Gas and politics: A volatile mixture
Brian Lee Crowley
HALIFAX – A few months ago, dollar-a-litre gasoline was a hot political topic. Not only was the price hike stiff and sudden, but it happened in an industry whose notorious complexity makes pricing behaviour a murky affair. That’s why the gasoline business is so often the subject of conspiracy theories.
In Nova Scotia, such theories have become the stuff of public policy.
It all started innocently enough. When prices recently spiked, Premier John Hamm’s minority Conservative government agreed to strike a Select Committee of the Legislature, chaired by MLA Bill Dooks, to study the issue.
At the ensuing hearings, angry consumers have been surprisingly scarce. But gasoline retailers, crying the blues about not being able to make a living, have been plentiful. They mutter about the bad behaviour of the major gasoline companies while speaking darkly to the Dooks Committee’s large rural majority about small communities losing their gas station, allegedly making it impossible for rural nurses to reach their patients.
Suddenly, a committee struck to examine why prices were so high is scrambling to figure out how to give gasoline retailers a better standard of living. Consequently, the committee is now openly discussing regulations to put an extra three to five cents in retailers’ pockets for every litre of gas they sell.
Here’s the hitch: Nova Scotians buy 1.2-billion litres of gasoline every year, so this will cost $36-million to $60-million. Who’s going to pay? The committee naively thinks oil companies will. Yet no Nova Scotia regulation can change the world price of crude. Crude and taxes together represent something like 85% of the cost of gasoline, so the extra cost has to be taken out of the 15% that’s left. And you can’t take it out of the retailing/marketing margin: They are the people whose incomes the committee wants to raise.
What about refiners? They are under no obligation to sell to Nova Scotians; why would they, if the government decreed they could not earn the going rate for their gasoline?
And here we get to the reason price regulation is almost always disastrous. In an open market, you cannot, by fiat, squeeze the margins of the people who ship, refine or transport oil — or any product. If they can’t get the going rate, they will just go away.
Local retailers, on the other hand, are immobile, so they bear the burden of regulation — or, more likely, simply pass it on to consumers. (That’s why, next door in PEI, gasoline price regulation has been ruinous for the kind of marginal rural retailer so beloved by the Dooks Committee. And, on average, Islanders pay more for their gas — tax excluded — than Nova Scotians.) Any regulation that adds three to five cents per litre to retailers’ margins in Nova Scotia will be a gasoline tax increase, pure and simple.
Does that mean the major oil companies are getting away with abusive practices and fat margins? Hardly.
The gasoline industry is one of the most studied in Canada. When arm’s length analysts such as the Competition Bureau, Industry Canada and the Conference Board investigate it, using intrusive investigatory powers and applying sophisticated statistical analyses, they find no evidence whatsoever of widespread price-fixing or anti-competitive behaviour. In fact they have consistently documented that, once taxes are removed, Canada has the lowest pump prices of any industrialized country, including the United States.
But a trifling consideration like evidence is no bar to a politician working up a good head of indignation. The Dooks Committee’s members, like their fellow politicians on similar inquiries in other jurisdictions, take the populist low road and decry the Competition Bureau as a toothless tiger, allowing the companies to ride roughshod over consumers and small businesses.
Which is all nonsense. The Competition Bureau hears inflammatory charges against the major oil companies every day. Having repeatedly investigated such charges and found them to be groundless, it can’t be faulted for failing to launch fresh investigations every time the same tired allegations are made.
The sad thing is, the Dooks Committee is trying to solve a non-problem. Giant retailers such as Wal-Mart, Sobey’s, Canadian Tire and SuperStore are adding gas bars to their operations. That will lower prices and improve availability for the vast majority of people, wherever they live. Markets and competition consistently deliver lower prices than regulation, and they’re good at getting the product to consumers too.
But the political attractiveness of being seen to “do something” about high gasoline prices, and jockeying for short-term political advantage in an unstable minority legislature, may mean that Nova Scotia’s Dooks Committee will still try to mix gasoline and politics. Stand well back when that Molotov cocktail meets the white hot anger of consumers and voters who will see all too well who pays and who benefits. I can just see the bumper stickers now: We’ve been Dooked.
Brian Lee Crowley is president of the Atlantic Institute for Market Studies, a public policy think tank based in Halifax. A more in-depth analysis of gas pricing and other public policy issues can be read at www.aims.ca. BrianLeeCrowley@aims.ca
This piece is based on material presented to the Select Committee of the Nova Scotia Legislature on Petroleum Product Pricing. Click here to see the full brief entitled Keeping our eye on the ball: Looking out for consumers, not producers, in the Nova Scotia gasoline industry.