Gas Prices in Perspective

Posted on May 25, 2007
Filed Under /dev/null/ | 674 views |

Today I received a delightfully naive email suggesting that the best way to combat rising gas prices in Canada was to boycott Petro Canada and buy from the private-sector companies instead:

Starting June 1 of 2007 DON’T purchase ANY gasoline from the biggest Company in Canada. Petro Canada ! If they are not selling any gas, they will be very quickly inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit. Think about this. Petro Canada has 1500 retail locations and the entire country consumes 68 million gallons a day! Yes per day! And as Petro Canada is Canada’s largest gasoline retailer, then doesn’t it make sense that the consumer can bring this giant to its knees and force them to lower their prices?

It is left up to the reader to explore the wealth of reasons this “strategy” smacks of delusional optimism. Instead, I decided to use this as an opportunity to explore just how badly I’m being “gouged” by gas prices. Assuming a gas price at an ire-inducing (well, not in me but seemingly in most other people) $1.30 / litre, how would that stack up against the other liquids I consume? Would would it cost for a litre of:

• Beer, by the pint: a litre of pints = $10.55 (I drink $5 pints)
• Beer, by the bottle: a litre of bottles = $13.50 (I drink $4.50 bottles)
• Starbucks grande latte: a litre of latte = $8.45
• Colca-cola: a litre of cans of Coke = $3.00 (at a buck a can)

I didn’t bother with bottled water because water is free, part of the structure of civil society and those folks who pay $1.50 or $2.00 per half-litre of bottled water when there’s a clean faucet nearby are already lost causes (do the math vis-a-vis gasoline).

By those numbers gasoline at $1.30 is a steal. None of the liquids above are non-renewable resources, none require expensive, dangerous machinery to create, and they’re all based on water. There’s that crazy free stuff again.

So why are people outraged about the price? My suspicion is that it comes down to a combination of the following factors:

• Most people feel like they have to buy it, to get to work, to drive the kids around, to do their jobs. This sense of forced necessity generates a resentment that the willful spending of $4.00 for a cup of coffee every morning doesn’t.
• Which leads us to: self-control. Any situation in which people feel a loss of control generates resentment. People would much rather feel like they control their spending excesses. When a sense of control is present then wasting money is a “decision”, an “indulgence” and not an imposition.
• Which leads us to: quantity. Gas is sold in large quantities and thus the final purchase price appears really high and thus the act of buying gasoline feels more expensive. It is amusing to me that people don’t realize that the inverse of this principal is exactly what companies like Cola-Cola and Starbucks rely on for their profits: selll something to someone every single day in smaller quantities and you can charge more because people won’t add up the cost over time. Why do you think a single can of Coke costs so much more, proportionally, than a 2-litre bottle of Coke? The difference is pure profit, hidden by the smaller quantity (”it’s just a can a day”).
• And then there’s history. People are good at comparing two numbers directly, but terrible at factoring indirect influences like inflation. You’ll know someon is doing this because they’ll start their sentence with “Back in 19xx gas was $x/litre and today…” as evidence of unfair pricing. Ask that same person what the rate of inflation and increase in cost of living between those points are and they’ll have no idea. In pure mathematics two numbers may be directly related but in history they are often second cousins at best.
• And finally: profiteering. The general consensus is that there is profiteering and collusion going on in the gas industry today (I have no evidence, I make no claims) and that infuriates people because somehow we’ve decided that gas ought to be free like water (but not bottled water). Given that oil companies have reported record high profits for 2006 it seems to suggest something is amiss but is it wrong? They’re selling a commodity people are buying, no different than houses in Vancouver or islands off of Saudi Arabia (if you want to talk about expensive!).

Profiteering is the only issue up there I could be convinced to agree something should be done about it but the common suggestion - that the government gas tax be reduced - is the wrong solution. In fact, that’s so patently stupid that I’m going to outright say it: reducing the government tax on gasoline to save consumers money is patently stupid.

The cost of crude oil can be considered fixed for all intents and purposes (even though it fluctuates on a daily basis, that fact can be ignored for reasons I will explain in the next sentence) and the tax on gasoline can be considered fixed because, well, it is. No one’s changing it. The price of crude can be considered fixed because no matter what it is, the end-seller, the gasoline companies, will always roll that into their price and pass it along to you. It is an immutable percentage of the final price, like the gas tax. Gas companies also have their costs incurred during refinement and all that other stuff that’s involved in getting the gas to the pump. For all intents and purposes that too can be considered a fixed cost.

So what’s that leave in the price that’s got some flexibility? The profit. And what set a record last year? The profit. Why? Because it’s flexible, and gas companies can make that whatever they decide to make it.

Reducing the government tax on gasoline won’t subsidize consumer purchasing, it will subsidize oil company profits. In effect, reducing the tax will increase profits for gas companies since one of their fixed costs has been removed. The final price may indeed drop for a time, but because the flexible component remains untouched, they will rise again (bear in mind that gas companies are corporations - their primary reason for existing is to return profits to their investors, not to deliver gasoline to consumers. The only way to do that quarter after quarter is to sell more product or charge more per unit. Amsuingly it is our car-dependent culture that is allowing them to do both at the same time with impunity).

So what would make sense then? Leave gas prices alone, set by the ebb and flow of the free-market economy; compared to other consumer liquids we all buy the price is in fact not outrageous. Instead cap through legislation the maximum profit per litre the gas companies can make and strip off any excess as a profit tax (yes, that directly contravenes the “free market” statement I just made, on purpose). Return that excess profit back to the government to use as federal funds for say cleaning up the environmental damage done by oil companies in Canada, or to re-open closed schools or put more beds in hospitals.

Were this in place I have no illusions that there would be an influx of extra cash for federal social programs. Instead I’m reasonably confident that the gas companies would simply price their product at the point where there was no excess profits to be had. A gas price cap would then be in effect, as it were, with any overflow coming back to we consumers (keep in mind that unlike a corporation which can horde their profits, effectively harming the financial health of the society they operate in, governments spend tax money back into those societies).

Or we can all pretend that internet chain letters will make a difference. If that’s for you:

I am sending this note to 30 people. If each of us sends it to at least ten more (30 x 10 = 300) … and those 300 send it to at least ten more (300 x 10 = 3,000)…and so on, by the time the message reaches the sixth group of people, we will have reached over THREE MILLION consumers. If those three million pass it on to ten friends each, then 30 million people!!

Perhaps instead we could instead harness that colossal effort to push our government to stand up to the oil companies for us in a way that benefits the society we live in.

Or we could use less gas.

Just a thought.

(Oh, and as for why this chain letter is so inane, consider this: while Petro-Can operates as a private-sector corporation it is restricted from having more than 25% foreign ownership. It is effectively forced to be a Canadian company. Its primary competitors in Canada are, however, American companies. If we were to all take our money from Petro-Can and give it to the competition, where would those final profits end up? Yeah, not in Canada. This chain letter is a perfect example of cutting off the nose to spite the face.)

Update: Coincidentally, The Consumerist covers this very issue in Why Is Gas So Freakin’ Expensive?.

…
To ensure pricing continuity, refiners used to call each other and share pricing information. Activist judges on the Supreme Court called this “collusion.” The refiners, unfazed by the justices, came up with a crafty alternative: publicly posting their rack prices. Somehow, the Ninth Circuit Court found this to be illegal, too. Nobody knows how refiners discuss their pricing arrangements nowadays, but we wouldn’t be surprised if it involved a members-only group on Facebook.
…

A good read indeed.

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