and services consumed in Canada. I would first like to discuss the excise tax and then proceed to discuss the GST.
[Translation]
With regard to excise taxes, the federal government levies excise taxes on gasoline, aviation gasoline, diesel and aviation fuel. There are no federal excise taxes applicable to other kinds of fuel, such as home heating oil, propane, natural gas or electricity.
The federal excise tax on gasoline and aviation gasoline is levied at a rate of 10¢ per litre, while the federal excise tax on diesel and aviation fuel is imposed at a rate of 4¢ per litre. Those are fixed amounts that do not vary with changes in the retail price of fuel.
[English]
This means that federal revenues from federal excise taxes are a function of the volume of fuel that is sold, but not the retail price. Accordingly, the recent increase in retail price for gasoline and diesel fuel does not have a direct positive impact on federal excise tax revenues. In fact, to the extent that higher pump prices cause motorists to drive less and reduce their consumption of motor fuels, federal excise tax revenues could actually decline.
Revenues from federal excise taxes form part of the Consolidated Revenue Fund and are used to support a broad range of programs and services for Canadians. There is also a link between excise tax revenues from gasoline and recent federal investment in infrastructure.
Budget 2007 announced an investment in infrastructure of more than $16 billion over seven years. Including the funding that was announced in budget 2006, federal support under its long-term plan for infrastructure will total $33 billion from 2007-08 to 2013-14. A key element of this plan to invest in infrastructure is a gas tax fund, which provides significant stable long-term funding for municipalities. Budget 2007 included $8 billion to extend the gas tax fund at $2 billion per year from 2010-11 to 2013-14. Notionally based on an amount equivalent to 5¢ per litre of the federal excise tax on gasoline, this gas tax funding represents more than one-third of the $33 billion investment in infrastructure.
[Translation]
That concludes my overview of federal excise taxation of fuel. I would like to now turn to the goods and services tax.
The goods and services tax, or GST, is levied on most goods and services consumed in Canada, including petroleum products such as gasoline, diesel fuel, home heating oil, natural gas and propane.
The GST is levied on an ad valorem basis, on the final selling price for goods and services. Maintaining a broad base allows the GST to be levied at a relatively low rate and makes compliance with the tax easier for businesses. Of note, the GST was reduced from 7% to 6% on July 1, 2006.
[English]
One of the key features of the GST is that businesses are able to claim full refunds, called input tax credits, with respect to the GST they incur when purchasing goods and services that are used to make taxable supplies. This means that most commercial enterprises are able to recover the GST they pay on their purchase of petroleum products through a full input tax credit, including on gasoline and diesel fuel. For consumers there is a GST low-income credit, which is designed to help offset the impact of the GST for those most in need.
Because the GST is levied as a percentage of the final price, GST revenues vary with changes in the final selling price of goods and services. For example, an increase of 10¢ per litre in the retail price of gasoline will lead to an additional amount of GST of roughly 0.6¢ per litre.
[Translation]
This additional GST does not necessarily imply that the overall fiscal impact on federal revenues is positive. To the extent that increased spending on one commodity, such as gasoline, results in reduced consumption of other goods and services, the net impact on aggregate GST revenues may well be negligible.
In addition, increases in the selling price of certain goods, including gasoline and home heating fuels, affect the Consumer Price Index, which in turn results in increased benefits payable by the Government of Canada under programs such as the GST Low Income Credit, the Canada Child Tax Benefit, Old Age Security, and the Guaranteed Income Supplement.
That concludes my remarks on the federal taxation of petroleum products.
[English]
I would be very pleased to address any questions you may have concerning this topic with my colleagues Geoff Trueman and Sandy MacLaren.
:
Great. I've sent out a presentation deck. Hopefully everyone has a copy of it.
Good afternoon, and thank you for inviting us here today to discuss gasoline prices and the factors that influence them.
First, I'd like to talk briefly about the policy context within which gasoline markets function in Canada.
By agreement with the western provinces, the Government of Canada has been committed to a market-based energy policy since 1985. This means that Canada relies upon competitive markets to determine prices. The basis of the policy is that prices set in free and competitive markets represent the best signal to producers and refiners in terms of their investment decisions and to consumers in terms of the type of energy they use and how they use it. This market-determined pricing of oil helps to ensure that sufficient supplies are available at the most competitive prices. In the absence of a national emergency, the Government of Canada has no jurisdiction over the direct regulation of energy pricing. Under the Canadian Constitution, the provinces have this authority.
Turning now to the factors that influence retail gasoline prices, crude oil remains the single largest cost component of the price of gasoline at the pump. This is stating the obvious, but any developments that affect supply and/or demand for crude oil will affect oil prices. This includes geopolitical events that constrain production or, alternatively, put supply at risk; weather related events, such as a warmer or a colder winter; and the commodity market, which reacts to perceived supply and demand changes.
However, gasoline markets have their own supply and demand pressures that also influence the retail price, in addition to consumption taxes. These factors are often directionally the same as crude oil prices but can occasionally move in the opposite direction. Examples of this were the recent refinery problems in North America, as well as Hurricane Katrina, when you had an effect on the gasoline prices but not on the price of crude oil.
The next slide compares the major components of the average gasoline price in Canada for the years 2003 and 2006. There are four principal components that make up the pump price, as you can see on the graph. The first is crude oil, which, as I said, is the largest component and accounts for almost half the price in 2006. Consumption taxes at the federal, provincial, and municipal levels represent about one-third of the price. Next are the refining margin, which is the difference between the cost of the crude oil and the wholesale price of gasoline, and the retail or marketing margin, which is the difference between the wholesale price and the retail price of gasoline. Together these two margins account for about one-fifth of the price at the pump in 2006. I will discuss each of these components in turn.
First is crude oil. Canadian oil producers are price takers. They price their oil, like the Edmonton Par crude, to compete with West Texas Intermediate and Brent in the North Sea. The prices of all types of crude track each other, adjusted only for quality differences and the cost of transportation to major markets.
The world price of crude oil has tripled since 2002. The oil price hike is driven, in part, by increasing demand fuelled by North America and the emerging markets, such as China and India, as well as by geopolitical events in the Middle East and Nigeria, areas that contribute to the global oil supply.
While there's an obvious link between recent retail increases and the record levels we are witnessing in crude oil prices, as shown previously, the price of crude is not the only determinant of what Canadians pay at the pump.
The next slide compares the taxation levels at the pump in different cities. As you can see, in terms of taxation, there's a federal excise tax, which is set at 10¢ a litre and has been unchanged since 1995. The ad valorem taxes include the goods and services tax of 6% federally, and in Newfoundland, Labrador, Nova Scotia, and New Brunswick, a harmonized sales tax of 14%. In Quebec we have a retail sales tax of 7.5%.
Each province and territory also levies a per-litre tax. These vary widely, ranging from a low of 6.2¢ in the Yukon to a high of 20.2¢ per litre on Prince Edward Island.
Some municipalities also have taxes. These include Montreal, Vancouver, and Victoria.
Turning now to the next slide, we should demonstrate how the margins have changed over time for both refining and retail. What you see, in terms of the refining margin, is that it represents about 14% of the pump price in 2006. The margin does not reflect the profits but essentially covers the cost of refining the crude oil and provides the refinery with a rate of return on capital investment. Refining margins are typically volatile and generally seasonal.
As the graph indicates, refinery margins have increased significantly in the first few months of 2007, reflecting the supply-demand imbalance for gasoline across North America this spring. There have been over 30 separate events that we've tracked in Natural Resources Canada so far this year that have reduced the refining capacity use in Canada and the United States.
Finally, we have the retail margin, which represents the smallest component of the price at the pump, which is about 5¢ of the pump price in 2006. This has been relatively steady over time. You actually have a bit of a decrease historically, because a lot of the people who sell gasoline are now getting into selling other things, with convenience stores, car washes, or food outlets related to their operations. So they're able to operate with a lower margin.
The next slide shows the historical trend of the major components of the Canada average gasoline price and how it has varied over the last decade. I've already discussed the events that have driven up the crude oil component. The tax components have increased about 3¢ per litre over the period, primarily reflecting the ad valorem taxes that increase with the higher prices. At the federal level, this is partially offset by the one percentage point reduction in the GST last year.
In examining the margins, it is important to remember that margins, as I've said before, are not profits, and higher margins do not necessarily translate to higher profits. Margins cover the costs associated with refining, distributing, and marketing the product, as well as providing a rate of return on the investment. Increasing margins partially reflect the increased costs of producing fuel, including compliances with environmental regulations.
The next chart provides recent crude and gasoline price trends in Canada. The seasonal increase in gasoline demand, which is typically April through September, traditionally results in higher gasoline prices during the summer. However, as noted in the previous sections, this year a number of supply issues across North America are adding to the upward pressure on prices. This year extremely low inventories in the U.S. due to unanticipated refinery problems have bid up wholesale gasoline prices across North America to record levels heading into the summer driving season.
On the next slide, there are a number of reasons for price differences between markets. This compares different cities across Canada. I'll just go through them very quickly.
The first is taxes, as I mentioned, so there's a difference between provinces, and in some cases between cities, in terms of the taxation levels on gasoline. For markets that are more remote, there are higher distribution costs. There are economies of scale in terms of how much is actually sold at each outlet. And the local markets can sometimes play a role in terms of different pricing.
There are five provinces that currently regulate prices: Quebec, New Brunswick, Prince Edward Island, Newfoundland and Labrador, and Nova Scotia.
One last point is that while there's no evidence that the prices are lower because of regulation, it has reduced volatility. As we saw with Hurricane Katrina, the regulator prices are not blind to market forces. Newfoundland and Labrador, for instance, had to adjust their prices three times within six days following Hurricane Katrina to reflect the market reality.
I'll just speak very quickly to the next slide. It gives the differences over time between the taxation levels and the margins. What you see, as I mentioned earlier, is the fact that the margins have actually decreased over time from the 1980s.
The last slide just makes a comparison between Canada and other G8 countries in terms of the price at the pump. What you see is that with the exception of the United States, which is explained by taxation levels, Canada has a relatively low price at the pump.
I guess the last thing I'd say is that this information and other useful information is available on the Fuel Focus website, which is linked to Natural Resources Canada.
I'd be happy to take any questions you may have.