Bloated with Gas

Two things are certain in life: death and taxes. Everybody hates taxes. But we recognize that they are a necessity. We empower our government to raise money through taxes so that government can administer the country and provide us with essential services and protections. This covenant is a fact of life Canadians know too well. Government waste and neglect have catalyzed public calls for accountability and scrutiny in how our tax dollars are accumulated and spent. Occasionally, we are left to feel like the government is getting the better of us.

There is no better example then the current tax on gas, which is purported to pay for everything from roads, to environmental controls, to public transportation, hospitals, crossing guards, you name it. These expenditures occur at every level of government – federal, provincial and municipal – and are described as necessary. Some go so far as to say that Canadian cities are so dependent on gas tax revenues that they would crumble without their share of the pie.

The argument that usually follows this statement is that we (the gas-guzzling consumer) should never expect price relief in the form of a gas tax break. It would be self-defeating given the number of good things gas taxes do for us. So where do we turn for lower gas prices? Who else can possibly be involved in the price of gasoline? Surely there must be a complex network of suppliers and vendors. If not, the government would already be regulating the gas industry. There must be nothing they can do.

Bullshit. If we can’t expect tax relief on our gas purchases then it is high time to look at some form of government regulation of the petroleum industry. The situation is out of control.

Gas prices across Canada have reached epic proportions. After the Katrina disaster, the price of gas in most Canadian cities rose almost 50 percent. Some cities reported 25 price changes in one day and prices as high as $1.50 a litre. Of course, an array of pundits was on hand to tell the public that the situation was necessary, if not normal. Apparently, oil platforms in the Gulf of Mexico were unrigged and floating aimlessly adrift and the normal reaction was stratospheric gas prices in Canada. This was part of the explanation on offer. One can’t help but feel that the situation is anything but normal.

Did it suddenly cost Canadian oil companies 50 percent more to deliver a barrel of oil? Did Canada’s oil production suddenly drop by 50 percent? Of course not. We’re told that prices jumped this much because of “supply and demand”. But this explanation seems lacking, at least from a common-sense perspective: after all, Canada produces enough refined oil to make it a net exporter of gasoline. Did the Canadian supply drop by 50 percent? Did demand increase by 50 percent? No one was offering straight answers. The Canadian media was the worst offender.

As Tom Korski writes in a recent article for the Hill Times, the news coverage explaining gas prices in the aftermath of Katrina was so blunt and misleading that “it could have been ghostwritten by an Esso publicist.” Industry spokespeople were quoted saying production was “very tight,” and the headlines seemed to normalize the situation. The National Post told consumers that price increases were “perfectly normal” and warned against making “bogeymen out of Canadian oil companies.” But as Korski points out, that is exactly what we should be doing.

Protecting the oil industry while consumers and local industry suffer makes no sense. Since 1970 the number of oil refineries in Canada has declined from 58 to 16. Now, three companies, Imperial Oil, Shell, and Petro-Canada, control more than half the country’s gasoline production, reaping $5.238 billion dollars in profit last year. Imperial Oil’s “perfectly normal” revenues are bigger than the national budget of Egypt. Shell Canada’s “perfectly normal” profits increased 59 percent just last year. The CEO of Petro Canada made a “perfectly normal” wage last year – 23 times more than the Prime Minister’s salary.

“Governments regulate the sale of milk, eggs, turkey, chicken, even Maple syrup. But one essential commodity, gasoline, is controlled by three companies.”

These companies are very adept at manipulating our perception of the petroleum industry. How many people have stared at the sticker that adorns most Esso gas pumps? In case you haven’t, it looks a lot like this:

This is the Imperial Oil crash course on gas prices taken from their web page. Take note. The refiner’s “operating margins” (the necessary price that the refiner must charge in order to cover its costs and maintain a particular profit margin) and the market’s operating margins are the two smallest slices of the pie. The rest is the cost of oil and taxes for the government.

According to this chart, Imperial Oil really has little to do with the price of gas. The green slice, which represents the “market operating margins” is what’s required to run a gas station. The yellow slice, which represents the “refiner operating margins” is what’s required to run a refinery. (Interestingly, these slices do not indicate costs or profits, for example, they don’t show how much of the green slice goes toward operating a gas station and how much is pure profit.) Finally, the blue slice is the cost of “crude oil”. Doesn’t this make it look as though Imperial Oil is at the mercy of market forces beyond its control?

Except that Imperial Oil extracts its own crude oil, refines its oil into gasoline, and then sells its gasoline in its gas stations. In other words, Imperial Oil owns and controls the blue, yellow and green slices of the pie. Instead of a pie chart with four slices, only two are needed: the money that goes to Imperial Oil (a slice which keeps on getting fatter), and the money that goes to the government. Crude oil costs, the biggest blue slice of the pie, are domestic, albeit pegged on an international market scale. Surely, an Imperial refinery in Calgary doesn’t buy Saudi oil and sell the gas in Puerto Rico? I’m confused. How do all of these elements add up to make the incredible price we’ve been paying for gas?

On their website, Imperial Oil offers a more vivid explanation of gas pricing:

Let’s take a look.

Competition: Local competition has the greatest short-term impact on price. Unlike any other product, Canadian consumers shop for gasoline at 50 kilometres per hour, using two metre-high posted prices to comparison shop. Research has shown that Canadian consumers will cross two lanes of traffic to save 0.2 cents per litre or eight cents on a 40-litre fill-up. This is why marketers and individual retailers watch one another’s price signs like hawks. When one competitor lowers the price, others follow right away, to avoid losing sales. Consumers often have the impression that the prices all change in unison, but they don’t. In reality, it’s a rapid chain reaction. These fluctuations in price take place often daily and sometimes several times a day and they can be very frustrating for the consumer.

It’s definitely frustrating. What choice? I have to choose between three major gas retailers, who change prices in unison…er… rapid chain reaction. Fact: the number of gas stations in Canada has declined one-third since 1990, with independent retailers now making up less than 18 per cent of that choice. Of course we consumers try to save money, but we didn’t choose to market gas to the tenth of a cent. It’s hard to see how this could justify post-Katrina pricing. Let’s keep looking.

Taxes: Provincial and federal taxes account for between 40 and 50 per cent of the average price of regular unleaded gasoline in Canada. In 2004, the average price in Canada was 81.3 cents per litre, 31.9 cents of which was tax (or just over 40 per cent). In 2004, the average price of regular unleaded gasoline in the United States was 66.4 cents per litre, 15.9 cents of which was tax (or just over 24 per cent). Some areas in Canada also have municipal gasoline taxes. Excluding tax, however, Canadian gasoline prices are among the lowest in the world.

Taxes as a component to gas prices were already dealt with at the beginning of this article. We know they exist. We know basically what they are for. We also know they didn’t go up after Katrina. When prices jumped from 81.3 cents per litre to 126.3 per litre, who got the extra 45 cents? Was it the company who buys crude oil from itself to sell it at discount prices in its own gas stations? Still not certain – must be an answer in here somewhere.

Retail margins: Gasoline retailing is a relatively high fixed-cost business. Expenses such as rent, property taxes, employee wages and utilities have to be covered by the retailer’s margin, which is the difference between wholesale and retail prices. In order to cover fixed costs, a retailer with a smaller volume of sales needs to recover a higher margin per litre. Conversely, a high-volume site can cover fixed costs with a smaller margin.

Pardon? That sounds like business 101. This is hardly an explanation for skyrocketing prices all across Canada. Let’s see if I can try my own explanation. First, start advertising and selling secondary products not at all associated with gas at your brand of gas stations. This will surely boost your revenue and allow you to pass some savings on to the consumer. Put signs on the pumps and around the station, sell cigarettes and candy (with generous compensation from the manufacturers of those products I might add). Second, put ads on the pump handles so people have something to look at while they buy expensive gas, then put a video screen on the pump to broadcast more ads. While you’re at it, fire the gas attendants and let the customer key in their own debit card transactions. Third, put a Tim Horton’s in the gas station and turn it into a third rate grocery store. Start selling bottled water by the 24, fresh fruit, and magazines. Lastly, lecture your paying customers on the banality of overhead costs and tell them you’re just trying to get by. What a crock. Let’s keep looking.

Refining and marketing margins: Refineries, service stations and other distribution facilities must be upgraded and modernized to meet present and future environmental standards. They must also cover operating, distribution and marketing costs as well pay income tax. The distance gasoline has to be transported to market can affect prices, too.

Oh yeah, the environment. While transporting gas all over the country to be sold at astronomical prices, Imperial took the time to think of their role in protecting the environment. Keep in mind, in case you forgot, there are also overhead costs associated with this practice, including transportation costs. With the price of gas being what it is these days, you can understand how difficult it can be to get all that gas from Alberta to Nova Scotia. At the end of the day, gas companies are really just gas guzzling, tax-paying slobs like you and me. They pay income tax. And believe me they have a lot of income to tax, so you can imagine how much that sets them back. Sorry, Imperial, I’m still not convinced. What else have you got?

Crude oil costs and wholesale prices: Because Canadian crude is priced on the international market, Canadian crude costs are affected by world supply and demand changes, as well as by political events.

This looks promising. What’s this? Political events can affect prices? Now I have it. Katrina came along, an event that oil executives must have been thrilled about on some level, because it gave them the opportunity to crank the price of gas up to unprecedented levels. Why didn’t they just say so in the first place?

Who still thinks we need an unfettered petroleum industry?

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This article was written by alevo and Ade