Industry Issues: Are we any more prepared to deal with a fuel shortage?

by David Bradley

Recently, the headlines have been providing new warnings to the public that gasoline prices could spike again this summer reflecting concerns over low inventories and problems experienced at some North American refineries. Sound familiar? Back in March, in the wake of the severe shortage of fuel experienced in Central Canada, I wrote to federal Environment Minister, John Baird and federal Minister of Natural Resources, Gary Lunn, to remind them how perilously close we came to a full-blown crisis, which would have visited severe hardship on the Canadian economy and the health and safety of the public. I said “it would be unwise for us, having weathered this storm, to assume that it could not happen again.”

While I believe that government’s role in a market-based economy may be limited, and mentioned that lessons had been learned by carriers as well, I said that “the events of the past month have shaken our confidence in the current state of contingency planning in Canada and exposed what appear to be some serious shortcomings in the federal government’s analytical capabilities and its regulatory flexibility to respond to such desperate situations.”

I argued that “if this was a test of the contingency planning that has been developed since 9/11 then at best we have just dodged a bullet. I would hope that these contingency plans will now be reviewed with a view to ensuring Canadians have access to a stable, predictable and adequate supply of fuel.”

I pointed out that Canada is somewhat unique in terms of the OECD countries by not having a strategic reserve of crude oil. However, I added that unlike most OECD countries including the US, Canada is after all a net exporter of crude oil. The issue here is less one of availability of crude and more one of availability of refined product. Perhaps a strategic reserve of refined product is worthy of consideration, although there may be issues of “shelf-life.” I said that “at the very least, our government should review the level of protection afforded our energy infrastructure – pipelines and refineries in particular.

And, it should ensure it is fully equipped to exercise moral suasion over the major oil companies, and perhaps our OECD partners, to be ready to bring refined products into Canada from Europe, Mexico and/or Asia-Pacific in the event of another emergency shortage in this country.”

I also asked what I thought was a reasonable question: How was it that this acute shortage seemed to arise apparently “out of the blue” with no or little forewarning? I suggested, “the reporting requirements for the fuel producers should be reviewed to ensure that the federal government has the necessary information it needs to forecast, plan and to communicate accurate information regarding fuel supply to consumers, including commercial consumers like the trucking industry which plays such a vital role in moving Canada’s economy.”

Finally, I reiterated that the recent fuel shortage also exposed the fact that legislation such as the Canadian Environmental Protection Act has put the Government of Canada in a regulatory straightjacket and precluded it from taking temporary action that could have moderated the impact of the shortage. I referred specifically to the government’s inability, even if it had wanted to, to enable trucks to operate on a temporary basis with diesel fuel containing a sulfur content of 500 ppm, which was in plentiful supply. (This was a strategy employed by the Bush administration in the wake of Hurricane Katrina). I said that “while conditions would have to be set for a government to over-ride or temporarily suspend a regulation, there are times when it would be in the national interest to do so without having to invoke a state of emergency, for example.”

At the end of April, I received a written response from Minister Lunn. The minister states that “the Government of Canada is reviewing the circumstances that led to the fuel shortage and is considering measures to minimize the occurrence of, and to address the ability to respond to, petroleum product supply shortages in the future.” He acknowledges that “recently, American refiners have also experienced problems with a number of their refineries, which has resulted in a tight refinery capacity across North America.”

The minister is unequivocal on what the federal government will NOT be doing to avoid a future fuel shortage. Forget about price regulation, which we were not advocating anyway. He says that “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 competitive 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 competitive price.”

Don’t expect the Government of Canada to somehow force the oil producers to expand their refinery capacity – again something we were not advocating anyway. He contends that despite rationalization of Canadian refining capacity in recent decades the “Canadian market remains well supplied. In fact, today, Canada has more than double the refining capacity at its 19 refineries than it had when there were 44 refineries in the 1960s.” He said that “industry decisions will be based on the perceived long-term economic returns…(and that) the slight increase in profit margins that refiners are now seeing is creating an incentive to invest in new capacity.”

The minister also sees – as we alluded to – problems associated with the notion that Canada should hold strategic oil reserves – cost, where to locate the reserves, maintaining the integrity of petroleum products, etc.

Beyond that, the minister provides little clue as to what the other measures are that the federal government is considering. For the time being, we’ll have to wait and see and keep our fingers crossed that we don’t ever see a repeat of the fuel supply situation that arose this past winter.

– David Bradley is president of the Ontario Trucking Association and chief executive officer of the Canadian Trucking Alliance.

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