Power play at the pumps

"The premise of shortage of supply is, by any standard, a fallacy of staggering proportions. The "invisible hand" of the marketplace will not come to our rescue. Above all other economic activity energy is, in the final analysis, a political matter." 

Short-term memory loss is normally considered a worrisome symptom. But for the companies that sell refined gasoline it is the greatest blessing. To us, the general public that is squeezed everyday by the power play at the pumps, it should be a source of shame. To be a citizen of a democracy requires responsibility. And part of that responsibility is be an educated consumer of public information. We need a populace that can remember the relationship of crude to pump as well as it does the stats of the local hockey heroes. If we don ‘t wake up soon, we won’t be able to afford those tickets to the Bell Centre. 

Expenditures on gas prices just crossed 6% of individuals average monthly budgets in North America. According to government estimates, 4 % is the ceiling before consumers start tightening their wallets and the economy contracts. The reasons for it are a scandal. It’s a squeeze play.Over the past year, the price for a barrel of crude has fluctuated from lows of about $80 to highs near $130. That a 60% swing based on the lowest baseline. Have you seen drops in the price per litre when crude falls anywhere near that? Of course not. And here’s why. 

Everytime the price of a barrel of crude goes up, the big refiner/retailers jack up the price at the pump. Of course they always blame the wellhead price and “seasonal demand.” So just as an easy example using round numbers let’s say at $100 a barrel our price is $1 per litre at the pump. When the price falls to $80 do we see a 20% drop at the pump. No. We may see 3-5%. And when the barrel price shoots up to say $110, the pump price doesn’t jump by 10% it is normally increased by 20 to 30%. The excuses used by the refiner/retailers – let’s call them the R&Rs – is that they have to cushion against “potential” further increases. But when there are decreases instead of increases, we the consumers get very small reductions. 

The R&Rs get away with this because they change the baselines. They count on the broad public not being able to match up numbers. So when crude drops by 20% and our pump price by 3%, they know that no questions will be asked. There will just be long lines of people ready to fill up on “cheaper” fuel. The reason the R&Rs get away with this is one of the dirtiest little secrets on the public agenda. 

R&Rs do not include your corner station owners. Don’t get mad at them. They’re victims like us all. Nor strangely enough does it include the countries like Saudi Arabia who produce the crude. The Chairman of Saudi Arabia’s Kingdom Holdings recently admitted on CNBC that it still only costs the Kingdom some $4-6 a barrel to get the oil out of the ground and pipe it to the ships. This is not to deny that oil-producing states production manipulations don’t play a role. They do. But it is not constant. Even if OPEC wants to “punish” the west, it can only do so for a few weeks. These nations exist on selling their oil. No, the R&Rs are those oil companies who not only explore and drill but also refine. They have cut refining capacity in North America by over 50% since 1973 even though by their own numbers demand in North America grows 1-2% a year. But they control the refining so they control the price. 

Over the past four decades refiners in Canada have have closed 26 refineries. We have gone from 45 to 19. The picture in the United States is the same. And Canada plays a role. Several years ago Sen. Carl Levin of Michigan, Chairman of the Senate's Permanent Subcommittee on Investigations, uncovered regular manipulation of prices by oil refiners that of necessity would have required collusion. A startling example was the discovery by Levin’s investigators of internal memos from then BP Amoco PLC that set out a plan to "…influence the refined crude supply/demand balance by offering supply agreements to other oil majors in exchange for refining capacity shutdown and movement of product from the U.S.to warehousing in southern Ontario." 

When Levin asked Rob Routs, then president and chief executive of Shell U.S., whether he was troubled by, "The fact that gas prices go up and down together everywhere almost at once,” Routs replied, "No, it doesn't trouble me at all." Levin suggested that such pricing, while legal, ought to be considered "an anti-competitive act" and that juries should be allowed to consider whether that is an antitrust violation. But why will we never see anti-trust or anti-monopoly action by government? Because depending on the state or province, 40-60% of the price at the pump goes to taxes. No administration will ever kill the golden goose. 

Should anyone think that oil is a declining resource – or hard to extract - and that would justify the price manipulations by refiners to assure their existence, the facts belie that argument . Several years ago The Canadian Association of Petroleum Producers (CAPP) admitted that our oil sands projects are economically viable at market prices of $18-$20 a barrel. Well they’ve been way over that for decades. The U.S. Department of Energy’s International Administrator Guy Caruso stated in a 2006 report that Canada’s oil sands are viable at much higher production levels and that Canada’s real reserves are 180 billion barrels. Saudi Arabia’s are 264 billion barrels. Interestingly, despite the industry’s arguably justifiable opposition to Kyoto, CAPP once admitted that Canada's ratification of Kyoto would add only 25 cents to 30 cents a barrel in development costs. 

Finally, for those who would argue that reserves and discoveries have fallen behind growth in demand, the numbers demonstrate otherwise. Reserves have kept pace and more. According to the industry bible, the Oil and Gas Journal, reserves have grown by 55% since the mid-1950s as against a 24% increase in demand. And these numbers do not take into consideration Russian reserves which, even though they are the world’s most difficult and unconventional to exploit, are proven as to quality and are second only to Saudi Arabia’s in quantity. The premise of shortage of supply is, by any standard, a fallacy of staggering proportions. The "invisible hand" of the marketplace will not come to our rescue. Above all other economic activity energy is, in the final analysis, a political matter. As citizens we need to force our elected officials to reign in the voracious appetite of what is quickly becoming an oligarchic industry operating without restraint of consequence.