Tag Archives: collusion

Transportation

How The Fuel Price At Canada’s Gas Pumps Got So High

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To: Canadian gasoline buyers  

From: G. Kent Fellows 

Canadian retail gasoline prices have soared since the start of the Iran war – even though Canada ranks fourth globally in annual crude oil production, behind only the United States, Russia and Saudi Arabia. 

If we have so much oil, why are our gas prices high? 

Start with retail markets. In most of Canada, gasoline retailers are free to set prices. In doing so, they think of their costs, their competitors’ prices and how consumers will react. They’re less concerned about what they paid for the fuel they’re selling than what it will cost to replace it next time they order a gasoline shipment. So, when the wholesale price rises, they adjust their own prices quite quickly. 

Rockets and Feathers

Conversely, when prices fall, they end up in a game of chicken with their competitors. The station that cuts prices first does sell more fuel but it makes less profit on each litre. Retailers balance the profit they make from more volume against their reduced margin. This leads to a phenomenon some economists call “rockets and feathers.” Prices rise fast and fall slowly. 

As consumers it’s tempting to think we’re getting ripped off. But, over time, gas stations really aren’t big profit engines. They make a bit of money when wholesale prices fall, less when wholesale prices rise. Overall, they make enough to pay for their staff and inputs while getting a fair return on their investment. 

Working backwards through the story, gas stations buy gas from a wholesaler. Sometimes they buy from the same brand (i.e., a Shell station buys its fuel from a Shell wholesaler) but often there’s no connection: Retailers buy the cheapest gas available. There are fewer wholesalers than retailers but the wholesale market is competitive, too. Gasoline is pretty much the same no matter who you buy it from so it’s hard for any single wholesaler to charge a higher price than its competitors. Wholesalers, like retailers, set prices based on their competition and the replacement cost of their inventory. More rockets and feathers. 

To summarize: Retail prices spike with wholesale prices, and wholesale prices spike with crude oil prices. 

And why are Canadian crude oil prices rising when we are half a world away from Iran? Because global oil markets are linked and Canadian producers prefer more profit to less. When a Canadian producer markets its crude, it looks for the highest bidder. If it can sell to an export partner for a higher price, it will. Canadian refineries therefore need to match that price to buy oil for domestic use. 

This is a feature, not a bug. 

Canada and the United States are the only two major oil-producing nations with competitive crude oil markets. All other producing nations co-ordinate production through state-owned enterprises. Canadian oil companies, though large in absolute terms, are small relative to their international rivals. This makes them price-takers. 

A Canadian firm can’t simply decide to charge more, the way OPEC producers can. They’re too small to influence global markets. They’re also prohibited by law from colluding with each other to drive up prices. As a result, though Canadian producers may well benefit from rising global crude oil prices, they can’t cause them. 

Canadian producers could offer lower prices to domestic refineries, but that’s against their own interests and would reduce their profits. Preferencing the domestic market with lower crude oil prices would also risk damaging our trade relationships. 

A fundamental rule of economics is that prices and quantities are linked. As the quantity of globally available crude oil falls, prices rise for crude and gasoline alike. As gas prices go up, we consume less gasoline and by extension less crude oil. That’s how global market systems balance supply and demand. 

If we artificially suppress prices for Canadian consumers (and only Canadian consumers) we end up consuming more gasoline domestically and exporting less oil. Drivers would benefit but the reduction in exports would lower our incomes, damage our terms of trade and hurt our reputation as a reliable trade partner. 

Yes, when world oil prices rise Canadian oil producers make higher profits. But they aren’t “gouging” consumers and this isn’t a federal or provincial policy failure. It’s the global market doing what it’s supposed to do.  [A point to consider: last year the highest octane fuel available, 94 was selling for on average $2.00/L in Southern Ontario. Today that fuel sells for on average $2.12/L meaning an increase of 6% in cost. Yet the most common octane fuel: 87 has seen an increase of (avg. of $1.40/L vs today’s rate of $1.83/L) of 25%. Shouldn’t the % increases in fuel be the same? CP]

For the Silo, Kent Fellows.

Kent Fellows is assistant professor (Economics) and Associate Program Director of the Canadian Northern Corridor research program at The School of Public Policy, University of Calgary and fellow-in-residence at the C.D. Howe Institute. 

Culture

Regarding Money And Government In Business Positions

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LetterstotheSilo Dear Silo, I kept my Silo printed back issues and I just re-read the January-February 2013  issue of The Silo. I noticed that a few of the articles involve the issue of consent (biogas facility, mega-quarry, dads attending births) and choice (media publications, GMO foods, liquor sales). Freedom of choice and voluntary consent are basic human liberties that we often take for granted.

In the old printed article, Peter Dash questions the viability of government institutions to meet general needs, and MPP Toby Barrett says it’s high time the Ontario government takes its nose out of business. As the one image on page 13 puts it: “Government didn’t build my business, I did”. Government does not produce. It is usually an expensive and inefficient provider of services. Liquor sales should definitely be opened up to private competition to enable consumer choice. All government services, including health care, education, infrastructure, pensions, security and defense, should compete in a free market. Why should any group of individuals (including “government”) have an imposed monopoly on the provision of any services?

Goods and services should compete in a free market based on price, quality and consumer demand. Any individual should be free to do anything at their own risk and expense that does not adversely affect anyone else, and to negotiate an agreeable price for the purchase of any goods or services that they actually want and use.

monopolypoortax

Money and power are central to almost every issue. We do not have political freedom or economic freedom because we don’t have – or don’t exercise – monetary freedom. The banks, in collusion with government, essentially control money and credit by controlling the creation, allocation and price of the medium of exchange, which essentially controls the production of goods and provision of services. Money created as interest-bearing debt is always in scarce supply. Inflation is a hidden tax. We are essentially helpless to prevent anything decided for us by the people in government and their friends in big business because we do not control money and credit.

A necessary step, therefore, is to take control of our own credit and allocate it wisely, rather than doing what the controllers of money demand of us. Products and services, including currencies and alternative exchange systems, should compete with each other in a free market. Thomas H. Greco’s recent book, The End of Money and the Future of Civilization, provides an excellent explanation of the nature and function of money and offers a practical alternative to the present system. The Money Fix, a documentary by Alan Rosenblith, also explains the creation of money and its role in the economy. You might find both of these sources informative and interesting.

Sincerely,
K (Name withheld due to request)

“Banks create money. That is what they are there for… The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all. Each and every time a bank makes a loan, new bank credit is created – new deposits – brand new money. Broadly speaking, all new money comes out of a bank in the form of loans. As loans are debts, then under the present system all money is debt.”
Graham Towers, Governor of the Bank of Canada from 1935-1955

Quotes To Consider- 

“Money is created when banks lend it into existence. When a bank provides you with a $100,000 mortgage, it creates only the principal, which you spend and which then circulates in the economy. The bank expects you to pay back $200,000 over the next 20 years, but it doesn’t create the second $100,000 – the interest. Instead, the bank sends you out into the tough world to battle against everybody else to bring back the second $100,000.”
Bernard Lietaer, economist and author

“By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised. … The essential notion of a capitalist society is voluntary cooperation, voluntary exchange. The essential notion of a socialist society is force.”
Milton Friedman

“What is the basic, the essential, the crucial principle that differentiates freedom from slavery? It is the principle of voluntary action versus physical coercion or compulsion.”
Ayn Rand

“For in reason, all government without the consent of the governed is slavery.”
Jonathan Swift

“Give to every other human being every right that you claim for yourself – that is my doctrine.”
Thomas Paine