By Brian Lee Crowley
Halifax Chronicle Herald, Moncton Times Transcript
EVERYONE hates paying high prices for gasoline and heating oil. They hit the poor harder than everybody else; they wreak havoc with family and business budgets. Perhaps worst of all, they seem to happen without rhyme or reason, like bolts of lightning out of a clear winter sky. Quite understandably, then, these price rises provoke fear, anger and suspicion of the oil and gas companies that are their authors.
But before we rush off to embrace the responses that many people propose to solve this problem, we had better be sure exactly what the problem is and what all the consequences would be of, say, letting governments fix the price of gas.
Let’s start with the notion that we are somehow singled out for high prices for petroleum products. Not so. After the U.S., Canada has the lowest prices for most refined products in the industrialized world. A litre of regular gasoline in January ranged from $1.36 in Spain to nearly $2 in the U.K. Even the most expensive gas in Canada comes nowhere close to these levels.
Roughly 84 per cent of the cost of a litre of gasoline is composed of two things: the price of crude and the taxes that governments slap on gasoline and other refined products. And many of those taxes, by the way, rise as the cost of gasoline rises, so that the tax bite exacerbates the swings in the underlying cost of gasoline. One of the biggest beneficiaries of recent price spikes is government.
The big swings in price for gasoline and fuel oil are strong evidence that the oil and gas companies don’t get to set prices to suit themselves. That doesn’t mean the companies don’t try to get the very best price they can. They’re in business to make money.
Companies are always testing the market to see if they can put up prices. And since the margins that retailers earn are pretty slim, they often try to make up in good times what they lose in bad. But each time they put up prices, they increase the opportunity for discounters. These are often local companies that cut their prices and go after volume sales, rather than higher markups on lower sales. They cut the price, often below cost. Others follow suit. Price wars erupt. Then the discounters pull back because they can’t sustain a long-term price below cost, and prices go back up.
And these local oscillations are tacked on to the fluctuations in the world market for crude. Those swings are huge. A year ago, the price of crude was $18 a barrel. Today, it’s around $38. Sometimes these factors join forces, as they did a few days ago in Moncton, when in one day the city saw the collapse of a local price war tacked on to surging international crude prices.
The point is that the companies don’t get to set whatever price they like. If they could, they’d set it high and just leave it there. But the huge price volatility that so annoys people is itself the proof that the market is forcing prices down when they get unreasonably high, and up when they fall below what makes business sense.
The most popular recipe to end price volatility is regulation, making companies get the permission of some bureaucrat to raise or lower their prices. But price regulation was abandoned in most provinces because it actually doesn’t serve the interests of consumers. People look at P.E.I. and Newfoundland, the last two regulated provinces, and applaud when prices rise more slowly than elsewhere. They forget to notice that they also come down more slowly. Over time, study after study has concluded that consumers are better served by allowing rises and falls to feed through quickly.
The regulatory solution is also based on a laughable idea: that world crude prices respond to the regulatory decisions of Canadian provinces. Do regulatory decisions taken here force down the world price of crude? No. What about the cost of tankers and pipelines to bring the stuff in? No. The cost of capital, taxes and labour to refine, wholesale and retail gasoline? Nope. Local regulators can only really influence a few local factors. And that’s precisely why in the regulated provinces, the people who are hurt most are not oil sheiks or international petroleum companies. They are the little, local businesses that are prevented from passing on their full costs to their customers.
Regulation privileges the big players, which is why small-volume and rural dealers are closing in record numbers under regulation, precisely the opposite of what we need to keep the market working well.
Nobody likes high prices, but a return to regulation would be a triumph of political short-termism over the enduring interests of consumers like you and me.
Brian Lee Crowley is president of the Atlantic Institute for Market Studies, a public policy think tank in Halifax. E-mail: email@example.com