[Recorded by Electronic Apparatus]
Thursday, November 9, 1995
.0918 
[English]
The Acting Chairman (Mr. Calder): Ladies and gentlemen, I call this meeting to order.
We have in front of us two gentlemen from the Canadian Petroleum Products Institute, Messrs. Bob Clapp and Brendan Hawley. They will be presenting to us on input costs for farming.
I'd like to apologize to the Bloc. The report we have this morning is in English only. We'll get a copy to you in French sometime next week. I appreciate Mr. Landry accepting that inconvenience.
Gentlemen.
Mr. Brendan P. Hawley (Vice-President, Public Affairs, Canadian Petroleum Products Institute): Thank you, Mr. Chairman.
My name is Brendan Hawley, and I'm appearing today on behalf of the Canadian Petroleum Products Institute with my colleague, Mr. Robert Clapp.
We also apologize for the absence of a French translation of the document we've tabled here this morning. We had hoped to have the translations available this morning, but unfortunately that did not occur. We will get them to you as quickly as possible.
We'd like to thank the members of the committee for inviting the institute to appear before you to discuss farm input costs.
I would like to note we have tabled two briefs this morning. One is on the issue of farm input costs, which I will go through very briefly. The other is on the whole issue of gasoline pricing. It's a brief we submitted to the Standing Committee on Natural Resources last June. Invariably, whenever we appear before committees the issue of gasoline pricing always comes up. I have no idea why that is, quite frankly.
Some hon. members: Oh, oh.
Mr. Hawley: Let the record show that members are smiling and laughing at that remark.
Mr. Vanclief (Prince Edward - Hastings): Mr. Chairman, before the morning is over, we'll remind him of why that is, okay?
Some hon. members: Oh, oh.
Mr. Hawley: However, it is an issue of some considerable interest both within the industry and to consumers as well, so we hope the brief goes some way to help answer your questions.
With respect to the brief, since the copies have only been provided this morning, I'll briefly go through it.
.0920
CPPI represents an association of companies involved really in two businesses; one is oil refining, and the other side of the business is petroleum products marketing. We have thirteen member companies.
In the last five years, since the institute was established, we've been involved in a number of programs we're quite proud of: a national program for recycling used motor oil; a national marine spill protection program; the voluntary introduction of a low-sulphur diesel fuel; and currently we have a proposal before the CCME for a reformulated gasoline that, if accepted, would provide Canada with the highest national fuel standard in the world in terms of environmental performance.
As I've mentioned, the topic of gasoline pricing does come up from time to time. We also have been involved in debates concerning the issue of alternative fuels, which one of the committee members, Mr. Reed, is quite familiar with.
Generally speaking, to take a broad look at the industry in the 1960s and 1970s, there was very large growth in the petroleum products industry. This was driven largely by economic expansion in Canada. However, two factors, one of which is the increasing fuel efficiencies of cars to the order of 28%, have reduced to some extent or have stabilized the demand for the product. The cost of the actual fuel to consumers, if you subtract taxes and inflation, has actually dropped 15%. We always like to make that point simply because it is not understood or people have perhaps not heard that statistic before and it is an important one to record.
It is a fairly large capital-intensive industry, not that dissimilar from the agriculture sector. Rates of return have averaged about 3% per annum over the past five years, and there is a chart to substantiate that. In addition, the actual profit to the industry has worked out to 0.08¢ per litre, certainly during this last year. The previous year it was 0.06¢ per litre.
We have approximately $12 billion in fixed assets throughout the country. That includes 22 refineries, 14,000 service stations, and a whole network of transportation and distribution terminals.
Interestingly enough, that $12 billion figure works out to about $600 million per refinery in terms of capital value. I understand from news reports that there's currently a debate between the City of Ottawa and the federal government concerning the assessed value of Parliament Hill. I understand the federal government assesses the value at $130 million and the City of Ottawa assesses it at $300 million. I'm not sure if that's a comment on the value of political capital or not. In any event, let me just say -
An hon. member: That's before due diligence.
Mr. Hawley: - that it's $600 million on average for a petroleum refinery.
That gives you an overview of what the petroleum products industry is. I would mention that this information, and considerably more, is contained in a report produced jointly by ourselves and Industry Canada called ``The Competitive Sector Framework Study on the Petroleum Products Industry in Canada''. I would perhaps ask Mr. Clapp to make a few remarks about that, because it does relate to some of the issues we'll be discussing later this morning.
Mr. Robert Clapp (Vice-President, External Relations, Canadian Petroleum Products Institute): Thanks, Brendan.
This is a study that goes back several years to when we started looking broadly at the issues that affect the competitiveness of the petroleum sector in Canada. About two years ago, in a joint effort with Industry Canada, Natural Resources, and Environment Canada, along with the Consumers' Association of Canada, we conducted a very in-depth analysis of the industry on a national scale.
We looked at how this sector weaves its way intricately through all aspects of the Canadian economy. Fully two-thirds of our product goes to other industrial sectors in Canada. We also looked at the contribution to the GDP, the whole supply network in Canada, and how that relates to the international networks. It really points out that this is an internationally competitive business. Truly, the prices in Canada have to be internationally competitive because if they are not the doors are open for imports to flow in either up through Buffalo into southern Ontario, on the east coast through shipping into Montreal or into the Atlantic provinces, or on the west coast through shipping into Vancouver.
.0925
We looked at the key levers of competitiveness for the refining industry. We talked about the size relative to the U.S. counterparts, the availability of various crude supplies, and the complexity of refineries, with ``complexity'' being the ability, in simple terms, to take a hydrocarbon molecule, beat it up and make whatever you want out of it. We can have the full gamut of that in Canada. In general, we have complex refineries but they tend to be a lot smaller than their counterparts in the U.S.
We also looked at the tremendous number of environmental issues facing the industry and what their impact could be on the competitiveness of the Canadian sector. We compared that to what's going on in the U.S. and generally arrived at the conclusion that if we stay lock-step with the U.S., we can manage through time.
As you know, the U.S. has been having significant problems, particularly recently with the introduction of reformulated gasoline. That was mandated in the U.S., and now there's a situation in which a number of jurisdictions that had opted in for reformulated gasoline are now opting out. The industry is basically left holding the bag, with a huge investment but no outlet for their product. This has had a very serious economic impact on the U.S.
So we've looked at these things and have tried to read them across to the Canadian industry. This is a report we've taken coast to coast. We've talked to all the provinces, and we've talked to most of the federal ministries. It would be available to the group if you wanted to get into a more in-depth understanding of the industry. We look at it as a benchmark study and one we're working on now with industry in order to take it further.
We want to get some sectoral or some geographic segmentation by looking at the three parts of Canada and by doing some analysis around those particular markets: Atlantic-Quebec, the Ontario market, and then western Canada. As you break it down, as you peel the layers of the onion back, you can start looking at this industry to see what the differences are that affect it regionally, because there are some specific regional things you have to look at when you're looking at competitiveness.
So that's it in a nutshell. It's normally a presentation that takes about two hours in order to go through all the information in it. It is quite an extensive database, and it would be available to the committee. Perhaps we could make a copy available to the clerk for follow-up.
Mr. Hawley: Thank you, Bob.
Of course we know members of the committee are more interested in our impact on the agriculture sector rather than our own particular problems. I think the important point to note, though, is that in the petroleum products industry two-thirds of our outputs are inputs to other businesses, which of course include those in the agriculture sector. To the degree that our industry is efficient and competitive or is handicapped in terms of being efficient and competitive, there is of course an indirect consequence to other industry sectors as well.
With respect to our contact with the agricultural industry, table three of the report simply outlines in a schematic way how product moves from the refinery to the farm. The important point to note is that when you get into the distribution of product, some of the product may be sold directly by an oil company, or it may be sold indirectly through a cooperative, through a regional marketing company or a privately owned enterprise. In other words, as you move from the refinery there is an increasingly broadening range of ownership relationships and economics that come into play, particularly with respect to pricing of product, which I suspect is an issue of concern for you.
Turning to the general data, approximately 6% of our output is sold to the agriculture sector in Canada. Apparently last year it was about $1.5 billion in terms of farm cash receipts spent on heating oil and on machinery fuel. That represents an average increase of about 3.4% per year over the past five years on a dollar value basis.
With respect to fuel volumes, last year we sold something in the order of close to a million cubic metres of gasoline, twice that amount in diesel fuel, and relatively smaller amounts of heating oil. I assume that diesel fuel is probably the issue of greatest concern for you. If we look at these volumes, we see the demand for diesel fuel has been increasing somewhat significantly, on an average of 7.5% per year. So we'd just like to note that the actual dollar value or dollar cost to the farmer has gone up by slightly over 3%, while the demand has gone up by over 7% in terms of volume.
.0930
We close on the identification of a few issues affecting our industry. I think the primary one is trying to ensure that our industry remains as competitive as possible. We did mention a number of environmental initiatives we have met, and we are still challenged by additional environmental initiatives, as are members of the agricultural community.
Fuel reformulation is certainly an issue that's ahead of us. The Canadian Council of Ministers of the Environment recently agreed to a proposal we put forward that will cost our industry about $500 million, which is a cost we're prepared to accept. There are discussions for additional items on that list. It's a fuel reformulation that could cost an additional $500 million, and that's just in the fuel area alone.
There are other areas of the environment that may increase costs to the industry as well. That is an issue that, depending on how we can manage those costs, would also have to be recovered to some extent in the marketplace, and of course that would affect your constituents in the agricultural community.
To simply conclude, the agricultural sector represents about 6% of our output. It's an important sector, although it's not the largest sector. We're attempting to continue to rationalize our own industry to make it more efficient, and hopefully that will be helpful to members of your constituency as well. Thank you.
The Acting Chairman (Mr. Calder): Thank you very much, Brendan.
Before we go into the questioning, I'd like to ask something about the report you talked about, Bob. I was wondering whether you could send a copy to the standing committee. I think it's something we would find very interesting. If we can peel back the layers of the refining industry, as you were talking about, it would give us a better insight.
Mr. Clapp: Certainly. Would you like a copy for each member?
The Acting Chairman (Mr. Calder): You can just get a copy to Marc here, and then it can be distributed.
Mr. Clapp: Okay. We'll do that.
The Acting Chairman (Mr. Calder): Great. Thank you.
Mr. Landry.
[Translation]
Mr. Landry (Lotbinière): I have a number of questions to ask our witnesses about the way in which gasoline prices are set. I will be talking about agriculture and about consumers as well, with reference to the difference in gasoline prices between Quebec and Ontario.
Sunday evening, I paid 61.9¢ a litre for gasoline in my riding. And on Monday, I paid 46.7¢ a litre for gasoline here in Ontario. That is a price difference of 15.2¢ a litre.
My first question is: How can Quebec compete with Ontario, given the 15.2 ¢ a litre price difference I saw on the weekend? Who controls the prices? You say that you control the setting of gasoline prices. Do you have any controls over this?
Doesn't some gasoline come from the United States. I know a guy who buys his gasoline in the United States, without paying taxes in Canada. You say that you are setting gasoline prices. Can you explain to me how there can be any equity between farmers in Quebec, and those in Ontario and the rest of Canada?
[English]
Mr. Hawley: We appreciate the question, and I'll try to answer it in a reasonably concise manner.
With respect to the whole issue of the price of motor gasoline, certainly off the top, about one-third of what you pay for motor gasoline represents crude costs. An additional 50% at the moment represents federal and provincial taxation on the product. The federal tax is standard across the country. The provincial tax varies considerably, and there is a situation in Quebec where there are higher fuel taxes. I'm sure you're aware of that.
Finally, the most important factor in all of this really has to do with the conditions in the local marketplace. That means the size of the market, the number of retailers, the average volume each retailer sells per year.
For example, an average retailer in Ottawa would sell about 2.5 million litres of gasoline. An average retailer in Toronto would sell approximately 5 million litres of gasoline. Both retailers have fixed costs and variable costs, which have to be amortized over the volume of product they sell. Therefore, there is an inherent need for the low-volume retailers to charge something of a premium on their product to make sure they meet their operating costs.
.0935
In a perfect world, an inefficient operator might be able to charge more and an efficient operator might be able to charge less. However, the consumer enters the picture. Most consumers believe that gasoline is pretty much the same. They can do some price-comparison shopping at 40 kilometres per hour, as we put it, and they're not prepared to pay a premium for a product that they view as being similar, regardless of who the retailer is. Therefore there's an inherent bias, regardless of what the retailer's costs are, to match the lowest price in a particular market.
This leads to a tug-of-war, literally, between retailers, those who have higher costs versus those who are discounters who offer relatively simple types of retail operations. You end up with these price cycles going back and forth.
Certainly in some areas we have seen some very high prices. In the spring we saw prices in Ottawa up to around 60¢. Currently we have a gas war, which has driven the price down to 47¢. It's not so much a function of the value of the product. It's more a reflection of the retailers' costs and how competitive they can be in the marketplace given the market they're serving.
I'd like to make two points. One is that all consumers are price sensitive. It's hard not to be, given the way we advertise the price of the product through our service stations. In fact, only 20% of consumers routinely shop for the lowest price all the time.
The other fact I'd like to introduce is that 80% of consumers buy gasoline within two kilometres of home, which means that if you're buying in your own local market, probably a set number of retailers are competing for your gasoline dollar. If one drops his price, then the others really don't have much option other than to drop their price. As they drop their price, the stations outside that immediate two-kilometre radius then have to respond, because there's another set of consumers out there. They drop their price, and they drop their price, and they drop their price. So you end up with these price changes moving quite rapidly through a given market.
The corollary to that is that for the retailers who then end up selling either at or below cost, what they need in order to stay in business, typically what happens is that one of the retailers, often a major, will then use what we call a ``price restoration'', which is a price increase. That tries to re-establish an operating margin that allows them to cover their fixed and variable costs with whatever that price happens to be at the pump.
I know that it's a very confusing business where you have what appears to be a uniform commodity with prices fluctuating wildly from day to day, and from hour to hour sometimes, certainly week to week, with different prices in different communities. However, essentially it's a function of the size of the market, the retailer costs, and also consumer attitudes with respect to their buying behaviour.
We have control over how we can efficiently produce the product. We have control over how we can efficiently transport the product. However, when we get into the marketplace, we really don't have very much control, because it's a function of retailer costs and of consumer appetite, if you like.
You mentioned the issue of people buying American gasoline without paying tax. I know that the committee raised the issue of fuel tax evasion. It is an issue. Product that supposedly is going to the United States never actually makes it across the border and just remains in Canada as untaxed fuel, which is then sold to retailers, which then tends to accelerate this whole price cycle, because you have product sold without tax entering into a market competing with product where the tax has been paid on it. Again, it tends to accelerate this whole price cycle issue.
.0940
The one province that has been looking at the issue seriously is the Province of Ontario. They set up a special investigation force to look at the issue. We worked with them essentially to try to curb some of this problem. They estimated that without the intervention by the police authorities and the industry this have amounted to tax fraud in the area of about $100 million per year.
So it's a significant issue, and as I say, we're working with the government and the police authorities to try to curb it.
I hope I've answered some of your questions.
[Translation]
Mr. Landry: In respect to gasoline prices, we have to look at the power of the oil companies, such as Shell or Esso, and that of independent distributors. Second, do you have any control over the pumps themselves? I raised the issue with minister Manley several months ago. I told him that at some point, when you pay for $10 worth of gas, you did not get exactly the right number of litres of gas. I would not say that all gasoline pumps are like this, but some have been tested in Canada, and I have not yet received an answer from the minister, I'm still waiting.
[English]
Mr. Hawley: There are two issues. One is how much control does the manufacturer have over the final pump price.
You get into a situation where there are different ownership or management contracts with retail sites. Currently in Canada approximately 40% of the retail sites are actually owned and managed by the individual on site. In other words, they take title to the product when they buy it wholesale, which gives them complete liberty to sell the product at whatever price they want. For example, many of the discount gas bars are in that situation, where they have the opportunity to set whatever price they want. It's a function of what would be acceptable to consumers in that marketplace.
The other arrangement they have is with dealers, who are people who own their own service station but have leased or rented their pump to a major supplier. They do this on the basis of a commission. Regardless of what the price is, they will be paid a cent or two cents per litre. Locally, in Ottawa, Mr. Gas would be an example of that. The retailers are all on a commission basis.
Then you have the company-owned sites. You will have noticed, I'm sure, from your own observations that many of the company-owned sites have branched out beyond gasoline retailing into convenience store operations, car washes - I don't know if we're into dry cleaning yet, but I'm sure we're getting there shortly - doughnuts, cash, and so on. The companies own the site, the companies own the gasoline, and they have the authority and the right to set the price for that retail operation.
So in the media you do get these reports of someone getting a phone call and being told to change his price. Yes, that does happen, and that's quite legitimate, because the person making the phone call is the person who actually owns the product in the ground.
That's basically the ownership structure. I know it's not well known among the public because every service station looks the same, but the contractual arrangements are different. I would only close with that figure that at about 40% of the sites in Canada the individual operator sets his own price quite independently.
Mr. Clapp: Maybe I could respond to the second question, which has to do with the accuracy of the metering devices. I think that was the second point you wanted to talk about. That piece of information is under the weights and measures branch of Industry Canada, and they came to us about a month ago because of what was reported.
The information we received was.... The number escapes me, but I believe it was about 85% compliance. So there is a 15% gap. Of that non-compliance, 5% had nothing to do with the accuracy of the metering; it was some other technical problem. So there is a gap of 10%, and statistically you would expect it to be equal to the vendor and to the purchaser. In actual fact, I think 6% of the error was in favour of the seller, and 4% in favour of the buyer. So there was a 2% gap overall.
We have been asked by Industry Canada to work on a set of guidelines and standards for the industry in this particular area to try to close the gap to ensure the higher compliance standard. They're concerned, and I think we are, about making sure we can close that gap. We're at the front end of that, but certainly the weights and measures branch is keeping a very close watch on this issue.
.0945
Mr. Hawley: I would just add one final comment with respect to the whole issue of calibrating the pumps. The industry does not calibrate the pumps. It's done by the weights and measures branch of Industry Canada in the same way that, in the agricultural community, all the measuring devices have to be calibrated by the federal government as well.
I think the issue we may get down to at the end of the day is a question of maintenance. Right now, because there are so relatively few inspectors, the opportunity to look at the pumps comes once every several years anyway. It's more of a maintenance issue perhaps than any other factor that might be attributed to it.
[Translation]
The Acting Chairman (Mr. Calder): Thank you for your questions, Mr. Landry.
[English]
Brendan, I think maybe I'll interject one question on my own, then I'll go to ``Mr. Ethanol'' down here at the bottom.
One of the things I hear from my constituents over and over again, during the summer in particular, is the fact that every time there's a holiday weekend we see the price of gasoline go way up at the gas stations. Maybe you could enlighten us as to why that happens. I've observed it, and that's exactly what happens.
Mr. Hawley: Statistically, most consumers buy their gasoline on Tuesdays and Wednesdays. With respect to the Friday price jump or the holiday pricing - whatever term you want to use - normally a price increase or price restoration is a decision made on the basis of the price and the particular market having dropped down to or below the wholesale cost. It's a function of that, not the day of the week.
However, I'm sure there's enough anecdotal evidence to suggest that some retailers do put their prices up on Fridays. All I can tell you is that if that's the case, my advice to consumers is that they should probably buy their gasoline earlier in the week - like most consumers, buy it on Tuesdays or Wednesdays - if they see that pattern developing.
In actual fact, the price increase is a function of the wholesale price and pump price; it's not related to the day of the week.
The Acting Chairman (Mr. Calder): I'm not totally convinced on that. I think this is collusion in reverse. If you see somebody put the price up at the beginning of the weekend, then of course everybody puts their prices up. That's exactly what I see.
Mr. Hawley: I will speak to that as well. When you're in a market in which, as we demonstrated here, your profit margin is, on average, one eighth of a cent per litre, then in many situations, while you may be selling in a marginally profitable situation, there are many times when you're selling below cost.
When there is a price increase in the marketplace, there's very little disincentive for any retailer not to move their price up in line with their major competitor - or only competitor - in a given market. While the major retailers may have a need for higher prices to cover their costs, at the same time, you have discounters in the market who will move up only part of that increase. Then we get back into that cycle of price discounting.
The independents who are involved in the discount side of the business offer the consumer the cheapest price around for gasoline, but they don't have the elaborate set of services that some of the other retailers have. For a certain segment of the market, that's very important. They don't care about the other offerings, such as the service and the other products; all they want is the cheapest gasoline.
The business the other majors are in is a bit different. It caters to a different part of the consumer market in which people are more motivated by service, convenience, etc. As a consequence, there's no need for the independents, unless they are suffering some financial hardship, to move all the way up to the level of the majors. At the same time, the majors can't hope to stay in business if they're going to be trying to maintain a 2¢, 3¢ or 4¢ per litre premium over the discounters in their market, because consumers simply won't shop at those service stations.
Unfortunately, there's a bit of a symbiotic relationship between the two ends of the market. They're both competing for the same gasoline dollar and they both have to be conscious of their pricing, accordingly. That's why you do have the prices moving. But the price increases tend to be fairly dramatic, and they take a lot of the market with them. The discounting that goes on tends to be more gradual and usually takes place over two or three weeks.
.0950
The Acting Chairman (Mr. Calder): Thank you very much.
Mr. Reed (Halton - Peel): Just as a matter of information, what is the Quebec tax on gasoline? I don't know that.
Mr. Hawley: I don't know. I'll have to check.
Mr. Reed: It's all right. I was just intrigued. You were talking about the difference in tax between Ontario and Quebec.
Mr. Hawley: The federal government does produce a report on a quarterly basis of tax across the country. It's a very complex arrangement of different tax levels, and of course subsidies in the case of some alternative fuels, etc.
Mr. Reed: In terms of the attack on this tax avoidance that has been undertaken fairly recently, there have been some prosecutions and convictions, haven't there?
Mr. Hawley: Yes, sir.
Mr. Reed: I seem to remember as well that there was also a conviction for adulterated motor fuel. Is that right?
Mr. Hawley: Yes, that's correct.
Mr. Reed: Is that widespread?
Mr. Hawley: It's all part of this whole issue of fuel tax fraud. In the case of what's called ``fuel cocktailing'', people will buy a product that may be some form of a chemical that hasn't met specifications. They'll blend that with motor gasoline to extend the gasoline. They then take these tank wagons and shop them around to individual retailers for some very attractive prices. Unfortunately, retailers may not know what they're buying. So what they buy is a product that quite frankly doesn't meet the product quality standards that our own members meet all the time for every product they sell.
Mr. Reed: Is it ever harmful to engines and so on? Can adulterated motor fuel really -
Mr. Hawley: Bob can certainly speak to it.
Mr. Clapp: Yes, it can do that. A number of companies have research departments. They quite frequently get calls from auto dealers about some funny things they're finding in the engine. It can lead to a number of things. First, there's fouling of the spark plugs in the chamber. We found that it can also lead to the failure of some of the hoses and to car fires. Yes, it can be quite deleterious to the engine. Then, if you get some really bad stuff, your car just won't run very well at all. It'll be very rough. Deposits can be a real concern, not only in the engine, but in the catalytic muffler system.
Mr. Hawley: I'd like to point out that this would only happen probably after a period of extended use in which you're buying the same contaminated product from the same retailer.
Also I must tell you that part of our effort in working with the Ontario government and certainly their police authorities is that we had developed a diagnostic device that allowed an inspector to do a quick spot check of product at retail sites. In many ways, it's similar to urine testing for Olympic athletes. We've had this process going on.
We have absolutely no qualms about the type of product we're selling. We've made this device available to the police authorities so they can check those sites where they feel this might be a problem. It has led to certainly some arrests and some convictions.
Mr. Reed: A couple of things in your presentation kind of stood out. One was the last paragraph on the opening page, which says that reinvestment rates for the industry are in the order of 50%. Could you just roughly outline what that reinvestment involves?
.0955
Mr. Hawley: Largely, it's simply the capital upgrading, the maintenance, environmental investments. It's really covering the normal operating costs for the type of physical plant we run, which is the refinery, the product pipelines, and even to some extent the retail sites: for example, an underground tank at a service station, pulling up an old tank, installing a new tank. Costs in the order of a million dollars per site are not unusual.
Mr. Reed: This 50% is 50% of what? I ask this just for clarification.
Mr. Hawley: I'm not sure. I'll have to check.
Mr. Reed: Gross -
Mr. Clapp: After-tax revenue.
Mr. Hawley: After-tax revenue, I believe.
Mr. Clapp: About half of the $800 million goes into refineries and about half into retail networks notionally, and that can go from 40% to 60%.
Mr. Reed: I've always been watching with keen interest the whole petroleum retail industry in motion out in the area where I live, where retail outlets are closing down and others are being built. I am astounded that there are investments. I have some passing familiarity with the environmental costs of cleaning up that ground and so on. I see those stations being shut down, and yet you're building.
Mr. Clapp: Overall, what you're seeing are generally fewer and fewer stations, but for the one that people identify as a keeper, one that's going to be in there for the long haul, they're reinvesting, replacing tanks. The classic one I walk by every day is at Bank Street and Gladstone. They levelled an Esso station there, but it's a keeper, so they're rebuilding the thing and investing a fair amount of money. At the same time, they're probably shutting down four or five others around the city, because they're just not profitable outlets in the long term.
It's really looking down - and I think everybody's doing that - in terms of improving the whole calibre of what's left in the marketplace, but shrinking the number as you go.
Mr. Hawley: The analogy I use sometimes is that it's not dissimilar to what we saw in the 1950s and the 1960s with the notion of retail sites concentrating around urban malls, where the population was, etc. We're seeing that in the retailing business. We're seeing fewer sites, but certainly more complex and larger ones.
Mr. Reed: The pages aren't numbered, but at about the fourth page, under the heading of ``Issues'', there's a paragraph stating:
- The efficiency of the industry could be prejudiced through the introduction of environmental
requirements not based on scientific need or economic rationality.
Mr. Hawley: That might have been a fairly broad hint. I'm not sure.
Mr. Reed: I'm interested in the fact that the whole refining industry does not agree with the opposition to the removal of MMT. For instance, Sunoco is using oxygenates and so on; Mohawk Oil in western Canada has been using ethanol as an oxygenate for many years. I don't know if they are using MMT as well.
With the evidence that came before the natural resources committee, which didn't seem to be manufactured evidence - it seemed to me to be hard evidence when we looked at catalytic converters that were choked up with manganese oxide and so on - I'm wondering about this line about ``not based on scientific need or economic rationality''.
Mr. Hawley: I'd like to make two points. First, from an association perspective, we're an association; we're not a dictatorship. Companies may support our position on a particular issue, but then for their own particular set of reasons, probably related to marketing as much as to anything else, they're certainly at liberty to go their own way. Companies have acknowledged that from a policy perspective they support us, but from a business point of view they may go off on a slightly different path. We respect that, as everyone would in an association context.
.1000
With respect to the issue of MMT, the point we've repeatedly stressed with the auto makers, Ethyl Canada, and the federal government is that we were looking for a third party to conduct an independent evaluation of the merits of the product and we would be guided by that determination. If the determination was that MMT was harmful to emission systems, we agreed we would voluntarily phase out the use of the program. In tandem with that offer, we also voluntarily offered to reduce the amount of MMT in gasoline.
Obviously the debate has gone off on another tangent, but we stick to the principle that if you are going to make these decisions they need to be based on science. We have had a number of highly qualified people in the area of fuel combustion, engine performance, etc. who for one reason or another have not been persuaded by some of the evidence that was presented. They have been very persuaded by the evidence provided by Ethyl in terms of its actual road tests, etc.
At the end of the day we feel you probably have two parties, in some sense, making scientific arguments, obviously with an eye to a bottom line. It's hard to believe in complete and total impartiality. There is a need for an independent evaluation, but that has not happened.
Mr. Reed: With the reformulation of fuels and so on that has taken place, and the dramatic reduction in emissions over the last 10 or 15 years, one could ask the automobile industry why it is continuing to sophisticate its emission control systems to such a degree. Why wouldn't the industry simply depend on reformulated gasoline and so on, and forget about emission controls altogether? That's carrying the argument out the other side.
Assuming we need emission controls, if we agree they're a good thing and they're something the public accepts and the environment responds positively to, and recognizing that 18 automobile manufacturers conducted their set of tests and came up with a set of conclusions that appear somehow, on the surface at least, to be at odds with the Ethyl Corporation, what kind of position do we as politicians take here? Should we get rid of MMT and help the automobile industry by not goofing up its systems? Do we say to heck with it, we're stopping here, we're not progressing any further, we've gone as far as we can go?
You realize there's no black and white answer here. It's a matter of judgment and choice.
Mr. Clapp: Yes, you have a judgment issue. You also have a number of other factors that are taking place, and I think you have to stand back and look very broadly at this and make sure we're not throwing the baby out with the bath water on an issue like this.
We did have an independent panel take a look at the information that was presented by both Ethyl and the automobile manufacturers. Its conclusion was that neither side presented a case that could be supported in scientific rigour, and recommended that further study be done. The U.S. Environmental Protection Agency also reached that conclusion. Based on the data that was presented to them by the motor vehicle manufacturers, they could not conclude that MMT had any detrimental effect on the exhaust systems or the diagnostic systems. That was not an issue. What you have in the U.S. is a situation where by the middle of December MMT is back in the marketplace.
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Let's not throw the baby out with the bath water. There is an environmental issue in using MMT: it reduces NOx. NOx emissions, nitrogen oxide emissions, are probably one of the most difficult things to reduce, and MMT has a significant impact on those. Let's make sure we understand the full implications before we do something like ban it.
Mr. Reed: Again, talking about NOx emissions, even that has been challenged. As I think we all accept, NOx is not the top of the drawer in terms of percentage of contaminants in emissions. In other words, if you're going to oxygenate gasoline and significantly reduce carbon monoxide, you're going to somewhat reduce carbon dioxide and so on, even taking the results that say MMT reduces NOx.
I think up to 20% is one of the figures that's been given, but 20% of very little is still very little. I used a more colloquial expression the last time. One of the things we try to look at is what kind of poison we are going to accept here and what kind of poison we are not going to accept. If we can get macro reductions in some emissions, then maybe, if there's up to a 20% difference in NOx emissions - and that evidence is still being debated - doesn't it make eminent sense to look after the most macro emissions?
Mr. Clapp: You have to look at what air quality objectives we're really driving for. If you're looking just at MMT, ground-level ozone keeps popping up as the one we have to deal with in Canada.
Mr. Reed: Absolutely.
Mr. Clapp: That's NOx and volatile organics. There's a fair amount known about how to reduce volatile organics, and we have reduced them by changing our gasoline and how we handle it. Less is known about how you deal with NOx, and NOx in many regions is the controlling factor on ground-level ozone, so it's the one we should be zeroing in on when dealing with MMT.
Mr. Reed: Thanks, Mr. Chairman.
The Acting Chairman (Mr. Calder): Mr. Vanclief.
Mr. Vanclief: I'd like to thank Mr. Landry for being cooperative this morning in allowing us to continue with this meeting with the presentations only in English. I'd also like to thank the gentlemen for coming.
Before I switch away for a minute from gasoline, the more visible aspect of fuel pricing, I want to note with interest Mr. Hawley's comment. He put together the words ``price increase'' and ``price restoration'' and used them as the same thing. In my view, he seemed to state that they're one and the same thing. I might remind him that probably most of the Canadian public would think that a price decrease would be a price restoration, rather than the other way around. But I guess it all depends on where you sit.
Mr. Hawley: Point taken, thank you.
Mr. Vanclief: I don't think I have to go on with the argument of why that might be seen differently from a different view.
I'll go over to the area that I think we need to discuss a little more deeply. In the figures, as you have shown, the largest single type of fuel that's used by the farming community, that portion of the agrifood industry for the farm input cost, is diesel fuel. That's not as visible as the pump price as we drive to town or through the local village.
Quite frankly, I know what the price of gasoline is in Belleville, at least what it was on the weekend. Within a one kilometre distance it went from 52.5¢ to 47.2¢. I still can't understand why people buy gas at 52.5¢ when they can go a little farther and get it for 47¢. But they do, and you stated that it's for a lot of reasons.
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I don't know what my son's paying for diesel fuel, because that's not as visible. It would be at the gas station for our cars or our pick-up trucks, or whatever the case might be. And you haven't outlined that to the extent I'd like to see in your presentation this morning.
I have a couple of questions, and maybe you can get the information to us. You make the comment on the in the second paragraph of the first page that the actual cost of gasoline to consumers has declined by 15% if we subtract the impact of inflation and taxation. It would be interesting to know how that statement relates to the price of diesel fuel.
The other thing is we hear from time to time, because of specific examples or other - and I don't know the facts, maybe you people can provide them - about the difference between the average farm costs of diesel fuel, bottom-line costs, out-of-pocket costs, to our farming competitors in the United States versus Canada. I know it varies. It's like any other product. The closer it is to the border, or whatever, might make a difference, and there's a lot of variability. The bottom line is that a corn producer in Iowa and a corn producer in southwestern Ontario, or wheat producers in various parts of Canada and the United States, are all selling at the same world price. So where are we, or where are those producers in terms of the competitive range in comparison with their counterparts in the United States?
Maybe you have a couple of comments on that. That's the big one. Diesel fuel is the biggest single one that our farmers use. I'd like your comments, sir.
Mr. Hawley: Sure. With respect to diesel fuel, I hesitate to answer the question. Perhaps Bob can, but I'm a little reluctant to because I haven't quite made a complete study of that. But if you look at the situation, for example, with respect to gasoline, which is an issue we're more familiar with, certainly in the U.S. they do have lower prices, and obviously that's a function of tax. It's also a function of the efficiency of refinery, size of markets, that type of thing. When people drive down to the United States they notice the price difference, and those are the two primary reasons. I suspect I would be somewhat surprised if the situation for diesel were not similar, for those same two reasons.
Mr. Clapp: I would just reiterate that I think you could say the same thing for diesel. We'll substantiate that. We'll get the information. It's not as readily available as gasoline. You're right, people don't watch diesel as much as they watch gasoline. In comparison to the U.S., we will dig out some figures on that for you.
Mr. Vanclief: I'd appreciate it, and I understand full well that a number of large farm users may very well have their own equipment and their own tanks, which make them more independent, and they can shop a bit. But there are many cases going the other way, where the supplier owns the tank, etc., on the farm. I have also farmed long enough to know that I didn't always tell my neighbour what I was paying for diesel fuel. I'd try to discreetly find out what he was paying, and if it was less than I was, then that was a different story. Then we could use that.
It is a major input cost. I know it was certainly the total of all three of those. It was certainly a large portion in my operation when I farmed. So it would be interesting if you could get us more of a breakdown, with similar types of comments, gentlemen, as far as diesel fuel is concerned, to those you've addressed in the gasoline area. Thereby, we could have a further look at that.
Switching back to the gasoline, I know you've alluded to and commented on reformulated gasoline. I'd like your views or your industry's views on the future use of more ethanol in gasoline, your comments on what your industry might be talking about around the coffee table as far as the investment in ethanol is concerned, because of your percieved future in ethanol and gasoline.
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Mr. Hawley: With respect to ethanol, some of our member companies do sell ethanol-blended gasolines. Our position on the issue has been primarily that we're not opposed to short-term subsidies for new products in the marketplace. It's a question of a short-term subsidy versus a perpetual subsidy. We're obviously trying to outline the economics of a product that has very high fixed costs, very low profit margins, and yet we are trying to remain competitive. It's very difficult. In some cases we would prefer to see equal tax treatment, shall we say, for all fuel products, which then allows the marketplace to determine what products will have prominence or not.
With respect to companies' investment intentions, I really have no idea. Clearly that's within the purview of the companies themselves. We, as an association, could never entertain any type of a discussion of that sort because of the Competition Act. I really have no idea.
I think the bottom line is that many people view ethanol as a type of niche market. I think we all collectively know that in the future transportation fuels will change. At the start of the century the primary energy source was coal. It then changed to oil. We're now in a transition state, probably away from oil. The question is will people be patient enough to wait for market economics to make that transition happen or do you want to force it through government regulation and intervention. Our position is let the marketplace work.
Mr. Vanclief: Thank you, Mr. Chairman.
The Acting Chairman (Mr. Calder): Thank you, Mr. Vanclief. Mr. McKinnon's on the phone here, so we'll go into a second round. Sorry, John.
Mr. Maloney (Erie): I'll perhaps tack on to where Lyle was leading. Your answer may have been that we can't get involved. Given the direction in which Canada is going on alternative fuels, I find I can't understand why the petroleum industry is not coming on board in a stronger way either in acquisition of or investment in alternative fuel production operations.
Notwithstanding the arguments on both sides, if you could see the direction it was going in the United States, although perhaps not right now, as opposed to resisting, would it not be better for everyone concerned - your industry, the consumer - to explore this as we look the evolution of transportation fuels? Why aren't they coming on board? Why are they resisting? Would it not be more profitable for all concerned to work together?
Mr. Hawley: If you look at the network of retail outlets in Canada today, numbering approximately 14,000, I believe the statistics show that approximately 1% of those outlets curently sell natural gas. I believe in the order of around 3% sell ethanol blends. I believe in the order of around 8% to 10% sell propane.
There is some market penetration. Industry is not resisting alternative fuels. It's a question of supplying these fuels in markets where it makes sense.
Let me share another anecdote. The Department of Natural Resources currently has a program offering companies up to a $50,000 grant to install a natural gas retail facility. I understand that's about one fifth of the actual cost of putting in such a facility. In other words, to put in a natural gas facility at a service station would cost you about $250,000, and the government's providing up to $50,000 in terms of a grant or subsidy of some sort. You have a business decision to make as to whether or not it's worth it to invest the other $200,000: can you recover that through sales of the product, given its rate of penetration among the consuming public at this time?
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Mr. Maloney: I have one very broad question that you might be able to answer. Do you have any recommendations on how the farming community could reduce their input costs vis-à-vis the petroleum industry? Do you have any tips for farmers?
Mr. Hawley: The same advice as we give to consumers who call us. We have an information line about gasoline pricing. We would certainly encourage people to shop around. If you have a number of suppliers in your market, then you should be in touch with all of them and make sure that they know that you are shopping the market, that you're looking for a supplier and that price is very important. Just being an aware consumer and behaving accordingly is really the best advice I could give.
Mr. Clapp: I would add to what Brendan said, considering my background in the oil industry, to make sure that your customers are using the energy efficiently. In every use of energy there's a lot of opportunity to use it more efficiently, and people should look very hard at how they're using the energy and the equipment they're using it in. Is it the most efficient use of that energy? There are energy efficiency opportunities that we need to be taking into consideration, and they have large leverage to reduce costs.
The Acting Chairman (Mr. Calder): You'll be happy to know, too, gentlemen, that Glen McKinnon has just told me that oil sales will probably be going away up in Manitoba. There's a snowstorm out there.
Mr. McKinnon (Brandon - Souris): That's why I've had to dash away to the phone a couple of times about my transportation home today. I hope you'll excuse the fact that I left and I'm not really up to speed on what the questions were previously.
I would like to focus on some of the factors. I'm looking at your presentation on gasoline pricing when I make these comments. I believe I heard you say that 50% of your pump price is really the cost of getting the petroleum product there.
Mr. Hawley: I'm sorry; 50% of the pump price is tax.
Mr. McKinnon: Okay, keep going. What about petroleum?
Mr. Hawley: Petroleum is approximately 30%.
Mr. McKinnon: How much of that 30% component is distribution and transportation cost?
Mr. Hawley: The 30% is actually accrued, and the transportation and distribution is accounted for in the remaining 20%, which are the marketing and retailing costs.
Mr. McKinnon: What I'm heading into here is farm servicing, with which this committee is dealing. In my part of the world there has been an increase in the number of miles because of the shrinking number of depots, and in essence we are now trucking fuel significantly farther from depot to farm gate. Is that really efficient, or have you got a comparative chart?
For instance, in my part of the world - I live in Virden, Manitoba - I think we're now down from five to two farm delivery companies. A lot of them are still in business, but they're going much farther now. Have you got the picture? I would like to hear your comments on that phenomenon that's been occurring.
Mr. Clapp: What you're seeing happen is that the demand for the product shrinks. I think it has been shrinking. You had five. Five of them are no longer viable entities. Their fixed costs go up per litre that they sell, so they're starting to shrink. You're getting more volume going to the two that are left, so the fixed costs they have to cover are lower. Their transportation costs might be a bit higher.
I would argue that the net to the consumer is still probably a more efficient system to supply their oil, because you then have a couple of very efficient distributors with base costs that are lower than those of the five that were there before, to try to cover their costs.
Mr. McKinnon: There must a point of diminishing returns on that phenomenon of which you're speaking.
Mr. Clapp: Oh, I'm sure there is.
Mr. Hawley: The point I would make is that if you look at the capital costs for maintaining an inefficient bulk plant versus the capital costs of increasing your truck fleet by three or four units, I think those economics would determine the fate of the bulk plant and how the fuel was actually delivered.
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Mr. Clapp: That's particularly true in western Canada. There's been a significant rationalization with a number of bulk plants because of the fixed capital tied up in them.
Mr. McKinnon: I think there has been some cynicism from the farm community. In a public relations manner, it hasn't really been managed all that effectively in terms of communicating the need to do what the industry is in fact doing. A lot of people who have been ESSO customers for 20 years - I'm just pulling an example out of the air - have decided to switch their allegiance in many cases. I think a lot of ill will has been created in this transition period. I'm just making that point because I thought maybe you should hear it.
I'll get off the farm side now and look at the entire industry in terms of public relations. It would be my view that the industry could do a far better job of explaining to the general public the nature of your business, such as why the price is what it is and how there may be, as somebody said here, a change from 47¢ to 53¢ a mile down the road. That was Mr. Landry's comment earlier about his own province.
My riding butts onto Saskatchewan. I might also comment to you, gentlemen, that my riding is the only one in Manitoba that has oil wells in it. I know it from the other side. Virden, Manitoba calls itself the oil capital of Manitoba, and that's where I live. So I've had some experiences from the petroleum side as well.
My concern is that we are midway between Regina and Winnipeg. Cromer, Manitoba has the second largest capacity of storage of petroleum fuels anywhere in Canada.
Do you know where Cromer, Manitoba, is, sir?
Mr. Clapp: I think so.
Mr. McKinnon: It's 20 minutes from my home town, my front door. There is gasoline out there that could be distributed from that site to the farm gate, but the industry is choosing to bring the fuel in from Winnipeg or Regina to my home area, which is about 180 miles from either place. As I said, Cromer is 20 minutes from my community.
I'm suggesting that there is some lobbying going on here in your industry by certain subsidiary interests not to use that facility. In other words, there is a lobby to use a transportation system that is antiquated, and the industry still stays with that particular mode. I'd like your comment.
Mr. Hawley: I can take note of your concern. Obviously I don't know the specifics of the situation, but I'd be more than happy to follow up with you afterwards. If there's some way we can represent your interests, we'd happy to.
Mr. Clapp: Is the terminal you're referring to a pipeline terminal off the main interprovincial?
Mr. McKinnon: Yes.
Mr. Clapp: I know the one you're talking about. We should get back to you. I don't know the details.
Mr. McKinnon: Thank you.
The Acting Chairman (Mr. Calder): Thank you, Mr. McKinnon.
Brendan, in our conversation previously you said you had a possible dentist appointment at 10:30 a.m. You can either get drilled here or get drilled there.
Mr. Hawley: I think I've had enough drilling here, thank you. I'll leave it to my colleague,Mr. Clapp, who's more than capable. You know how hard it is to get appointments with oral surgeons these days.
Before I leave, though, I'd just like to say something with respect to the tax difference between Ontario and Quebec. For the record, in Quebec the provincial tax is 18.9¢ per litre and in Ontario the provincial tax is 14.7¢, so it's a difference of approximately 4¢ per litre.
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Thank you for your indulgence, Mr. Chairman and members of the committee. I would be more than happy to meet with any of you on an individual basis. I take your comments seriously about the need to explain the industry. I would certainly say we have made a number of efforts to try to do that. As you know, we have advertised an information line in some publications, including The Hill Times newspaper. Any time you have an opportunity or would like someone from the industry to meet with you, or meet with a group, I'd be more than happy to accommodate you. Thank you.
The Acting Chairman (Mr. Calder): Is anybody going to come forward to sit with you, Bob?
Mr. Clapp: No.
The Acting Chairman (Mr. Calder): Okay. You are going to carry the load by yourself.
Mr. Clapp: I'll see if I can answer your questions.
Mrs. Cowling (Dauphin - Swan River): My question sort of follows that of my colleague from Manitoba. I am also from Manitoba and at one point was involved with the major farm organization there, Keystone Agricultural Producers. This organization has monitored the prices in Manitoba. They monitor those prices to the farm gate from where they have to haul. In order to bring those prices down, there were several times when farmers themselves actually went across the border and brought back huge loads of diesel fuel. That was the only way they could force that price down.
That seems to be a very awkward position for the farm community to be put into. From your perspective, how do we as a committee and how do you overcome that so we don't force those producers to have to do this to drive the price down so they can have the money available to them to get their crops in?
Mr. Clapp: The argument on that would be similar to the gasoline markets where you have market areas and people buy within a market area. That really sets the price, based on the people engaged in that market and their costs. People with normal buying patterns will continue to buy in that market until they get dissatisfied. Then you have to go to adjoining markets to effect change.
It's overlapping markets. In essence, they've left a market where there's a certain price and gone a significant distance away to another market where a different mechanism is setting the price, to try to make that market influence the market they're in. It works.
What you've just described is classic market dynamics. If you're dissatisfied in one market, you go to another or try to influence that market. I think we have demonstrated that externally influencing that doesn't work. You have to let the market work. If people need to do that, they will bring the market back down. I don't know what has happened since then, whether the markets have gone back into their normal patterns or not.
You need to go to the economists. A lot of work has been done, more in gasoline than in diesel, trying to understand market dynamics. We have a number of studies done by academics that have looked at how these gasoline markets really work. I don't know whether we've studied diesel markets as much, as they tend to be farther apart. They're more remote. You would probably get into a situation more like the gasoline issue in small rural communities versus large urban centres, and the difference is there.
Mrs. Cowling: I'm not sure if you can answer this question. You are correct that the farmers did this because they brought back large volumes and they bought on a volume basis. But from a Canadian perspective, how do we solve it? Why do we have to do this to drive those prices down?
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My riding is very close to Mr. McKinnon's riding and very close to Cromer. If we have that kind of a facility there, why don't we use it? Why do we have these farmers drive all that way to force down a price, load their trucks up with fuel, go out of Canada and then bring it back? Why not use the facility that's in Cromer, which is less than 100 miles away from them?
Mr. Clapp: Cromer will now have to get back to you as well. I can't comment on that.
I think I know the terminal. It's the key break-out point for product that's then piped up to Winnipeg. I don't know. I was involved in that ten years ago. I'd be guessing, and I don't want to give you a wrong answer.
The Acting Chairman (Mr. Calder): I'll follow along on what Marlene was talking about here, Bob.
You already have a sort of rebate system in place for public servants and senior citizens. What if members of the Wheat Producers' Marketing Board or the OFA or the Chicken Producers' Marketing Board all went together and said they would buy their fuel from one specific distributor, something like a co-op idea? Would you be interested in giving a rebate or a lower price because of bulk buying?
Mr. Clapp: CPPI doesn't buy and sell, as you know. That gets into commercial arrangements with the suppliers.
Co-ops, as you mentioned, are an example of a group of people getting together and using that to leverage buying power. There's a lot of evidence of that going on in the marketplace, particularly in the farming community. Certainly the advantages of a large contract versus a small contract are there to be had.
They get into individual negotiations with individual suppliers and how they want to manage it. That's really all I can say about it. It's an opportunity.
The Acting Chairman (Mr. Calder): Yes; it's something we should explore.
Mr. Reed: I'd like to explore this word ``subsidy''. It bothers me that we are being accused of subsidizing ethanol when in fact the petroleum industry has been subsidized since the Second World War or perhaps before.
I'm the first to admit that CPPI doesn't deal with that area of petroleum subsidy, because your mandate goes from the refinery gate to the pump. But in fact the petroleum industry is perpetually subsidized. We should really level the playing field on this. It just happens that the excise removal on ethanol is in the refinery area of your jurisdiction, but the subsidy to the petroleum industry is at the well-head, essentially.
My researcher went through public accounts and looked up tax expenditures on the petroleum industry in 1990, and it was something like $700 million of tax expenditure. Somehow or other, it's essential to balance the scale. The argument made by some petroleum companies that they don't want to use ethanol because it's subsidized is pretty weak in the light of the benefits the petroleum industry has had and continues to receive.
Mr. Clapp: Julian, your question is very timely. I was at a meeting this week in Toronto where Natural Resources Canada were presenting the results of work they'd done that came out of the task force on economic instruments and disincentives to sound environmental practices. I think you'll remember that one, which was co-sponsored by Ministers Martin and Copps.
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One of the outcomes of that was to look at the level playing field. How much tax subsidization is in there? People keep coming up with that question. How much is oil getting, how much do hydro projects get? I'd commend to the committee this piece of work that tried to look at what they called the tax uplifter, which is given to various competing energy projects.
I'll just try to summarize the results as I recall them, because they were quite an eye-opener for a lot of people. Your western Canadian natural gas and oil projects would fall in the range of a 0% to 10% uplift from the tax system today. That's looking at all taxes versus a neutral tax system. Megaprojects like Hibernia or a major hydro-power project would be getting tax uplifts in the neighbourhood of 10% to 20%.
Mr. Reed: That's a surprise to me.
Mr. Clapp: That's today, that's the system. You need to see and understand this study; it's an eye-opener.
Mr. Reed: I'm going to try to find out where that subsidy is because I'm building a hydro plant right now.
Mr. Clapp: There are two other areas of interest. One is ethanol. They look specifically at ethanol. The ethanol uplift was 140%, which is enormous compared to the others. Energy efficiency projects like replacing lighting or insulation in a building like this actually got a 0% to minus 10%, so they got an unfair tax break.
I'd commend to the committee this report, this study that has been done by Natural Resources Canada. It's a good first step to understanding the impact of our tax system on various forms of energy. It's hot off the press and I'd commend it to you to look at and understand. They looked at ten different kinds of projects.
Mr. Reed: I'd certainly be pleased to. I do have one question, and maybe the study does contain it. What is the return on that tax expenditure?
Mr. Clapp: The assumptions are built in.
Mr. Reed: They're in there?
Mr. Clapp: Oh, yes.
Mr. Reed: We do know that every $1 of tax expenditure in ethanol, for instance, has about a $3 net positive return in terms of job creation, agricultural stimulation, etc.
Mr. Clapp: I think each one of the projects would have something that would be akin to that.
Mr. Reed: We also should recognize that in the United States the tax expenditure for ethanol blends is double that of Canada. The government in its wisdom, for whatever reasons, has continued that support. It doesn't deliver it directly to ethanol in the States; it delivers it to the ethanol blend on a per-litre basis for the whole block. So does one assume that the leg-up in the States is 280%?
Mr. Clapp: I don't know; I'm not an economist.
Mr. Reed: I'd be intrigued to see the study. Very often judgment calls are made on the business of subsidy in order to have some net benefit down at the end of the road.
Mr. Clapp: Yes, it's a policy issue.
Mr. Reed: The subsidy to the oil industry at the well-head was done initially in order to actually get product out for the war effort and so on. It has continued because it's considered to be a net benefit and because now we're all hooked on oil anyway and we will be until some of these alternate fuels get on track. Hence the reason for doing some tax expenditure is to interfere with the chicken and egg problem that you so eloquently explained to us. Why would a station put up $200,000 out of $250,000 to supply natural gas to vehicles that may not be very numerous?
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The reason for doing these things is simply to get the ball rolling, if you like, so it improves our overall mix of energy availability, and hence, in the longer haul, our security.
Mr. Vanclief: Mr. Clapp, I wonder if your institute could also get us some information on the energy value of Canadian diesel fuel compared to that of the U.S. and Europe, and the environmental value as well. I'm sure you have access to it, but I don't know whether it's readily at your fingertips or not.
I think all of us around the table have been in some cities in different parts of the world, and I recognize that some of us, because of the transit system or the buses, may very well be long since worn out, but you'd swear they're burning soft coal. You can taste them as well as hear them and see them go by. Is that because of the quality of diesel fuel? The health aspect comes into this as well.
How does Canadian diesel fuel stack up against other diesel fuel in quality and in meeting all of these energy, environmental, and health standards from different parts of the world? If there is a difference in the overall ``quality'', there may very well be a justifiable difference in price, if there is a difference in price.
Mr. Clapp: I'll deal with two of the issues. The classic issue you're talking about in diesel is the black smoke issue. Most technical people would acknowledge that the main reason for the black smoke is a poorly tuned engine. It's not really related to the fuel. You need to maintain your engine.
In terms of quality, there are a number of aspects. Diesel fuel is made within certain parameters. I believe Canadian diesel is every bit as good in quality as is diesel in other parts of the world. In fact there are some specific climactic conditions in Canada that our diesels are designed to meet - our minus 40 degree winters in Manitoba, Ottawa, or wherever. We call it pour point and cloud point, to ensure that when you want to start the engine it starts and you don't wax the whole thing up.
So we've designed not only our diesel fuel but also the lubricants that are used in all of the machinery to meet very stringent cold-weather conditions. In fact I think Canada is probably the leader in cold-weather applications of hydrocarbons, both in the lubricant area and particularly in diesel, which has very stringent specifications.
In terms of sulphur, as you know, one other aspect is looking at low-sulphur diesel. On-road sulphur is at 0.05%. The agreement with the Canadian Council of Ministers is that the entire on-road segment will be at 0.05% by 1997. The U.S. is there today. We're moving towards that. Europe is still trying to decide when they're going to go to that.
There are other aspects. I don't have the data on the BTUs. I can get that for you. I would expect they're not that different, but I'll find out and get it for you.
Mr. Vanclief: Thank you.
The Acting Chairman (Mr. Calder): I want to thank you very much for coming here, Bob. We appreciate the information you've given us.
I hope everybody from the committee has a good riding week. If there are no more questions, the committee meeting is adjourned.