Posted by I love it when gas prices spike and everybody with a social media account goes bat-shit crazy with tweets about being gouged by the evil planet-destroying oil companies. It’s made worse when, as this Financial Post article points out, you have the highest gas prices in North America.
“Vancouver sits less than 750 miles from the Canadian oilsands but it may as well be on another continent for vehicle drivers. Gasoline prices in the Pacific Coast city hit $1.62 a liter (US$4.77 a gallon) on Monday, the highest in North America, according to Dan McTeague, a senior petroleum analyst at GasBuddy, which collects real-time fuel prices from more than 140,000 gas stations on the continent… Vancouverites are paying about a third more than drivers in Honolulu, more than in the Cayman Islands which doesn’t have a single refinery and imports fuel on barges. More, in fact, than any other major oil-producing country except Norway, which also heavily taxes fuel.’
When idiot reporters go to try to find an answer to the question why are petrol prices so high, they sometime find some equally stupid “industry expert” or “analyst” who then tells them that it’s because of the evil money-grubbing capitalists, especially the earth-polluting oil and gas companies. Like this article from the Vancouver Sun titled, “Gas prices in B.C.: A perfect storm of taxes, gouging and market malfunction.” “‘The oil companies are gouging us,’ said economist Robyn Allan. ‘There is no market reason that explains the price of gas in B.C.’ The Port of Vancouver is a net exporter of fuels, so supply isn’t an issue, she said. We are actually awash in gas. ‘The cost of producing gasoline (at Parkland in Burnaby) and in Alberta should drive the price of gas in this market,’ she said. ‘They closed the refineries in B.C. to produce oil more cheaply in Alberta.'”
They also publish drivel like this Canadian Brainwashing Corporation article titled, “Spiking gas prices: sometimes it really is a conspiracy.”
Having spent over three decades on-and-off working in oil and gas from being a corporate drone in the finance department of one of the “seven-sisters” oil conglomerates to consulting and running my own small company; I know a thing or two about the energy industry. So let’s debunk some myths.
The first fallacy of news reports is that the refineries are gouging us and raking in the dough. Let’s be clear on this; refining is one of the worst businesses in the world to be in. Refineries have huge capex (refineries are very expensive to build, maintain and operate), have razor-thin profit margins that are exposed to massive cost inflation because the price of their primary input (oil) is out of their control, and they get blamed politically for just about everything because that’s where the end products come from. Upstream exploration and production (E&P or actual oil producers) don’t get as much flack politically because everyone knows they can’t fix oil prices and are also slaves to the whims of global market forces and OPEC. Ask yourself one simple question: If refineries are the main culprit in gasoline price gouging, then surely they must be so profitable that it’s a great business to invest in. The problem is that there has not been a major refinery built in North America in over 40 years. That’s not a typo. If you want to check that little fact out, the last major refinery built was the Marathon refinery in Louisiana in 1977. As they say, all you have to do is follow the money. If refineries were indeed the source of price gouging and are making money hand over fist, you would expect that people would be investing in them and building new ones like crazy. They’re not because it’s actually a really bad investment. It’s not just North America either. I remember educating my junior oil and gas analyst that Sinopec was always going to be a long-time underperformer of the “big three” oil companies in China just because it had so much more mid-stream refining capacity and much less upstream E&P than the other two (PetroChina and CNOOC).
If it’s not the refineries, then it must be the gas stations that are ripping us off then. Occasionally, some reporter digs up some government fines for price collusion and draws the conclusion that we are being ripped off. In regards to price collusion, we probably are but the reality is, like refineries, gasoline service stations are a really bad business to be in. Rather than raking in monopoly profits, acts of price collusion amongst gas stations are more likely an attempt to just stay in business. Even headlines like this one from a CTV “National gas station count growing due to stronger profit margins“, are misleading.
The number of gasoline stations in Canada grew for the second consecutive year in 2016 after a 10-year decline that resulted in the loss of one in five outlets. The Kent Group’s annual census showed a net increase of 15 outlets in 2016, taking the total to almost 12,000 or about three stations for every 10,000 people. Just over 100 stations were added in 2015. The survey by the retail fuel industry consulting firm comes as large refining companies sell their retailing divisions to buyers who continue to use the same brands. Imperial Oil sold its last 500 Esso-branded retail gas stations to five fuel distributors for $2.8 billion last year. Chevron Canada recently agreed to sell 129 Vancouver-area stations and its B.C. refinery for $1.5 billion to Alberta’s Parkland Fuel. Although 39 per cent of the stations in Canada sell fuel with brands associated with the three major refining companies – Suncor (Petro-Canada), Imperial (Esso) or Shell – only 11 per cent were owned or managed by them in 2016, the survey says. Jason Parent, vice-president of consulting for Kent, says the average margin on gasoline has risen to eight or nine cents per litre in the past two years from the 20-year norm of four to six cents, leaving more profits at the pump for the owners.
So what we really have is an industry that has historically had razor-thin margins and the major players are trying to divest themselves. Doesn’t sound much like a price-colluding cartel spewing out monopolistic profits to me. I studied the retail part of the oil and gas business decades ago in university and there was a reason why every gas station was starting to link themselves up with convenience stores and other services. It’s because they didn’t really make much money from selling gasoline while any profit they made was when a customer came in to pay for the gas ended up buying a pack of smokes, a bag of chips and a lottery ticket as well. If you really want to know more about why gas stations are such a crappy business, you can read this Inc article titled, “Why Gas Station Profits Are Drying Up“.
Wait a second. If it isn’t the evil oil companies, or refineries, or service stations that are gouging us; why are gasoline prices at record highs? To answer that, we only have to look to city hall. You see, politicians found out a long time ago that sin taxes (alcohol, tobacco, gasoline) are easy to raise because they generally encounter the least resistance. They are “sins” afterall and should be punished. They also tend to be hidden behind the overall cost of the product and are dolled out in small sums at a time (a buck here, a buck there) so they don’t rebound back on the government that hikes them as much as direct taxes like sales or income taxes or large sum taxes like property taxes.
Getting back to our poor hippie friends in Vancouver, burdened with the highest petrol prices in all of North America; with no due respect, they kind of deserve it. Here is a breakdown of the tax and retail price of gasoline across Canada by their respective components as well as a comparison globally (especially with our friends south of the border). While Vancouver could argue that the refiners are gouging them a little (they probably are but it serves them right for continuing to block the Kinder Morgan expansion and other pipeline construction), the biggest contributor for high petrol prices in British Columbia is taxes. As is the case for most of the developed world except the United States which has very low taxes.
Even these numbers from the end of 2017 are already horribly outdated. On 1 April 2018, the New Communist Party (NDP) Horgan government increased the carbon tax to 7.78 cents per litre. It is only the first of four annual carbon tax rises that the new British Columbian government has already stated it will do. I’ve discussed previously how Carbon Taxes are all just another tax grab masquerading as good environmental policy and how claims that they are revenue neutral are all just a bunch of lies as pointed out in this Financial Post article titled, “How B.C.’s formerly ‘revenue neutral’ carbon tax turned into another government cash grab“.
Back in 2008/09, when the province first introduced the carbon tax, the B.C. government promised revenue neutrality. And initially it was. To offset the new revenue, the government introduced new cuts to personal and business tax rates and a new tax credit for low-income earners. The value of these new tax reductions was enough to offset all the new revenue generated from the carbon tax. However, just five years later, as the carbon-tax revenue increased, the government no longer provided new tax cuts that sufficiently offset the carbon tax’s revenue. In other words, B.C.’s carbon tax ceased being revenue neutral in 2013/14.
But truth and good policy are hardly a strong point of governments anywhere in the world as Washington State tries to push through their own Carbon Tax based upon the failed British Columbian model just north of the border. As the Seattle Times points out in their article titled, “Look to B.C. for evidence carbon tax doesn’t work“. “Carbon taxes also don’t work as promised. North America’s first such tax, in neighboring British Columbia, is failing to reduce emissions.”
On top of this new carbon tax adding to motorists woes at the pumps, there is the B.C. Transportation Financing Authority fuel tax of 6.75 cents a litre; the B.C. Motor Fuel Tax of 1.75 cents a litre; the Federal Fuel Excise tax of 10 cents a litre; and in Metro Vancouver, the TransLink fuel tax (supposedly to finance public transit infrastructure) of 17 cents a litre. To top it off, there is the federal GST of 5% which is charged on the total so you get to gloriously pay tax on your taxes.
Isn’t democracy grand? What really sticks out in the cornucopia of gas taxes is the TransLink fuel tax of $0.17 a litre. That number is huge and it is semi-unique to Vancouver and ear-marked to fund transit programs that most people in the GVA don’t want or won’t use. That’s why they had a referendum three years ago and the voters resoundingly turned down a 0.5% rate hike in sales tax to fund the government’s grandiose $7.5bn transit plans. But it doesn’t matter what the seething masses of “deplorables” want; big brother government and their enviro-hippy lobbyists know best. So we’ll ignore the wishes of the unwashed majority and stealth increase their taxes to fund our pet TransLink projects by using – yeah, you guessed it, gasoline taxes. On 28 June 2018, according to this CBC report, “Metro Vancouver mayors approve gas-tax increase of 1.5 cents a litre to fund transit plan“. It’s on top of “a two per cent increase to all transit fares over two years, beginning in 2020, a $5.50-a-year increase in property taxes per average household, beginning in 2019, and an additional $300-$600 fee per unit for new residential developments.” So in other words, in the city with some of the most expensive real estate in North America (and certainly the most expensive in Canada), they’re going to raise the cost of property ownership as well. Stupid voters – who are you to think you can actually vote against and stop government pork and higher taxes? In the immortal words of Gordon Gekko from the 1987 movie Wall Street, “Now, you’re not naive enough to think we’re living in a democracy, are you, Buddy?” Even the CBC couldn’t stomach the hypocrisy of the situation and ran the opinion piece, “Gas tax hike an exercise in buck passing by B.C. politicians“. With oil prices now stabilised at a higher level, the economy of oil-rich Alberta next door is likely to do much better over the next several years; especially once we vote the New Communist Party out in just under another year like Ontario voters just did with their thrashing of the Liberal Party last month. Unfortunately, we better get ready for another stream of economic refugees coming in from British Columbia. Don’t worry – we won’t separate you from your children at the border.
UPDATE 1 (1 July 2018): One of the side effects of excessive taxation is cross-border arbitrage by consumers close enough to a border with another country with lower taxes and prices. It has always been the case for Canada where something like 80% of the population lives within 100 miles of the US border given that most of our major population centers are nestled right along the 49th parallel. In the case of Vancouver, the drawing of the border has created an anomaly with Point Roberts in Washington State being cut off from the rest of the country due to how the border was arbitrarily drawn. This sleepy little peninsular enclave of the US is physically attached to Canada and its tiny population of 1300 boasts four petrol filling stations. You can bet that a lot of their sales are not to locals but for Vancouverites fleeing taxation persecution just north of them.
So while it’s not new that Vancouverites and Canadians pop across the border for a little shopping and fill their tanks; the more the socialist politicians here try to raise taxes, the more pronounced the trend is likely to become. Like this recent Vancouver Sun article, “Motorists flocking to Washington state to flee Metro Vancouver gas prices.” One thing that our economically illiterate socialist politicians in Canada fail to understand is the Laffer Curve. Simply put, there is a point of no return where further rising tax rates actually results in a reduction of net tax revenue as people find it worthwhile to find ways to circumvent the taxes or outright just fail to pay them. Lest we think our tax and spend friends at city hall are powerless to stop this with the American border so enticingly close and accessible, the case of Singapore offers some interesting thoughts. Tired of motorists popping across the border to Malaysia to fill up with much cheaper petrol, the Singapore authorities enacted the 3/4 tank rule for vehicles crossing the border. Simply put, the 3/4 tank rule states, “If you are departing from Singapore in a Singapore-registered motor vehicle, the vehicle’s motor fuel supply tank must be at least three-quarter tank full… Those who do not meet the rule may be prosecuted in court and fined up to S$500. The driver must turn back to Singapore to fill the vehicle’s fuel supply tank to at least three-quarter full before the vehicle is allowed to leave Singapore… If the vehicle’s fuel gauge is tampered, the driver will be charged in court for illegal alteration of the fuel-measuring equipment.” I wouldn’t be surprised in Vancouver or Canada in general eventually implements something similar if current trends continue.
If only our Pacific neighbours pay attention to gas price breakdowns and tax contributions instead of contemplating the next environmental gathering while filling their SUV tanks.
Whatever happened to those pie charts on the gas pumps showing how little the retailers make versus the government’s take? Maybe some provincial laws got passed to ban them from public viewing.