In light of recent price increases for a barrel of oil and price hikes at the pumps, I think it is worthwhile to expand on this issue and look at the general trends affecting gasoline prices. This is not a new issue; in fact the price of a litre of gasoline has been fluctuating for years, and numerous task forces have been investigating this problem with no conclusive evidence pointing to the industry as the possible culprit. In Northwestern Ontario the findings of the last task force were released on July 5, 2002.
The Gas Price Task Force in effect told us that they were not able to get any straight or real answers from the oil companies as to why the price of gasoline changes so drastically from week to week, or why it is higher in Northwestern Ontario than other parts of the province.
A more recent investigation looking at prices across the country also could not come up with any definite answers.
While the goals of these task forces are commendable, the lack of results should not come as a surprise.
I do not have the answers on these specific questions either, but there is in fact sufficient historical information to provide some insight on the difficulty of finding a solution. Here is why!
After 2000, the North America economy was headed towards a slow down and the events of September 11, 2001 pushed it into a recession. With the price of a barrel of crude oil dropping drastically, the cost of a litre of gasoline went as low as 58 cents. By April of 2002 it had jumped back to 77 cents and in 2005 had actually reached $1.25 per litre. It remained in that higher range until recently, and it is now hovering around the $1 mark. While some increases were expected due to a recovering North America economy and increased demand for crude oil, the biweekly 10 cents jumps cannot be explained by demand and supply factors alone (more on this in future articles).
While uncertainty of war in the Middle East have also contributed to the price hike, it is my opinion that the underlying reasons why the price of gasoline will remain high in the foreseeable future can be traced to a tacit understanding between the industry and governments.
Because of public outcries over similar unjustifiable price jumps, federal and provincial governments have been trying to get some answers by conducting fact-finding studies on the petroleum industry for years.
Even the Ontario government a couple of years ago jumped on the bandwagon and started holding meetings all over the province. The results? It seems that nobody is doing anything illegal, and by the way, the government will not cut back on its share of the take (51% of what we pay at the pump is taxes) because it cannot trust the industry to reduce prices accordingly. Well, that in itself tells me a lot.
Is the petroleum industry the culprit then? I believe that when unbridled motivation for profits and return on shareholders equity is not balanced with the highest level of ethical and corporate responsibility, crazy things start to happen.
Like increasing prices at the pumps within weeks when oil prices go up and not passing on savings to consumers for months when the cost of oil is declining. Why does it take months and not weeks to deplete the same inventory capacity? Demand does not fluctuate that much. We can see the scam, why can’t the government see it. Or do they care? The huge profits the industry has been raking in lately should tell them something.
I do not believe the government cares to control it, and the industry will continue doing it because they can. That is, they will charge what they believe the market will bear (that is, able to pay). Here is why. Since the price of a barrel of oil is determined by demand and supply on the international market, all oil producing nations benefit by an increase in price, including Canada.
The extraction and production of crude oil is big business (i.e. tar sands in Alberta, Hybernia in the Atlantic) and governments benefit greatly through royalties and taxes. As long as prices do not get out of hand, even non-OPEC (that is, countries like Canada, U.S., Great Britain, Mexico, etc.) producers have limited production from time to time to ensure prices remain sufficiently high.
Last but not least, most if not all governments have signed treaties to limit pollutants and carbon dioxide emission into the atmosphere. The single major contributor to pollution is emissions from vehicles. Keeping gasoline prices high should curtail consumption and help reduce emissions. This reason alone will ensure that the price of a litre of gasoline will not be coming down any time soon unless we slide back into another economic recession.
Frank Pullia is the Principal of Pullia Consulting. He can be reached at 767-6579 or via e-mail at HYPERLINK “mailto:frank@frankpullia.com”frank@frankpullia.comQuestions or comments are welcome.