EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, June 8, 1995

.0910

[Translation]

The Vice-Chairman (Mr. Arseneault): Order, please. Pursuant to Standing Order 108(2), we will undertake a study of gasoline prices.

[English]

According to Standing Order 108(2), this is a study of gasoline prices.

[Translation]

It is only a preliminary study to determine whether we should pursue the issue next fall.

[English]

I should reiterate, for those who are present today and for those who will be doing the hearings across Canada, that this is only a preliminary investigation to see whether we should go into an in-depth study.

We do know that this subject has come up before committee, it has been raised by a number of colleagues from time to time, it has received public attention, and it is a subject that is of interest to the Canadian population.

With us today we have a number of witnesses. I will introduce those witnesses and then we will begin. We have a panel. We'll hear their testimony and then we will go into a question and answer period.

We have, from the Department of Natural Resources, Maureen Monaghan; from the University of Lethbridge, George Lermer; and from the Canadian Petroleum Products Institute, Brendan Hawley and Bob Clapp. Is there any special order in which you want to proceed? Maybe we should proceed with Ms Maureen Monaghan from the Department of Natural Resources.

Ms Maureen Monaghan (Special Adviser, Fuels Policy, Oil Division, Energy Sector, Department of Natural Resources): Thank you, Mr. Chairman. This morning I'm going to give you just a brief overview of some of the factors that affect gasoline markets in Canada and use a few examples from some of the recent price increases that have occurred.

I have circulated a package, of which I hope you all have a copy. I will be following and referring to some of the graphics in that package as I go along.

The first graph in that package demonstrates some of the components that make up the price of a litre of gasoline. There is a number of factors, both cost-related and market-related, that ultimately impact on the final price of gasoline at the pump.

One of those factors, of course, is crude costs, since the crude oil cost is a major component in the manufacturing of gasoline. The relationship, however, with products is much more long term. You would usually see a sustained change in the crude prices, either up or down, before that would be reflected in product prices.

The second largest component, of course, is the taxes, both federal and provincial: the GST, the provincial sales tax, and the excise tax levied at the federal level.

The rest of the bars, which show the differences across the country in the various cities, indicate kind of a catch-all category that we call refining and marketing costs and margins. That includes the cost of making the crude oil into products, the cost of getting it to the market, the cost of the actual marketing of it, the advertising, and the cost of doing business in each of the various stages. That is the component that gets squeezed, if you like, when there are other factors at play unrelated to costs, primarily competition.

.0915

Competition comes from two main areas.

The first is the international product price market. The events on international pricing markets that will have an impact on Canadian prices can be anything from the supply demand balances to the inventory levels and what's happening on other international markets as far as supply goes.

An example of that is some of the increases we saw a few weeks ago, mostly triggered by the recent publication of inventory levels for gasoline in the United States. Heading into the driving season, they were lower than people expected them to be. That caused both refiners and speculators to start buying up futures contracts on the futures market, and that had an impact on both spot market prices and, ultimately, wholesale prices, which we then saw filtering through to the pumps in both Canada and the United States.

Other factors, of course, that are ultimately important are the local market conditions, which can range from consumer buying practices - how price conscious are consumers, are they interested in shopping around for the best price, or are they relatively price-neutral? - to how many competitors there are in the market and whether they're satisfied with the distribution of the market share. If everybody is relatively happy with their piece of the pie, then you won't see a lot of price competition as far as trying to increase their share is concerned.

If one competitor wants to change their share - and generally people do want to increase their share of the market - then that's the kind of activity that triggers price wars or the sort of activity where you will see fluctuations in prices.

The size of the market is important at the local level, as are the volumes that go through each individual station. Those kinds of things can contribute significantly to changes across the country.

If you look at the next couple of graphs, you can see the impacts that some of those competitive factors can have. Gasoline demand obviously is a big factor, with demand being very cyclical, rising through the summer months, through the peak driving season, and lowering generally in the winter. Prices generally reflect that, and you will see switches and movements in prices to go along with the demand.

The graph that shows demand for the last 10 years indicates that demand for gasoline has been relatively stable, falling off during the recession years of 1990 and 1991 and, more recently, in just the last few years, starting to increase again.

Of course the other impact in that whole refining and marketing costs and margins component is the industry's desire to achieve an acceptable rate of return on its investment. I think the graph shows that you don't always get a price that would be completely cost driven. You have to take these other competitive factors into account, and quite often the price ends up being lower than what a strictly cost-additive one would come to.

The graph that shows the rate of return on capital employed for the past ten years indicates that the downstream part of the industry, this being the refining and distribution, marketing, of petroleum products, has been significantly lower than that of other non-financial manufacturing industries for most of the past ten years. Only recently, as a result of the rationalization that has been taking place within the industry, have they been able to start moving those rates of return up to more acceptable levels.

.0920

I'd like to look quickly now at some of the trends over the last few years in gasoline pricing. The next graph indicates that the Canadian average price, as we calculate from our survey, has been on a pretty continuous downhill trend for the last four years. The annual average has been lower in each of the last four years than the previous year. The very beginning of this graph picks up the large decline following the peak prices reached during the Persian Gulf crisis.

You also see the cyclical nature of the prices, where every year through that May to July period there's an increase. That increase ranges from 4¢ to 6¢ a litre generally and has over the last few years. If you look at the most recent increases, some of that is reflecting the seasonal pattern and also some of it would be reflecting the excise tax increase in February of 1.5¢ per litre.

What that translates to in looking at markets across the country, as the first bar chart indicated, is that the prices fluctuate from city to city and market to market. One of the biggest contributors to the differences across the country would certainly be the local market conditions. Then you have things like provincial tax levels being different, sizes of the market, and so on.

The next two charts in the package place Canada in comparison with the United States and with other industrialized countries. If you look at the international comparison, you can see that the ``excluding taxes'' or ex-tax prices really are not that different, keeping in mind that these are all in Canadian cents per litre, so there's an impact of exchange rates there.

You also see where our tax levels sit compared to other countries. The United States certainly has lower tax levels than we do, but we're considerably lower than most of our European counterparts.

When we look at a comparison with the American gasoline prices for the last few months we've been tracking it, the Canadian price on an ex-tax basis has in fact been lower than the average U.S. ex-tax average price. Again, I'd point out that those are national averages, so individual cities and individual markets would be considerably different.

Finally, I'd like to touch briefly on the role of government in some of this. The setting or determining of petroleum product prices is a provincial jurisdiction. The federal government, since it deregulated crude oil markets in 1985, has had no direct jurisdiction on crude oil or petroleum product markets. The only area of federal jurisdiction is how the markets behave in relationship to the Competition Act, and that, as you know, comes under the Bureau of Competition Policy. I understand my colleagues from the bureau will be addressing you in the next week or so to discuss that aspect.

At the provincial level, a number of provinces do have authority and have legislation in place to allow for price regulation. P.E.I. is the only province at the moment that's exercising that, and they do regulate all aspects of product pricing in their province.

As far as the Department of Natural Resources goes, we monitor the markets, we conduct a weekly survey of gasoline prices, we publish that information in the public domain to help keep the markets transparent, and we also track what has been happening and provide some expert advice to the bureau and to other departments as they look into these issues from time to time.

Thank you, Mr. Chairman.

The Vice-Chairman (Mr. Arseneault): Thank you very much for your presentation,Ms Monaghan.

Now we'll proceed with the presentation from George Lermer, the Dean of the Faculty of Management from the University of Lethbridge.

Professor George Lermer (Dean, Faculty of Management, University of Lethbridge): If I may, Mr. Chairman, I'll be using a few slides. It will be more convenient to proceed.

I apologize; I haven't prepared a text. What I have done is had a look at the questions that were provided. Having looked at them, I thought it would take a very large text for me to fully respond to them, so I thought it would be more useful if I simply responded to those questions briefly and succinctly.

.0925

The first question deals with trends in gasoline pricing. I have a few slides to summarize that.

I will try to avoid repeating what my colleague from Natural Resources Canada has mentioned. Much of what I have to say comes from their database and much of it conforms with their observations.

The dark line on the screen is the Canadian gas retail price excluding taxes. That's an amalgamation of all kinds of gasoline, all grades sold at full-serve and at retail, and sold across the country.

Similarly, there are U.S. gas retail prices. The Canadian prices tend to track above the American, but not in the past couple of years. The Canadian prices clearly - at least as far as this index or measure of gasoline prices is concerned - have been trending toward the U.S. levels.

A similar observation might be made about trends for the very important variable of independent jobbers. This also measures the revenues available to the retail sector of the refinery industry for the refiners, and this is the margin between the jobber price or the bulk price for gasoline and the retail selling price. This chart runs from January 1990 to late March 1995. The top line is Montreal and the bottom line is Toronto.

I have jobber prices for Montreal and Toronto only. As you will notice, the margins in Montreal have been declining. They traditionally have been considerably higher than those in Toronto and they're now falling in line. I would echo the comments of the previous speaker. The trend is downwards.

This margin is the revenue margin. It does not reflect cost. It is the difference between the price at retail earned by the marketer and the cost of the gasoline. It does not take into account expenses for running and operating the stations and the capital involved.

As for further trends, this is a report from NRCan on retail service station margins. It is the revenues available for the expenses of running the service station. Again, the trend there in each case is soft. It's downwards.

These are margins in Montreal, Toronto and Ottawa. Of course, these trends are reflected in the final retail gasoline price, although the margins are the more important variable, because crude oil prices, which are influenced strongly by OPEC and other factors, might cause gasoline prices to rise. But that hasn't been the case over the last few years, and the retail price picture here is for the period from summer 1992 until late May, the last date available.

As we can see, the trend again is running downwards. At this particular moment in history, gasoline prices in Canada seem to be a pretty attractive product from the point of view of the consumer.

.0930

I'll pass on the second question, if I may, which had to do with what goes into the pump price. I believe that was already answered.

The third question had to do with what causes fluctuations in pricing. I'd like to divide that into two, if I may. I think that might help clarify some of the issues.

There are day-to-day fluctuations in the price of gasoline. I would call those equilibrium types of adjustments. That is to say that if the gasoline industry, the service station industry, and the refinery industry were in a stable situation and a stable equilibrium, and weren't in a process of adjustment to change in a major way, there would still be fluctuations in prices from day to day. That's what we typically observe.

Crude oil prices, of course, might vary. Refinery gasoline prices might vary. We should keep in mind that gasoline is between about 40% and 50% of the value from a barrel of crude. There are other refined petroleum products to take into account and their prices may change. So the relationship between gasoline wholesale prices and crude oil prices might not be lock-step. But certainly that would be the most important factor.

The situation in Canada at the moment, though, is that we are not in an equilibrium situation. There's a mature industry. Demand is not growing. Refiners have been adjusting recently by rationalizing the number of refineries in the country, and quite a few have closed, so there's less excess capacity than before. But the service station industry in Canada seems to be overbuilt relative to the United States.

So we're in a period of disequilibrium, and in a period of disequilibrium we need some market mechanism by which the number of service stations we're going to eventually have relative to the demand for gasoline will settle down to some equilibrium level. I'm not sure what that level is, but it's certainly lower than the number of service stations we have today.

The market is going to reflect a pressure towards losses at the retail sector, with people trying to resist that tendency, and in the process we would expect quite a bit of fluctuation and possibly more price wars than you would anticipate having in an equilibrium situation.

I'm sorry. I realize I'm going along a little slowly, so I'll move this more quickly.

The fourth question is, why does movement in gasoline prices not always correspond in a directional sense to changes in underlying crude costs?

There are several studies on that question and I would say they conclude that crude costs and gasoline prices are closely connected. They're linked, and any changes in crude costs tend to be reflected in gasoline prices almost entirely within several months - sometimes a little slower, sometimes a little faster. The fact that we observe some delay is natural.

As I mentioned earlier, crude may be used for a variety of purposes. Traditionally, in Canada, the refiners would delay the price adjustments for two months because they were on a first-in, first-out inventory system rather than a last-in, first-out system. But even apart from that, studies done in the United States and England also show that connection with some delay.

As I mentioned, there are other products, not just gasoline, involved - other factors affecting gasoline price.

Another complication is entirely technical. We know what the crude oil price is minute to minute. It's quoted in New York or Chicago or elsewhere; it's easy to collect. Crude oil is pretty homogeneous. It has different grades. These are quoted and known, but we really don't know what the gasoline retail price is. It's a different price every day at every station. What we're working with is some kind of index of retail prices, and those indices of retail prices are not going to track the crude oil price perfectly. There are going to be influences of the process of indexing the retail price. So in fact the index that's used in Canada most often is NRCan's weekly series. It's a snapshot taken once a week and the price might vary a lot within the week. You might, by accident, catch the price at the top or at the bottom. It's a bit of a hit-or-miss operation.

.0935

So it's not surprising that there's some noise in the retail pricing as compared with the crude oil pricing. Working through those sorts of things, we do find that the market works worldwide.

The studies from the U.S. and the U.K. can be used to guide us in Canada because we know Canadian wholesale gasoline prices are pretty well linked to their U.S. counterparts. The price in Vancouver tracks the price in Seattle. The price in southern Ontario tracks the price in Buffalo. The price in Montreal tracks the price in New York. So if we have studies showing the wholesale price in the U.S. tracks the crude oil price, then pari passu it applies in Canada as well.

I should mention also that we don't really know what the retail price is, even when the service stations are surveyed fairly frequently and the average is taken, because that's just the posted price. Sometimes coupons may deduct a substantial amount from that price, and there may be other forms of discount. So we don't have the transaction price at retail, except through an index.

Question 5 was how would you explain differences in prices between various locations in Canada? I've already mentioned the differences across the country. They're not major, except for the tax differential. California and west coast prices are somewhat higher than the gulf coast prices in the United States. Those prices are also somewhat lower than prices in the northeast, north central United States. Canadian prices at wholesale will parallel those differences, which have to do with the transportation differentials to move the product and so on.

The gulf coast area is a major export area, rather than a consuming area, so its prices are the lowest. Canada largely produces most of what it consumes, but it's still subject to some imports, so our prices tend to be slightly higher than the U.S. level to attract those imports.

At the urban level, from city to city, I'm not certain of this, but in my judgment the major difference among cities is the rate at which the number of service stations has been declining. We have this anomaly here.

Again, if we were in equilibrium...by ``equilibrium'' I mean the service station operators are making a reasonable amount of money, no one is planning to go out of business, and no one is expanding the service station sector much. That's roughly what we have seen in the United States since 1988 or so. But in Canada that's not true. Service station numbers are declining, but they're not declining at a stable rate across the country.

Our first-year course in economics would tell us that if you have more service stations, there's more supply and the price should be lower. But our second-year course in economics will tell us that if we have too many service stations, the operating costs per station are much higher, because the cost of running a service station is virtually fixed. Until you get big line-ups at the station, there are very few extra costs associated with selling more gasoline. So the operating costs are quite sensitive to volume.

This figure might be useful. This is the average daily volume per station. These are very low daily volumes here in Quebec. That is Quebec minus Montreal. That's Montreal. Ottawa is in here and Toronto is away up here. This doesn't prove anything, but I would suggest that the reason why margins are lower in Toronto and prices are lower in Toronto simply reflects the fact that the rationalization of the service station business in Toronto has gone ahead faster than it has in many other parts of Canada, certainly Ottawa and Quebec, and probably the Maritimes. For that reason, average costs are lower.

.0940

This is the rate of increase from 1990 of gasoline volumes per station in various locations: Ontario as a group, Toronto, Ottawa, and so on. I use this just to point out that the rates have changed. They haven't followed along at the same pace in each area of Canada. They've varied for reasons that I cannot answer. I have no idea why this should be so. But the facts are that the improvements have been much faster in Ontario outside of Toronto. They've been pretty good in Toronto. They're not very good in Ottawa and in most of Quebec. They're very slow to adjust.

I don't want to draw any conclusions from that observation, merely that this must mean that the average costs of running a station in these areas is going to be higher than the average costs of running a station when the throughput is away up.

I'll be pleased to make these graphs available if they're thought to be of use. I know that it's difficult to follow at that pace.

I might be overstaying my welcome, so I'll move through the rest a bit more quickly.

What differences are there between the Canadian and U.S. gasoline markets? There are quite a few.

The most important difference is that the U.S. throughput per station is about double the Canadian throughput per station.

From 1970 to 1992 the retail margin in the United States fell from about 45¢ to 20¢ U.S. per U.S. gallon, because of the increase in volume, the switch to full service, and factors of that sort.

Canadian gasoline consumption has fallen faster per vehicle than in the United States. In the U.S.A. it fell from 640 to 600 U.S. gallons per vehicle per year. The same ratio in Canada went from 625 to 520. That's over the period 1983 to 1992.

The margin earned by the retailer in the United States is at least twice as high as the margin earned by the retailer in Canada on average. It's about 7¢ a litre, as compared to about 3¢ a litre here.

The U.S. sells more premium gasoline - about 32%, compared to about 23% in Canada - and margins are considerably higher on premium gasoline.

The premium earned in the U.S.A. on full service is considerably higher than in Canada.

I think those are the key differences. There are others, of course.

The refiners in Canada sell about 80% of their gasoline through their dealer network system or their own service stations. In the United States that number is much lower. I believe it's about 36%. A lot of the sales to jobbers are still sold to stations that purchase the brand from the refiner. So you'll still see the refiner's brand name on the station, but that's not even a dealer relationship necessarily. It might be purchased through a jobber.

.0945

In Canada the company-owned-and-operated stations are about 28%, the commissioned are about 16%, the leased group is about 12%, and the dealer-owned stations about 44%. That adds up to 100% of the stations selling branded gasoline. That in turn is about 80% of the stations. Another 20% would be independents.

How competitive is the gasoline business in Canada? Canadian refiners are price-takers. They take the wholesale gasoline price from the U.S. So as long as the border is open to imports, it's a competitive business.

At retail there's an excess supply of service stations, and it's in the nature of a monopoly to restrict supply. So at this moment in time, certainly, and for the foreseeable future, the competitive pressures in this industry are severe.

A monopoly is hardly a concern. There might be a concern, and there is a potential concern always, for oligopoly or parallelism of behaviour of the refiners since there's so few of them, but in a world of deregulation and open imports that concern is at best potential and not actual.

I'm asked in question 9 how influential the independents are. They're important because they are the first to jump to acquire imported gasoline if that's a better-priced alternative. They're important because a lot of innovation has taken place at the service station level because of independents in the area of cross-merchandising products, in the area of moving to full service - a variety of things. But the refiners have moved with the times pretty effectively as well.

As I say, if the borders are open, the concern for competition in Canada is not as serious as it might be if, for one reason or another, regulations or import controls would close the border. So I think the free trade agreement and deregulation in petroleum markets have made the question less vital than it was before.

Question 10: how profitable? As mentioned, the profits have been low in the downstream area. Thanks to the Petroleum Monitoring Agency, it's easy for people like me to follow that, and I must admit I'm not looking forward to that information not being available in the next little while. That's my plug for the petroleum monitoring reports. It has been, at least for me, a very useful source of data and information.

There have been improvements in profitability of the refiners' downstream operations in the last few years, and I looked at that quite carefully recently. Interestingly enough, almost all of it comes from improvements on the cost side. The revenue side has actually fallen somewhat. It hasn't come from being able to push prices up and maintain the scale of their operation. It's come from some pretty sharp declines in costs.

They slashed their operating costs, mostly at the refinery level. Distribution costs, I think, are still pretty high, and we haven't seen the changes there. I think they're still to come. And of course there has been improved capacity utilization because the business picked up a little bit as we came out of the recession.

My answer on question 11 is clear. I find words like ``gouging'' difficult to give economic meaning to. There's no evidence of prices having sharply risen except that they rise sharply in response to price wars, and price wars, of course, provide a tremendous bargain to the consumer. Those prices that result from price wars are not sustainable. We just wouldn't have a business, and no one would be in the business of supplying gasoline, if those prices were to last for a very long time. It might not do much harm. We might end up with a faster speed at which the service station sector would be rationalized and reduced. That might be good for consumers, and it might not be so good for the retail operators.

.0950

The other aspect is that I think - and I'm jumping quickly to question 14, on regulation - all the evidence on regulation of the service station sector is that it leads to higher prices for consumers.

I participated in hearings that influenced the deregulation of the Nova Scotia gasoline prices. The effect of that has been salutary for consumers. Prices in Halifax now tend to follow prices elsewhere in Canada, whereas previously they were always higher. There were too many stations, and it was essentially a marketing board for dealers.

So if one wants to repeat the experience we have with high prices where there are marketing boards, then regulation of the service station sector is certainly a way to go. I wouldn't recommend it, of course.

On competition policy, at least for the moment I feel I'm not competent to comment on the legal aspects. I work in the area on a regular basis, and I used to work for the bureau at one time. Certainly the environment in the oil industry, because of deregulation and the open border, suggests that those forces are a lot more powerful than a regulator, and even the competition bureau, can be - and I think they're working.

As for federal action, I guess the one point is that the legislation to limit liability for pollution at service station sites is probably something people should look at. It's thought that one reason why we have too many service stations is that people are concerned about closing the stations and leaving, because of the liability associated with the environmental impact. That means that, on average, all gasoline users will pay a slightly higher price. They'll be slightly better off, because they will never have to wait in line at the pump.

Frankly, 1¢ a litre amounts to something like $20 a year for the average motorist. So, to put it in context, it's not very different from the extra price we pay for eggs, dairy products, and everything else. It's a small amount, and I don't think the motorist is going to get politically too concerned about that. The concern seems to be about the frequent fluctuations, but, as I end, that is the way the market operates.

Thank you very much. I'm sorry if I went over my time.

The Vice-Chairman (Mr. Arseneault): Thank you very much, Mr. Lermer.

Now we proceed to our next witnesses, from the Canadian Petroleum Products Institute:Mr. Hawley and Mr. Clapp.

Mr. Brendan Hawley (Vice-President, Public Affairs, Canadian Petroleum Products Institute): Thank you, Mr. Chairman and members of the committee. We thank you for the opportunity on behalf of CPPI to appear once again before the committee, today on the topic of gasoline pricing.

We obviously acknowledge the frustration that consumers feels around this topic. We know that, as members of Parliament, obviously you have received representation from your constituents on this issue. So we hope that our comments today will be helpful in explaining the issue, and possibly providing us as a helpful source of information for any information concerns you may have.

I just want to note that all the data in our presentation today comes from government reports.I'd also like to note that, as a bonus for being a member of this committee, today you've received some more reading material, which is our sector competitiveness framework study that my colleague, Mr. Clapp, will discuss in the overview. This gives you a head-start on your summer reading.

Our comments today really complement studies done previously by the Bureau of Competition policy and work that our companies have done with consumers' associations in Alberta, Saskatchewan, and here in Ottawa on the topic of pricing dynamics.

The point we want to make here is that there's already a considerable amount of information available on the topic of gasoline pricing. I think the issue is not necessarily as much information as it is understanding.

To illustrate that, I'd like to refer to an anecdote. Several years ago, in the news there was a report of a major gas find in northern British Columbia. I received a call from a business journalist who wanted to know whether they'd discovered leaded or unleaded.

Some hon. members: Oh, oh!

Mr. Hawley: So we have a way to go in terms of communicating on this topic.

.0955

In that line, CPPI has recently, over the last couple of months, introduced a consumer information line. We're using it as a means of trying to answer people's questions. We've run ads in The Hill Times, your tabloid newspaper. We would certainly welcome your questions, or questions from your constituents.

We'll be concluding our remarks today with a couple of observations. We feel the retail market demonstrates the characteristics of a competitive market. These characteristics are, first, that there's price volatility; the price does change. There is retail brand diversity. In other words, a number of brands are available on the market. There's diversity in wholesale suppliers. There's openly posted pricing. There's ease of entry and exit into this market.

We hope at the end of the presentation you'll agree with at least some, or all, of the remarks we make.

On this note, I would like to turn it over to my colleague Mr. Clapp, who will take you through the structure of the industry and our sector competitiveness framework study.

Mr. Bob Clapp (Vice-President, External Relations, Canadian Petroleum Products Institute): I'm first going to give you a few comments about the sector competitiveness framework study report, which you have in front of you. This was a partnership effort by Industry Canada and the CPPI to prepare a comprehensive report on the sector. We had representatives from the consumer association, Environment Canada, Natural Resources Canada, and a number of our member companies to put this report together.

It has in it a lot of information about industry structure and performance, linkages to the economy, product supply-demand issues, refining and marketing margins, and environmental challenges, which are considerable for the industry. It then draws on the key issues facing the industry over the remainder of this decade.

It's a study we intend to keep evergreen with Industry Canada. We believe it is the most comprehensive piece of work that's been done in this sector, at least for some time, and maybe ever. I commend it to you for your dockside reading as you enjoy your summer vacations.

The presentation flow we have today...I'm going to give you a bit of an industry overview. I don't know what level of understanding you have of the downstream industry, but I thought I'd give you a little capsule summary of the downstream industry. I'll talk about gasoline supply. Both of our previous speakers have alluded to that. I'll try to add to what they've said. I'll make just a few brief remarks about the gasoline price components Maureen talked about.

Brendan is then going to come back and talk about the retail market: some of the basics of gasoline marketing, something about the structure of the business, something about the operations. She will deal with something everyone is interested in, why the prices go up and down; the price cycle. Then she will draw some conclusions.

That's what we'll be talking about today. I draw your attention now to the chart that's on the screen as I try to give a bit of an industry overview for you.

The oil industry, when people talk about it, is made up of two big chunks. One is the upstream, which has to do with exploration and production of crude oil and natural gas. The other part is the downstream. That deals with the refining and marketing of petroleum products. Gasoline pricing is a refining and marketing issue.

We start with the refining segment, where crude oil comes into the refineries and is turned into a multitude of products that are sent to market. This is what I call our first marketing impact. Here we have the crude oil market, which is an international market, playing out. It will eventually impact on the price of gasoline for the consumer.

The products from the refineries are moved by the various modes shown there, including pipeline, truck, rail, and tanker, to intermediate storage depots. It's around this area that we have what we would call the wholesale market. George referred to that earlier, and I've used it as an analogy; that's where the wholesale market is. The refiners are selling their products into the wholesale market, and you also have imports from offshore coming into that market.

The products are then moved to various segments of Canadian society. We've shown just a number there, for example. Our focus today is the one that shows the gasoline pump, and that's gasoline retailing.

The refining and marketing industry in Canada employs over 300,000 people at 22 refineries and a little over 16,000 service stations. Some 65% of the products from refineries are sold to Canadian industry. It's very pervasive. Petroleum products find their way into just about every segment of Canadian society: 30% of the products go to consumers - and that's primarily gasoline - and 5% are sold to governments. One of the conclusions of the sector competitiveness framework study was that this is truly an infrastructure industry, as it touches just about every aspect of our life.

.1000

Maureen talked about the profitability of the industry. Another way we tend to look at it is how many cents per litre we make on all the products we sell. In 1994, based on the data Maureen's organization provides, it's 1¢ a litre on all of the products sold in Canada.

I have a few comments with respect to gasoline. The demand for that product has been flat for about the last ten years and the forecasts would indicate that it will continue to be flat or have at the most about a 1% per year increase.

We've had significant rationalization of refineries in service stations, and George alluded to that. In 1980 we had 36 refineries in Canada. Today we have 22. In 1980 we had over 24,000 service stations. Today we have just over 16,000. So the industry has made a significant effort to bring supply in line with the demand for our products.

The average retail output is about two million litres per year. That's somewhere between half and three-quarters of U.S. stations. I think George said it was half. Some information that members of our industry have been collecting recently would show it's probably closer to three-quarters than half, and obviously you get different throughputs, depending on whether you're in an urban or a rural market.

Half of the retail sites in Canada operate under independent management and price management, and I think that's an important aspect of the marketplace. We've shown the margins have declined. Where they used to be 8¢ to 10¢ a litre, they're now 2¢ to 4¢ a litre, and this has driven competitors in the marketplace to look for other means of revenue on their sites.

Most of you are probably familiar with the emergence over the last five years of what we call the ``c'' store, the convenience store. That's really to put more value-added into the site and to generate revenue from other products, whether it's doughnuts or banking machines or popcorn or whatever it is.

Now I'm going to talk about industry supply and ask Brendan to put the next chart on. I'm going to talk about two aspects here, the supply from refineries and the supply from the import side.

We have refineries situated all across the country. As I said, there are 22 of them. They operate from coast to coast. Refining is a very capital-intensive business and hence a high fixed cost business. This drives refiners to want to ensure that the throughput of those facilities is maximized. Generally, over 90% utilization of a refining asset is what people strive to do. Today we are between 85% and 90% utilization, so we do have in the domestic refining industry surplus capacity in spite of the significant rationalization that's taken place over the last 10 years.

Crude cost to a refiner is their single largest cost. It represents 70% of the costs of a refiner. As a number of us have said, crude costs are set internationally, not domestically, and that's the first market that operates. We have crude cost driven by international markets as a key input to the refining industry.

Refiners operate on a basis of what we call contracted sales, and this would be to various retailers, whether it's through their own network or to independents, and to other major industrial customers. They use flex sales or discretionary sales to balance their production to other buyers.

The wholesale price then is driven partly by the domestic refining industry and is impacted by crude price, but not always directly because there are other factors that come into play on the supply side of the equation. Those can be things like inventory levels, seasonal fluctuating demands, unscheduled shutdowns of refineries, pipeline interruptions, oversupply or undersupply, and other factors that affect that price.

If we move then and talk about imports, which are the other key supply variable, we've had free trade in gasoline since 1985, when the barriers were removed as remnants of the national oil policy in the import compensation program. Today there are few barriers to importing. If you're coming in the east coast via ship you need a tank to perhaps take a pipeline batch, or we can have truckloads moving directly from the U.S. to service stations in Canada. This is what typically happens from Buffalo into Toronto. It's very easy to get imports into Canada.

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The gasoline price is an international commodity. It's set by the kinds of things I talked about that affect the Canadian industry, and more on an international scene. Prices change quite frequently and are reflected clearly in the Canadian price. In fact, imports by buyers in Canada really cap the wholesale price in Canada.

We can draw a couple of conclusions from that. We do have excess domestic refining capacity, and that plus the import option for dealers creates a good check and balance system for a competitive wholesale market. The wholesale price in Canada is the lower of the import option or local refiner competition.

The last chart I will talk to - and there's only a couple of points I want to make on this because Maureen covered it quite well - is the composition of gasoline pricing. She said gasoline prices have gone down on average each year since 1990. They've actually gone down 6¢ a litre. While that's been going on, the tax component has going up 3¢ a litre, so we're looking for a 9¢ gap.

What has actually happened is the refiners' and marketers' costs and margins have come down by 7¢, which is the lion's share. This is what George referred to in terms of the significant restructuring, rationalization and cost measures that have been taken in the refining and marketing industry and largely passed through to the consumer.

The crude cost component is down about 2¢ a litre and that is driven by world markets. We show that the retail margin is down about 0.5¢ a litre.

So that's all I wanted to say. I'm going to pass it over to Brendan to talk to the marketing aspects.

Mr. Hawley: I want to just check one point. I know you've had a lot of information, but did we mention that since 1980 the pre-tax on the inflation-adjusted basis for gasoline has actually decreased 15% and the tax portion has increased 255%?

A voice: No.

Mr. Hawley: The conclusion is that the government has been playing an active role in the marketplace and thanks a lot.

An hon. member: Are you saying that on a positive basis?

Mr. Clapp: Just as an anecdote to that, the total dollars our industry collects for federal and provincial governments through taxes is over $9 billion a year.

Mr. Hawley: I will try to make this as brief as possible. We're just going to go through some gasoline basics that you as consumers can identify with, some retail structure, and then we'll get into a price cycle discussion.

With respect to gasoline, first of all it is a commodity traded internationally. Since 1985 we've really had a free trade in petroleum products, so Canada is open to imports from around the world for gasoline.

In the minds of consumers, product differentiation is somewhat minimal since gasoline is gasoline. It's a relatively low-involvement purchase decision by consumers. You buy it when you need it. It's not the sort of thing you run out to buy more of when you get your income tax return and have extra money in your pocket. Your purchase is really motivated by need; it's not a discretionary purchase.

At the retail end of things, as you've noticed, we're getting into a much more complex range of offerings. We're probably moving more into the corner store business than the gasoline business, if you look at the convenience stores, car washes, cash machines and all the other offerings. That's driven by the demand by consumers these days for convenience and time efficiency.

Consumers are price sensitive but they want service and product quality. Seventy percent of sales take place within two kilometres of home. In most urban areas there is a large interlocking network of markets, which accounts for the fact that in urban areas a price shift in one micro-market translates very rapidly to other markets because consumers can drive through a series of these micro-markets to and from work. In rural areas it is a bit different where retail markets tend to be perhaps geographically larger but somewhat more isolated and self-contained.

.1010

Consumers don't perceive a lot of differentiation in terms of cost differences among stations, whether it's a small independent or a large company-owned service complex.

Gasoline is the only product that you can consumer- or price-shop for at 40 kilometres an hour. Consequently, consumers are very price sensitive, and they are in a position to make good discretionary choices on the basis of price and services or whatever.

High fixed costs are associated with operating a retail service station, so obviously volume is very important and obviously consumers are motivated by price. Therefore there is an incentive to price competitively in the market to get volume and amortize your high operating costs over larger volumes.

There's an oversupply of stations in most markets, which is evidenced by the fact that you usually don't run into lines at the pump - only at the car wash where I shop, it seems.

Price and convenience are consumer motivators to buy. The lowest-cost retailer with excess capacity has the potential to set the price in every micro-market.

The role of the ``c'' stores is obviously to move away strictly from gasoline revenue and into other revenue streams and to provide the service that attracts consumers.

Prices move rapidly and pervasively through large urban areas.

With respect to the retail structure of the industry, the industry consists of three major components. We have companies involved in refining and marketing operations, and then we have strictly independent marketers who do not have a refining capacity. The integrated companies are national and regional in scope. They provide gasoline supply to their own network and other retailers with whom they contract.

Independents tend to be more local in character, but some large networks exist. Independents buy local wholesale or can use the import option. They generally have about a 20% to 25% share in most urban markets. In other words, that is another indication of competitiveness. They are not linked into the refining industry. They can import, which means bringing it in by truck or by tank or however they want to do it.

Ownership and management contracts in the retail sector really determine who sets the gasoline price. At 56% of sites the retailer buys the gasoline and sets the pump price. In other words, the retailer has the title to product in the ground. I'll repeat the figure: that's 56% on a national basis. At 44% of sites the gasoline is owned by the refiner-supplier and is sold on a consignment or an agency basis by the retailer. In other words, the company has the title to the product and can determine what the price should be according to their marketing strategy.

In terms of structure, there are a lot of players in this market; more than half the prices in the market are managed by the dealers and are set independently; and the independent dealers are a significant part of the business, but they tend to be price takers. The price setter is the lowest-cost retailer with excess capacity in any market.

I'll go to retail operations. We have a little chart for that.

Here we have three different types of retail operations. Each of them has a different set of marketing strategies and different operating costs. The key variables for any retailer will be their sales volume, their site costs, and the ancillary revenue or revenue for things such as convenience stores, car washes, and those types of thing.

These are quite generic explanations.

Dealers are business people who are really sought out by company suppliers as reliable outlets for gasoline production. If you're a refiner making gasoline, then you also have to make sure that you've got an outlet for it, and they tend to be attracted to these high-volume independents as good business opportunities for supplying them with the gasoline.

Dealers who are on a consignment or an agency basis are motivated by volume as opposed to price. If you're on a commission sales basis, then obviously you will be more interested in maximizing your output. You will be price sensitive, but you will be most sensitive to price decreases in your market because you will want to match those in order to retain your volume or even maximize your volume as much as possible. When the price increases in local competition you will not object to having a lower price in that situation, again because you're motivated primarily by volume.

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The no-frills independent has another share of the market. They are often individuals who own and manage their low sites. They don't offer service. They are basically offering price. They try to achieve profitability by increasing sales volume through competitive pricing.

Finally, we have company-owned sites that are diversifying into ancillary revenue from non-gasoline sales. The pricing strategy there is to remain competitive within the market while offering a broader range of products and services. Profitability depends on increasing throughputs, on cost reduction and on ancillary revenue. For a large convenience complex, gasoline revenue is a very important, fundamental part of the business. But obviously if you have other revenue streams as part of your business operation, the revenue picture in terms of the gasoline is not as important a factor as it is for the independent whose only offering is gasoline.

Therefore, there really is a number of incentives for retailers to offer the lowest price in the market. And consumer behaviour can affect the price. Obviously, if you're travelling through a number of micro-markets you have the opportunity to shop the lowest price in a trade-off between price and convenience.

There is a point we really want to make here. To the average individual every gasoline station looks the same - and that may be true in the minds of some or many or all consumers - but the truth of the matter is that the operating costs and the economic forces at play suggest there are very different types of retail outlets.

Regarding the price cycle, each market has a wholesale price that influences local prices. The wholesale price will reflect the commodity price, local transportation costs, terminal storage charges, and other extraneous factors.

Each retailer has a distinct balance sheet, site and operating costs, sales revenue and profit requirements. Retail sites tend to have high fixed costs. In other words, we have talked previously about the notion of crude prices and their effect on pump prices. In fact, the closer to determinate or a barometer of what local retail prices will be tends to be the local wholesale price. That can often be affected by imports of gasoline on a wholesale basis from the U.S. or Europe or wherever the case may be.

When we talk about price cycles taking into account the ability to import gasoline wholesale and the fact that every retail outlet has a separate balance sheet, costs, sales volumes, etc., you typically reach the lowest price when the retail price is squeezed down to the wholesale price, or close to the wholesale price or lower. There it's the most efficient operator in the market who will set the floor. In other words, the most efficient operator in any market can conceivably set the floor or the lowest possible price.

That unfortunately puts most retailers in a negative cashflow situation and their revenue from gasoline sales simply doesn't cover their costs. Therefore, there's logically a movement in the market to move the pump price higher. The peak is ridged when a retailer is able to move the product price to generate a positive cashflow and cover lost income.

However, as you move up the price cycle, competition among retailers - and remember, there are more efficient and less efficient operators in every market - will set the ceiling. While some may lead in this price cycle, not everyone will follow. In other words, the price may be moving up and one company may be leading the restoration of the price, but that doesn't mean every other competitor in the market needs to follow. There are those more efficient operators who will, if you like, not pursue the price restoration, but who will settle out somewhere between the ceiling and the floor and hope their price will attract larger volume sales. That is the basic dynamic.

We observe that the price cycle is virtually repeated in all markets. I think it's pretty recognizable to most consumers, and it's a function of a competitive market.

Consumer behaviour can really influence both the frequency and the depth of the cycle. Obviously, consumers will help to erode the price by shopping at the lowest price offering.

I think I am running out of time here, so I would be happy to answer your questions.

.1020

In terms of a summary and conclusions, I'll go through this quickly.

As I said earlier, the gasoline market exhibits all the characteristics of a competitive market. Gasoline is a commodity. Consumers are price-sensitive. The range of supply and retail operations in the market really provides enough checks and balances in the system to ensure that there's a fair and competitive market.

With free trade in petroleum products available today, there's considerable choice for the supply of gasoline and retail. Wholesale price is the lower of the import option or local refiner competition, and information about gasoline retailing is already available for a number of sources.

I apologize for probably going on a little bit too long on this topic. Thanks very much,Mr. Chairman.

The Vice-Chairman (Mr. Arseneault): Thank you very much, Mr. Hawley and Mr. Clapp.

I would like to remind both of you, and as well Professor Lermer, that both groups of presenters used slides and we would appreciate having copies of those. If you would leave them with the clerk, we will make sure he makes copies and distributes them.

I am informed, as you know, that there is a scheduled vote this morning. That's why you're hearing the bells. It's a 15-minute bell, as far as I know.

I stand to be corrected; it's a half-hour bell. But the word from the whip's office is that they want to have the vote as soon as possible.

So we'll adjourn the meeting and return here right after the vote. We'll go into the question and answer period, and we'll start off in our regular pattern. It will give a break to our presenters and also to the MPs to gather their thoughts.

Thank you very much.

We'll adjourn to the call of the chair.

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PAUSE

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The Vice-Chairman (Mr. Arseneault): I'll call the meeting together again, ladies and gentlemen.

Witnesses, thank you for your patience. As you know, we expected one vote, but we ended up with three. So it delayed matters somewhat.

We'll proceed immediately to the question and answer period. I would ask my colleagues to be as direct as possible. I would ask the presenters to be as direct in their answers as well.

[Translation]

We'll start with the Official Opposition. Mr. Deshaies.

Mr. Deshaies (Abitibi): Thank you, Mr. Chairman; I would like to thank our witnesses today for their presentation. They have clearly demonstrated with their graphs how the gasoline prices can be set in Canada.

It now seems to me so simple that I'd like to say, if I may, that everything is well oiled. However, for the average consumer, there are sometimes things which are are not so clear. On your graphs, everything seems to be well structured: there is the crude, the refining process, the taxes, the federal government, the provincial government, and the profit margin for the retailer, the service stations. I am still not convinced. If we go small block by small block, it looks as if everyone is normally entitled to a small profit.

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Often, the bigger profit comes from the crude and the refining process as well as transportation. Sometimes, it's the same owners who, together, can get a better profit margin because they participate in several stages of the process. Since I come from the business community where I have worked for the past 20 years, I believe that, as a matter of course, they want to make as much profit as possible.

I don't know who could answer my question. Maybe Mr. Lermer or the representatives of the Canadian Petroleum Products Institute. For the consumer, we talk about price fluctuation when there is an increase. This increase takes effect immediately. However, most of the time, there is a certain delay. This delay is always shorter when there is an increase than when prices go down. Couldn't we have a more open process, without interference from the government, so that consumers don't get the impression that, when there is an increase, it takes effect immediately? When prices go down, the effect is not as direct. Sometimes, we have to wait several months because, supposedly, inventories have to be reduced. It's the reverse impression the consumer has.

Don't you think that the process could be more open so that the consumer, for whom gasoline is an essential product - we can't say yet that we can do without it - would believe that prices truly reflect what's going on?

[English]

Mr. Hawley: About transparency of pricing, it's a significant challenge. It's certainly a communications challenge. As I think we've demonstrated this morning, considerable information is already available on the topic of achieving consumer understanding. We've certainly found that to be a challenge. You're obviously trying to take an industry that is quite sophisticated and complex in its operation and distil that down into a very clear and simple message.

About the relationship between crude and gasoline prices, the point made this morning was that there is a relationship. But quite frankly, the relationship is perhaps more tenuous than has been suggested in the past. Crude prices increasing over time, as they have recently, will certainly have an impact on pump prices at some point. But really, the point we want to make is that the pump prices are more directly affected by commodity prices of gasoline; the wholesale price of gasoline in a local market. That is probably the more critical issue to address.

Speaking on behalf of the industry... it is somewhat frustrating to be in situations where, for example, news media will attempt to correlate what's happening to the street pump price of gasoline with the same-day change in the price of crude oil, when in fact the market does not respond that directly or that quickly.

Prof. Lermer: I agree with that comment about the connection between the crude oil price change on any particular day, or few days, and what is happening in a particular retail market. The way most price wars develop would involve one station, or group of stations, lowering the price a little below the others, and then the others adjust. So the price decline tends to take time and it goes down slowly, unless one of the operators tries to price more dramatically and lowers the price further still. Eventually they're all losing money. At that stage the tendency is for someone to try to raise the price back up to its original level, or some higher level, hoping other people will follow. That dominates the price move in that community.

So if you're at a point in a price war where prices are not sustainable and everyone's losing money and someone decides to see if they can get the price back up, that increase will take place without any connection with what's happening in the crude oil market in New York City or Rotterdam on the same day. But if you look at the price adjustments for crude oil over time, and price adjustments for different refined petroleum products over time, they work through to the gasoline pump in a reasonable period of time - studies suggest at most a couple of months. There can be fluctuations in between and some adjustments on the way up, adjustments on the way down, because of inventories, or it might be related to the season. But typically, you don't have two different worlds, crude oil prices over here and gasoline prices over there, without a connection; they are connected. It's just not connected in the same day or the same week.

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[Translation]

Mr. Deshaies: There's another interesting comment which is made on price differences. We're talking about a few cents per litre, not ten cents or more, and about the stations' profitability. In Metropolitan Toronto stations, the throughput can be twice as big as in some stations in Montreal.

[English]

Prof. Lermer: Excuse me?

[Translation]

Mr. Deshaies: Let me say that again for you. You said that one of the main causes for a two, three or four-cent price difference per litre was the potential competition from an operator who is more profitable, who has an additional throughput. Obviously, in Metropolitan Toronto, throughput can perhaps be double what it is in some areas. It's lower in Montreal and in Quebec as well. In your view, this might explain why prices are better in Toronto than in the Montreal area, and it might also be true in other parts of the country such as Regina or Winnipeg. This has to do with a large population as well as a short transportation distance. The population density is higher. We can see that there is quite a difference between urban networks. Therefore, urban networks can get better pump prices because of volume. Since rural areas are located much further away, the difference is even bigger.

My question will deal more specifically with rural consumers. Since the throughput in rural areas will never be the same as in Toronto - considering that even if there were only one station in the village or in the town, there would not be enough consumers to line up as they do in the States - could we not find a way to streamline the process so that small service stations can make a reasonable profit? It could be done through taxation. I'm giving an idea to the government.

[English]

Prof. Lermer: If that's directed to me, I'm not prepared to talk about policies on taxation. I would say that I think a lot of the companies - the refiners - have policies directed towards assuring that the retailer is supported when there are difficulties, or if prices fall too far some of the costs of running the retail operation are absorbed by the refiner.

I think, to some extent, the economics of it offsets the difference between a rural situation and an urban situation. The price of land in the rural situation may be lower, as well as the cost of facilities, the cost of operating the station. There may be factors there that offset the lower volume of throughput, and in addition there may be other cross-marketing opportunities available in a rural area. A rural station typically has been involved more in repairs and service and the urban station tends to be more full-service oriented. So my first reaction is that economics takes care of that and there's room for the dealer to operate.

It's still true that many small communities are located close to highways and people travel from town to town, and the prices of gasoline on those highways will be related to prices in urban areas. I believe the same relationship is applied to grocery stores and to many other types of businesses, and it's a consequence of a growing urbanization in Canada over time.

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Mr. Clapp: There was a comment - George really captured it - that, in the rural markets, the costs of doing business are significantly less than in the major metropolitan areas. So economics does take over to allow those people to make margins on lower throughputs.

We also talked about interconnecting markets before. There are interconnecting markets in major communities. These can stretch out into small, rural areas. You get the economic driving of prices in smaller communities as well.

I think the mechanism is there. I think the market does operate well to provide customers and retailers with prices that make sense and a sufficient margin to continue to operate.

Mr. Morrison (Swift Current - Maple Creek - Assiniboia): Before I begin my intervention, I would like a clarification on one quick point. One of the witnesses mentioned that the profit to the oil companies on the gasoline trade is only 1¢ per litre. Did that mean 1¢ per litre of crude oil? Is that what the reference was?

Mr. Clapp: Let me just clarify that. The profit on all products is 1¢ per litre if you take the total output of all products of the refinery, which would include gasoline, diesel, heating oil, and bunker.

Mr. Morrison: So it's on one litre of crude input, basically?

Mr. Clapp: It's one litre of product out.

Mr. Morrison: Okay.

Mr. Clapp: That's over the total product.

Mr. Morrison: That leads into what I am most concerned about. Someone mentioned the word ``oligopoly''. We have in Canada a limited number of vertically integrated companies that are in the refining and wholesaling business. As in any vertically integrated company, there is room to take your profit at any stage, whether it's at the beginning of the stream or at the very end, which is the retail end.

I would like the opinion of primarily Dr. Lermer - anyone can jump into this - on the possibility that these vertically integrated companies are taking the bulk of their net revenue at the production end and starving the retail end. After all, they get all of the profit on production, whereas, at the retail end, they have to share it with dealers, wholesalers, independent operators, and so on.

Prof. Lermer: I believe that those concerns have historically been an issue for the oil industry, because it grew up with a fairly small number of companies in the upstream end. The downstream end of the business developed later in time. There have been a number of semi-popular types of studies by Anthony Sampson and others that described the growth of the industry.

At the current time, however, there are numerous sources of supply. Crude oil prices are largely affected by OPEC policies. OPEC would be in a position to lower prices still further than they are today.

I believe I'm right in saying that all the major refiners in Canada are net acquirers of crude. They don't produce 100% of their slates; they need to buy some. In any event, they could sell the crude oil on the open market. It's a commodity product, and they could sell it. It would not make much sense to sell it in Canada at a loss if you could sell it in Chicago, California, or wherever, at a higher price.

So I would say today, given that the price of gasoline is essentially set at wholesale by the wholesale price in border points in the United States and the market is open, the refiner faces a very simple situation. He takes the price that's given. He can't influence it. The choice of whether to sell crude oil produced or sell at wholesale or sell at retail really depends on where they can get the best return. So I don't think there's much scope for hiding profits some place by taking them elsewhere.

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Mr. Morrison: That leads into one final question. You talk about the border sensitivity of gasoline prices or of oil prices. I would like to deal with a specific case that I'm somewhat familiar with, and I'll throw this at anyone at the table.

In the province of Saskatchewan, we only have one refiner, the Federated Co-Operatives Limited. They sell some of their product cross-border. It's trucked over and sold in the northern-tier states.

My information, and I may be open to correction on this, is that there is always a differential from 15¢ to 20¢ a litre between the price in Regina and the price in the northern-tier states. In other words, they take the Canadian product across the border and it sells cheaper than it does where it's produced. This puts some question in my mind about the border sensitivity of the prices.

I realize a lot of this is tax, because Saskatchewan has the most predatory taxation regime, or the second most predatory taxation regime, in Canada. I realize that and I accept it. But I don't think this could account for the kinds of spreads I am talking about. Does anyone here know anything about this? Can you help me on that?

Mr. Clapp: Let me just try to speak generically to it, because I don't know the details of your market. What you have is a refiner who has product to sell and he can move it into any number of markets. What he is doing is taking advantage of an opportunity for his excess capacity to sell into markets south of the border. He's a price-taker. He's taking what that market will give him there. The dynamics of that market are very different from the dynamics of the Regina market. You're probably getting into situations there that are set by the U.S. gulf coast and products moving up from Chicago. So you have a different market dynamic happening there.

It sounds like he's moving product down there and is a price-taker on what that market will give him.

The same is true in Regina. There's a market operating in Regina. He's a price-taker there in what the market will give him, because he's facing competition from product that's moved by a pipeline from Edmonton refineries. That's the best I can do, Lee, not knowing the details.

Mr. Reed (Halton - Peel): I think this question might be directed to Mrs. Monaghan. In the late 1970s there was a holding law introduced in Ontario to hold the price of petroleum for 90 days so that it did not appear at the downstream end for that period of time. It was presumed that the 90 days was the time it took for the inventory to flow through. I don't know whether you'd call that first-in, last-out or what.

I was curious to know, first of all, whether that legislation is still in effect and, secondly, whether it had been adopted in other provinces.

Ms Monaghan: That was actually a federal law tied into the regulation of crude oil prices. As crude oil prices were set and as crude oil increases were approved, there was a requirement for the companies to take 90 days before that price could be then reflected in product prices. So when crude oil markets were deregulated in June 1985, that requirement disappeared with it and markets then became completely reactive to international prices, both crude and product.

Mr. Reed: So now, I take it, we're in a last-in, first-out situation? Would that be...?

Mr. Clapp: I can answer that. For income tax purposes, we operate on first-in, first-out in Canada. We're one of the few countries that does. Most of them operate on what we call LIFO, last-in, first-out. The world markets, which we're tied into, operate on last-in, first-out. So you see changes immediately in the marketplace, because that's what happens to all of your international products, be they crude or refined products. You'll see a number of companies are reporting other results on a last-in, first-out basis now to account for that, because that's the way market really operates.

On a tax basis they still have to use a FIFO system.

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Mr. Reed: Does that mean then that there is a delay in the transmission of that price change or does it mean it is now instantaneous?

Mr. Clapp: There is a number of factors that will drive wholesale prices at the rack; for instance, events that happen in the Middle East can drive it. If the crude price goes up, it may or may not show up instantaneously because it depends on what the inventories are and what the current demand situation is. If there's a disruption, that can drive it up or down. So you have forces that can drive it either way. It may or may not be instantaneous.

As George said, over time we can probably say within two to three months you can see a correlation between crude price and, say, gasoline price, but it doesn't always happen instantaneously. There are other factors that play in the market.

Mr. Reed: I'll keep my questions limited, Mr. Chairman, in the interests of time.

Prof. Lermer: If I may, I'd be happy to add this point. Although the law didn't require it, I think a good example of what you're getting at occurred in the Kuwait war period, where for some reason or other the Canadian refiners chose to allow the pass-through period to take place and the prices in Canada went up more slowly than the United States. Of course, that's feasible, but as soon as the crisis was over and supplies returned to normal, the U.S. price fell steeply and the Canadian refiners were forced immediately to adjust their prices down to the U.S. level.

They sustained losses on the way up and they faced the market immediately on the way down. So I think that kind of policy and administrative cushioning of effects on Canadians is not really feasible these days.

Mr. Reed: A year and a half ago the prognosis was that the world price of crude would stay below $15 U.S. Three days after we received that expert information at this committee, the price began to rise. West Texas crude went over $20 a barrel a few weeks back. It's settled back down a little bit now and then was up a few cents yesterday again, I believe, which makes me wonder whether if you're doing a prognosis on the price of crude oil it can ever be accurate or whether it's purely speculative.

I express that concern because sometimes we're asked to make decisions or we're presented with situations where a prognosis is given and it always seems to turn out to be wrong. In the case right now with the industrialization of China and India now beginning, and the tremendous increases in energy consumption that are going on in those former third world countries, I just wonder what your prognosis is for the future of crude oil prices. I'll throw that open to anybody.

Mr. Clapp: I'm not going to make a forecast because we're probably the wrong guys to ask. I've always found that if you want a forecast of crude oil prices, don't ask the guys in the industry because the only thing we know for sure about forecasts is they're always wrong.

What you try to do in any forecast is band it with an upper and lower range of what you think is going to happen, and the key is to understand what events could drive it one way or the other.

Your comments have just reiterated what we said earlier, that the price of crude is set internationally; it's not set in Canada. You get into more than just technical issues that drive the price. You're getting into political issues, and that can become probably more important in many cases than the technical aspects.

Where it's going in the future I'd leave to George. Most people see it probably staying fairly flat, but I'm not going to speculate.

Prof. Lermer: Bob is very kind to leave it to me, but I should say that he sponsored a conference, which I participated in, on this very subject just a few weeks ago in Toronto, and therefore I have even less to say at the table today.

There are quite a few different forecasts, even for Canada, of future demand and supply, let alone what will happen to the world market price. A lot of people were coming in the range of a reasonable stability in prices, but it's clear that things that happen in the Soviet Union in terms of their supplies coming on line for energy and things that happen, investments that the OPEC countries might make, or Iran and Iraq coming on line, could have a big supply impact, and it's impossible to forecast if it will happen or when it will happen. So it's a dangerous thing to do.

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I would say, if we're anticipating big price increases in the future, we're probably fooling ourselves, and if it does happen it will be temporary. We seem to be living in a period of considerable sources of supply. You commented about the southeast Asia demand increasing; it's an important driver, which is maintaining prices. The economy is doing well in North America for the moment, but if we hit another recession some of that demand may come out of it and we may see prices falling again. So it's impossible to call it precisely.

Mr. Solomon (Regina - Lumsden): I have a number of questions, and maybe I'll just ask some administrative questions first.

Where does the Canadian Petroleum Products Institute obtain its funding?

Mr. Clapp: We're funded by our member companies, by the oil industry.

Mr. Solomon: Dr. Lermer, you're a professor at the University of Lethbridge in Alberta?

Prof. Lermer: Yes.

Mr. Solomon: Do you do any particular contracts, outside of teaching, with a particular industry, with a company, or with a number of companies?

Prof. Lermer: I do. A fair amount of my work has been for the Bureau of Competition Policy, some of it has been for Industry Canada, and I have worked for private firms as well.

Mr. Solomon: In the oil industry?

Prof. Lermer: Yes.

Mr. Solomon: Thank you.

I guess I'd like to start with some of the information that has been presented. Ms Monaghan has given us some graphs. I note that the international retail gasoline price graph shows, very clearly, price comparisons for Canada, the U.S., Italy, France, England, Spain, Germany, and Japan.Ms Monaghan, out of those countries - besides Canada - what other countries in that bar graph would be net producers and exporters of oil?

Ms Monaghan: Canada would be the only one.

Mr. Solomon: The reason I ask that question is because we seem to get a lot of this information from the oil industry and even from our government, but we never seem to get the comparative prices from oil-producing nations or net exporters.

For example, I think the committee would like to have comparative costs and prices of countries like Mexico, Argentina...some of the OPEC countries who are net producers and exporters, and run that on the bar graph with Canada and the U.S. If that were to happen, Ms Monaghan, what would it show, generally?

Ms Monaghan: I couldn't tell you because I don't have that information.

Mr. Solomon: Does the Government of Canada have that information?

Ms Monaghan: I'm not sure we do. We get this information from the International Energy Agency, which obviously only looks at its member countries, but I'm certainly able to look into that and see if we can get it for you.

Mr. Solomon: I would appreciate information in respect of those prices. I've seen some, and the analysis that I've done shows clearly that the net exporting countries' prices are far lower than those in Canada, to their own people. I think if we had the precise information it would be most helpful to our committee.

The other information, Ms Monaghan, that I see you've given us is the trend in the average Canadian price for regular gasoline declining, and you've got the trend line going downwards. What we don't see is a comparative chart of the West Texas intermediate futures price over the same period of time, actually since 1988 or 1989. But I do have that information with me; it was provided by the Department of Energy in Saskatchewan, which does monitor this, because Saskatchewan has produced some energy, as the witnesses would realize, and it does monitor this stuff on a regular basis. What it very clearly shows is that in 1988 the average price of crude was just under $16 a barrel; in 1989 it was about $19.58 a barrel, on average.

In 1989, the price of gas at the pumps in Canada was about 41¢ a litre. The average price for 1994 was just under $19.50 a barrel, yet the prices have gone up, in many markets, from 41¢ a litre to 61.5¢ a litre. I'm curious to know, when you exclude the taxes, how this graph would look if you compared 1989 prices to 1994-95 prices and why there may be some discrepancy in terms of explanations we received for the rationale and justification for price increases.

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That question would be to Ms Monaghan or to any of the panellists this morning.

Mr. Clapp: I don't have the data handy to deal with that, Mr. Solomon. I suggest we go back and look at it and get back to you later. I don't want to guess and speculate; I'd rather have the data and give you a sound answer.

Maureen, I don't know whether you have it or not.

Ms Monaghan: I don't have the data.

Mr. Clapp: If you would like the information, we'll get it for you.

Mr. Solomon: I appreciate that.

The point I make is that in your representations to the committee, you said the price of gas to consumers at the pumps has declined and consumers are quite happy about that. I'll get into the consumer issue in a second.

But what the record shows is that in the West Texas intermediate future price spot month closing level, the price of crude oil in 1989 is actually lower than it was in 1994, yet the prices of gasoline are much higher once you factor out the tax increases. So I'm just disputing the information you've given us. If you could get the information to us, I'd appreciate that immensely.

Mr. Hawley: I could perhaps add a comment. We have tried to demonstrate that there are a number of factors that do go into influencing what the retail price is in a particular market. Certainly when you talk about crude oil prices and movements, obviously gasoline being made from crude oil will be influenced. But ultimately there are marketing forces that do override many of these cost factors, such as the price of crude oil.

I just think the discussion of that particular topic needs to not relate crude prices and their movements directly to gasoline prices in a particular market. You need to take a look at that market and what's been happening there because of the other factors, such as possibly a rationalization of service stations' changes in demand, municipal tax structure, site costs, and that type of thing. What I'm saying is that there's a range of factors that would need to be part of that whole discussion.

Mr. Solomon: So you're saying it's a very complex issue and really would require much deeper study in terms of the implications and the costs and what in effect establishes the price of gas.

Mr. Hawley: I think the point is, certainly speaking for ourselves, that we're not experts on a particular market. We've tried to explain a generic situation, but I certainly think we could provide comment on the information you require and would be happy to do so.

Mr. Solomon: I appreciate that. Thank you.

Prof. Lermer: Mr. Solomon, on this point, I left some of the charts with the clerk. Figure 4 is on retail prices ex-tax in Canada. I guess it might depend a little on how one does the averaging over the year, because in late 1989 one gets a big price bump in the ex-tax price in Canada and that lasts through the early part of 1990 and into 1991. That was all the Middle East-related crisis.

But in the prior period, prices were somewhat lower. Certainly through 1988 prices were lower than they have been recently. It's hardly noticeable; it's almost flat right across the chart. This may not be the time to do it, but I think if you had a look at some of those charts.... I have some other charts, which I'll leave, since you've asked this question, which take it all the way from 1986.

I think one needs to be very careful about data that take annual averages, because with prices, some shock may have taken place that caused the average to go up at one time. That has nothing to do with the crude price, or it might be out of line with it by a month or two and that would distort the averages. But prices certainly have been, at best, constant over the period, if you take out the Kuwait crisis period from the data.

Mr. Solomon: Thank you.

Dr. Lermer, I understand that you rely on information from the Petroleum Monitoring Agency. Is that correct?

Prof. Lermer: I turn to the agency's publication for the profitability data and the separation of the downstream total. It's the only source available that does that separation that carefully and ensures that each of the companies reports on a common basis. Otherwise, there would be a serious problem in getting that out of annual reports or from public sources.

Mr. Solomon: So with the shutting down of the agency this coming December, what do you think the impact would be, not only on yourself but on Canadians receiving this information from a regulatory body or a neutral body?

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Prof. Lermer: I'm quite concerned about budget deficits coming from Alberta, so I don't want to support my special pleading. But it certainly is of assistance to me if I'm asked about the profitability of the oil industry downstream. That's the only source I have available.

It would be very difficult for me to decipher that or sort that out from all the annual reports, and not too many of my clients would be interested in funding it, and I don't have the time to do it on my own.

I'm going to miss it, but I'm sure there will be other ways of trying to get at the data, and maybe some private entrepreneur will do they best they can, but they will have problems in collecting the information.

Mr. Hawley: I would certainly want to have our association echo that comment. We feel that the agency has been doing an extremely good job, and as a third party it has a high degree of credibility and certainly a built-in expertise in terms of the analysis interpretation of this information. So we have always strongly encouraged the use of that data, and, as you know, much of what's in our sector competitiveness framework report is based on it because of its completeness.

Mr. Clapp: Just one further comment, if I may, on that particular issue. We are about to initiate discussions with Natural Resources Canada about the data, what it is they collect, and what they've collected in two shops. I think maybe there's an opportunity to put them both into one shop and get the information that people use and need. Perhaps there's an opportunity for independent marketing or for Natural Resources Canada to be independent marketers of this information. So we're looking at ways to keep the information that's needed and I think that's the important part. What is really needed? What do people find of value?

Mr. Solomon: Mr. Chairman, with respect to -

The Vice-Chairman (Mr. Arseneault): Mr. Solomon, are you going to be much longer?

Mr. Solomon: About two or three more questions.

The Vice-Chairman (Mr. Arseneault): It's a question of time. There is another member.

Mr. Solomon: I have two very important questions, if I may, Mr. Chair. The first relates to my colleague, the member for Kamloops, Mr. Nelson Riis, who resides in Kamloops, and what has transpired there, and also what has transpired in Regina or Saskatchewan's market, the area I represent.

Although you say consumers are happy with the prices, I have had hundreds and hundreds of interventions with respect to their unhappiness with the setting of gas prices.

How do you explain a market like Kamloops and a market like Regina? Kamloops has about 75,000 people; Regina has about 187,000. In your view, how does the industry justify an increase in price of gasoline by all the stations to the same price, to the tenth of one penny, within an hour of each other, if this is a competitive market, as you've said?

How do we explain to consumers that this is in their best interests and they are actually getting a good deal, when all of these gas stations - many of them controlled by the vertically integrated companies - set the price to within one-tenth of a cent within one hour of each other, and it's usually on the up side as opposed to the down side?

Mr. Hawley: Could I speak to that? I believe in our introductory remarks we did note, obviously, the high degree of consumer frustration with the price changes.

The purpose in our coming here - and we appreciate the opportunity to speak to the issue - is to hopefully provide some information that would help explain the marketplace dynamics that take place.

We did discuss the issue of in-urban areas where you have people shopping typically within two kilometres of their home, and there is a series of concentric overlapping markets. What this means is that a price change initiated - and it can either be a price increase or a price reduction in one market - will overlap the next or adjacent micro-market. As a consequence, these price changes are signalled by visual inspection because of the prominent price posting at every service station. The price changes occur fairly rapidly because most consumers don't particularly monitor the price on an hour-by-hour basis. What they do notice is price changes between trips to the service station or in the morning versus the afternoon or evening when they're driving home from work.

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The explanation as to the relatively rapid nature of the price change is this phenomenon of concentric and overlapping markets.

With respect to the exact parity of the price, we did also discuss the whole issue of when you have prices down at or near a wholesale level, the high fixed costs of retail outlets, and some operators in a negative cashflow situation. They do for obvious business reasons try to initiate an increase in the price because it has to be part of a viable and sustaining business operation.

Their competitors in the marketplace, as we also discussed, are motivated by different factors - a broad range of product sales, perhaps volume-oriented, whatever. What they do is, some will match but some will not.

Prof. Lermer: Where I come from, Lethbridge, which is a little bit smaller than Kamloops - this is not scientific evidence, but I can just tell you that when the prices go down and there's a price war, my youngster phones me up and says, beat it over here to the north side; prices are way down.

The word spreads quickly in a small town. There are a lot of trucks out there with dual tanks. When there's a severe price war, there's a quick movement of people around town to pick it up. I don't go. He phones me, but I look at it and say I'm not going to go across town to save 3c. a litre when I only buy 40 litres at a time.

People do that, and it's very quick. Information about what's happening to prices around town spreads very quickly, and it's an identical product and homogeneous. It's just unavoidable that prices would move together.

The sharp price increase is a reflection and reaction to the situation. On the way down everybody wants to niggle it and be just a little bit lower than the other guy. We call that a kink demand curve model in the trade. On the way up, it doesn't help to be just a little bit above the other guy. That's the worst position to be in. So you're signalling that you cannot keep the battle up of selling gasoline at below cost.

There are instances where it pays to bring a tanker truck up and fill up at retail and deliver it to some other station if the price gets below wholesale.

I hope that responds a little bit to your question.

Mr. Solomon: It doesn't respond to the question concerning how everybody increases almost simultaneously across a city of 180,000 people, or a city of 75,000 people. When very rarely gas prices are reduced...you make the good scenario for that, but it has only happened maybe once or twice in my lifetime in the city of Regina, and I'm not sure about Kamloops.

The other question I want to ask is this. You indicated in your presentation that competition is really hot and heavy and it keeps prices low in Canada, and part of that is because of the free trade agreements and the open market between the U.S. and Canada and because you can purchase gas shipped from the States to Canada.

My question is two-tiered. First, how much gas is imported from the United States to western Canada? Secondly, because of the fact that there have been 6 price increases in the last 12 months in Regina alone - and we're only 60 miles from the Saskatchewan-U.S. border - has the competition there resulted in these price increases? Or is there some other reason we've had 6 price increases, which when you factor out the 1.5c.-a-litre tax increase is still 6 increases, and it's gone up over 20% in terms of gasoline price to consumers?

Prof. Lermer: I'm no expert on the Regina market. It is true, of course, that the prairies are less linked to the U.S. than are other regions in Canada. On the other hand, the major refining centre for western Canada is in Edmonton, and in recent months that refinery centre has had less excess capacity than it used to have because some of that product is being shipped out to Vancouver.

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Surprisingly, there's a stronger link between prices on the prairies and prices in the Seattle wholesale market than there has been in the past, because the refiners were interested in moving less product down the line to Vancouver and pushing more on the prairies if there were more to be earned that way than by competing with the Seattle price in Vancouver.

I think overall on the prairies there's been a huge excess capacity both in refining and in service stations, because there was a big build-up due to the expectation of the market continuing to grow through the 1980s. That hasn't happened.

As a result, the situation is excess capacity for everyone. That must have put pressure on prices in those arenas. I know that in Edmonton and Calgary there are persistent price wars that clearly can't be sustained.

Mr. Solomon: With excess production and excess inventory why would they be increasing the prices in Saskatchewan?

Prof. Lermer: Those excesses have been worked out of the system. That's my point. There's less underutilization of the refining capacity in the Edmonton supply area right now.

Mr. Solomon: That means there'd be larger profits because the refineries are operating more to capacity. Therefore, their margins are greater because they've got the capital cost there and they're producing more than they were. If they were operating at 85% capacity and then go to 95%, they're not really adding more labour and more capital costs. They're actually running more throughput.

If western Canada is a net producer and exporter of crude oil, that doesn't explain why we should have six increases in one year. I don't seem to follow the rationale.

Prof. Lermer: Briefly, what I was saying is that the market is tighter than it was, so that doesn't argue against prices strengthening somewhat when the market gets tighter. Obviously, there are two sides to that picture. If there's a lot of excess capacity, there's going to be pressure on prices.

Mr. Solomon: Why would it be the highest in Saskatchewan when compared to the rest of Canada? That's the point. It's 61.5¢ a litre in Regina and....

Prof. Lermer: I haven't looked at the Saskatchewan market so I'm going to defer to my colleagues, but I'd be surprised that the ex-tax price in Regina.... But it's simple enough to look up because it's in the city-by-city report, so we can have a quick look.

Mr. Clapp: Let me interject with a couple of factors. Every time the price goes up, it goes up because it's gone down at some point, and you get into price cycles that Brendan talked about. You're going to see these happen. Nobody notices it going down because it tends to go down slowly over a period of time. A restoration is a spike back up, and then it whittles on down again. That happens.

There are a couple of other factors in Saskatchewan. We've had a tax increase of effectively 1.6¢ a litre this year. The price of crude has gone up about 25% since the beginning of the year on the international basis. So there are a couple of factors that play into that.

Mr. Solomon: This year's price is the same as the price of seven years ago.

The Vice-Chairman (Mr. Arseneault): Mr. Solomon, order, please. Let the witness finish. We are getting on in time and Mr. Loney has a question. You have already exceeded your time. You've had roughly 25 minutes and all the other members had 10 minutes each.

Mr. Solomon: I've finished my questions.

The Vice-Chairman (Mr. Arseneault): Mr. Loney, please.

Mr. Loney (Edmonton North): Mr. Chairman, although there's been passing reference made to this, I would like to ask the panel if in their opinion the tax assessment on gasoline is too high.

Mr. Hawley: I think with any product you reach a certain saturation point as to when there is probably too much tax on a particular product. The Ontario provincial government is certainly aware that there has been some activity in the area of fuel tax fraud. This has been reported publicly in newspapers and it is an issue that we are somewhat concerned about.

We have taken measures, working cooperatively with the Ontario government, to try to address this issue. Basically the situation is such that you get into situations in which tank wagon deliveries that are manifested for shipment across the border and supposed to be sold in the U.S. in fact never get across the border. Those are sold on an ex-tax basis. So you have tank wagons then coming back into the Ontario market essentially tax-free.

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Clearly there's enough incentive now between the tax and the ex-tax to attract people into that business. Certainly, we've been working with the provincial government and the appropriate police authorities to try to reduce that activity by providing cooperative research.

Mr. Clapp: Compared to this framework study, which you have a copy of, there's some mention of that issue and the statement that it's not sure, you're not clear, but there's some evidence, as Brendan just talked about, that leads you to ask the question. There's follow-up work that will be done to look at the tax load to determine the factors you should consider on the situation.

Prof. Lermer: It's an ethical welfare question. It involves environmental issues and so on. It's not really an economic issue, which is my area. But I do think there are problems having taxes that force our prices out of line with the border states in the U.S. The Lethbridge retail market is booming these days because the cross-border shopping is coming our way instead of going the other way. We'd like to keep it that way.

Mr. Clapp: Obviously, we're not in favour of any additional tax load on our products. It's quite sufficient, thank you.

Mr. Rideout (Moncton): I have just a quick question. In order for there to be competition in the marketplace, then, obviously, some of the stations that aren't affiliated with any company have to be supported in some way, or else there will be a vulnerability in the marketplace, I would think, if the refiners are also the people who are selling at the retail level.

In my region, we've had a number of price wars that have been beneficial to the consumers. Those have been initiated by the independents. What mechanism should we have to ensure that those private, independent gas stations still survive? They obviously have to buy the product from the refiner that services the area. Should we be concerned about that at this level?

Mr. Clapp: As we tried to identify it, there are many sources of supply, and it's not just the local refiner. The rack price at which an independent buys is affected by the domestic supply. As we said, it's capped by the import alternative, and you can always get at that.

What do we need to do to help these guys? Quite frankly, I don't think we need to do anything to help them. Some of them are doing extremely well in the marketplace; they're good businessmen.

The same rules apply to all players in the marketplace. They have lots of choice. The international cap put on the domestic market gives them a full choice of prices at which they can buy.

Mr. Rideout: Perhaps in Atlantic Canada the options aren't quite as great as in Ontario or even the west, where we're really tied into one refiner and that's it. The stuff coming across the border really is non-existent.

Mr. Clapp: Again, market dynamics will work on the wholesale rack. The threat of imports is always there. You can bring imports into eastern Canada, and they do come in. They come in, in essence, to Quebec City. I know that for sure. That price backs around and affects the maritime provinces, so it's there. Scotia Fuels is starting up and getting into the business as well.

So whether or not you actually have imports occurring, the fact that they can occur has a significant impact on the marketplace.

Mr. Solomon: With respect to a barrel of crude oil, would you tell us how many litres of gasoline would be produced from a barrel of crude and what other products would be produced from it?

I've been doing some research. I think 6,000 different products are produced.

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What I'd like to know - I think the committee would like to know this - is not just how many litres of gas would be produced from a barrel of crude, but with the residue or the balance that's not used for gasoline, what is that used for by the refinery? Do you have any percentages in terms of the barrel?

Mr. Clapp: Let me take a crack at that. We're into refining 101, which we could spend the rest of the afternoon on. There are several ways to get at this. I can try to do it more simply or we could meet with you privately and go through all of that.

Let me take a barrel. Some 40% of it is gasoline, on an average basis. One can also make aviation fuels or diesel fuel for both off-road and on-road use. I'm going down the barrel, so this is as you get heavier and heavier.

One of the drives in most refineries in Canada is that you do not want to make any heavy fuel oil. There's a strong drive that sells for less than crude.

It's driven by international markets, so you invest in conversion facilities, not to make it and turn it back into overhead products.

Some heavy fuel oil is made. Some people are in the asphalt business. There are a few people in Canada who are in the lubricants business.

The actual slate coming out of a refinery will depend upon the market being served, the demand for their product, and, to a large extent, the configuration of the hardware inside their refinery.

It can be how much they can beat up a molecule of hydrocarbon and what they can turn it into. Some of them can literally beat it up and take it apart and put it back together a number of times to make whatever the marketplace has. Others are quite simple.

Mr. Solomon: So how many litres would that be then? How many litres of gas would you produce out of a barrel of crude?

Mr. Clapp: I'd have to go through some calculations.

Mr. Solomon: Roughly. Is it 130, 180, or 200?

Mr. Clapp: Does anybody back there have it quickly from their head? I don't have it handy.

Prof. Lermer: It's about 20 gallons.

Mr. Clapp: You're getting about 80 or 90 litres, as a ballpark figure.

The Vice-Chairman (Mr. Arseneault): That information could be tabled with the committee and we'll distribute it to all the members.

Mr. Clapp: Yes. There's some material in the competitiveness framework study that does deal with that. We'll extract that and get it to you.

Prof. Lermer: Every refinery is different. Every set-up is different. There are different runs at different times. So it's not that we're trying to avoid this.

Referring back to your previous question, which was similar, what has happened over time is that the heavy end of the barrel in Canada has been displaced by natural gas. You don't make as much on that as you might have in the past.

The only area in Canada where there's a substantial demand for the heavy end of the barrel is for electricity generation in the Maritimes. So the refiners make a lot of it there. They even import it there. The refineries in the Maritimes tend to also be geared up to exporting gasoline and other products to the U.S.

I think you made a reference to Canada being an exporter of product. We are a producer - we cover our products - but we are typically an importing area for gasoline. From time to time, we sell it. We tend to get that margin.

If Canada became a much larger refiner and produced a lot more product, it would have to find a market in the United States. Then you might say that we're becoming an export region and the price would have to fall a little bit. I'm not predicting this will happen, because I don't think the economics would warrant the investment in Canada as opposed to the U.S.

I am just commenting on your premise that Canada is an exporting region for energy products. Although that's true, we should be viewed as an importing region, or a balanced region at best, for gasoline products in most of the country.

The Vice-Chairman (Mr. Arseneault): On behalf of my colleagues, I thank the witnesses for some very good information.

If you feel you have other documentation or comments you want to provide to the committee, please feel free to forward that to the clerk. It will be distributed. Thank you very much.

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Mr. Clapp: Thank you for inviting us to share our views on a very important issue to us.

Mr. Hawley: I would only add that if you have additional questions, don't hesitate to call our office.

The Vice-Chairman (Mr. Arseneault): The meeting is adjourned to the call of the chair.