Answers from natural resources minister, Gary Lunn

Last month I told you all about a letter I wrote to the natural resources minister in the light of supply failures in Central Canada and what should be done in Canada as a whole, to answer the supply situation.

That can be found in my March 05, 2007 posting...

The letter was also intended to serve to set up an energy clearing warehouse and an inventory reporting system much like the "Energy Information Administration" in the United States.

Here's his reply dated April 12, 2007...

Dear Mr. Murphy,

Thank you for your recent letter regarding the tight supply of gasoline and related commodities. I appreciate the opportunity to respond to your questions and concerns.

I realize the difficulties caused by the recent fuel situationin Ontario.Throughout this period, Natural Resources Canada (NRCan) has worked closely with industry and the province to monitor the situation and do whatever was necessary to ensure adequate supplies were available to consumers. In addition, I certainly understand your concerns and those of other Canadians with respect to the negative impacts of increases in energy prices. Higher prices for these and other important commodities raise the cost of living for everyone.

While it is true that the Canadian refining sector has undergone significant rationalization in the last three decades, Canadian markets remain well supplied. Changes in the industry served to make the market more cost effective by closing down small inefficient facilities, which could not have been economically retrofitted to acomodate Canada's cleaner fuel standards and replacing them with new larger installations. Today, canada has more than double the refining capacity at its 19 refineries than it had when there were 44 refineries in the 1960's.

Although the economics would favour new capacity additions, there are a number of competing priorities for these investment dollars. Refining is a capital-intensive business that requires ongoing investment to remain competative. Over the last decade, most new investment dollars have been spent on refinery modifications to implement environmental initiatives and regulations, and to reduce energy intensities.

Industry decisions to construct a new refinery will be based on the perceived long-term economic returns. The slight increase in profit margins that refiners are now seeing is creating an incentive to invest in new capacity. Currently, Shell Canada, Irving Oil and Newfoundland and Labrador Refining Corporation have put forth proposals to build new refineries in Canada. Other companies are evaluating the possibility of expanding current refining capacity. However, these initiatives will take several years to be realized.

Although consumers in Southern Ontario were inconveienced by the decreased availability of petroleum products in February and early March as a rsult of refinery problems and distribution issues, there was always enough supply to meet the demand. This reflects the fact that all suppliers maintain inventories to bridge supply gaps when such unforseen events occur. Companies will always be cautious in drawing down stocks at the onset of a problem until the arrival of new supplies is more certain. Companies always ensure that they always maintain sufficient prduct to supply emergency vehicles and essential services.

Throughout the last few weeks, the government of Canada has worked with the industry and the provinces affected to mitigate any shortages. The Government is committed to ongoing collaboration with all interested parties to ensure adequate supply of petroleum in the interests of all Canadians.

Canada's energy policy continues to have its basis in a freely functioning , open market where companies are free to make business decisions within the regulatory framework that is designed to protect current and future Canadian interests. We consider that prices set in free and competative markets represent the best signals to producers in terms of their investment decisions, and to consumers in terms of the type of energy they use and how they use it. This helps to ensure that sufficient supplies are available at the most competative price.

Statistics Canada collects and compiles a wide variety of petroleum data relating to production and consumption. Tjhis data is available publicly through Statistics Canada's monthly Supply and Distribution of Refined Petroleum Products in Canada publication. The latest addition is available at the following web site:

http:www.statscan.ca/bsolc/english/bsolc?catno=45-004-XWE

For further weekly petroleum pricing, information on oil and petroleum product markets and ways to manage energy costs, I encourage you to visit NRCan's Fuel Focus website at www.fuelfocus.nrcan.gc.ca.

Again, thank you for writing on this important matter.

Yours sincerely

Minister's signature