Nonsense on gas prices from the Canadian Centre for Policy Alternatives

Gas prices at 106The CCPA has always had difficulty with the idea that the “right” price for something is what a willing buyer is prepared to pay a willing seller, so I guess it’s no surprise that it’s produced a report (PDF) finding that the retail price of gasoline in Canada is “unjustified” to the tune of about 15 cents. It concludes this by estimating the price of producing one litre of gasoline right now at 88 cents and figuring everything more than that is “excess profit.”

From the Canadian Press story:

Hugh Mackenzie, an economist and researcher with the group, said there has always been an “unexplained differential” between what consumers pay at the pump and what they would be paying if the industry tied prices to costs and traditional profit margins.

“Up to the point of August 2005, what you saw was a normal pricing pattern where the unexplained price would fluctuate between the positive and negative,” Mackenzie said.

“But after the fall of 2005, there’s a marked change and the price differential became mostly on the positive side and grew.”

This is an extremely bizarre line of reasoning, assuming as it does that gasoline retailers “should” set their prices according to their costs of production, plus a fixed profit margin, and be done with it. In this approach to business, if a company’s costs happened to be higher one week — let’s say half its delivery truckers were sick and the other half worked overtime to get the stations supplied — its retail prices would be through the roof, nobody would buy its gasoline, and the company’s bosses would just shrug helplessly.

The gasoline industry doesn’t work this way. No industry works this way. The costs of producing whatever you sell are only loosely connected to the price you sell it at — in that if you can’t consistently sell for more than it costs you to produce, you’d better get out of the business. But that’s it.

Additionally weird is the admission that up until August 2005 (when hurricanes Katrina and Rita devastated oil rigs and refineries in and along the Gulf of Mexico), “what you saw was a normal pricing pattern.” Presumably the CCPA’s previous complaints about gasoline prices (such as this one (PDF) from 2001) are inoperative.

Even now, mind you, the CCPA acknowledges that some people might pay “less than the normal price”: its report touts an online calculator (found on this page, though the link is currently broken) that’ll tell you how much you’re being gouged. Uh, or how much the oil companies are gifting you out of the goodness of their hearts, knowing they could gouge you but for some reason choosing not to.

Which makes more sense — that a cabal of oil-industry executives are setting prices for thousands of gas stations across the country (including many hundreds of independents) multiple times a day, sometimes gouging by 20 cents a litre, sometimes giving it away for less than the cost of production for reasons of their own … or that the gasoline industry works like every other commodity business, with prices that float with market trends?

Interestingly, I can find very little discussion from the centre about environmental concerns beyond forestry. There is a report on Alberta’s oilsands, although mostly from a perspective of economic nationalism, not environmentalism. High gasoline prices, however derived, should be a major force pushing consumers to make more sustainable decisions about how they organize their lives.

Look, I understand, intellectually, the frustrations someone who made normal lifestyle choices — a house deep enough in the suburbs to get a nice yard at an affordable price, two cars (one maybe a minivan for moving the whole family and some sports equipment), and so on — only to find those choices rebounding on him or her due to factors entirely out of his or her control. But apparently the following things cannot be yelled loudly enough:

  • Gasoline is not a public utility.
  • Five companies do not control the industry. There are lots of independents. They and all the majors know they can get cars lined up out to the road by cutting their prices by a penny a litre and still, according to Mackenzie’s analysis, make 15 cents a litre of “excess profit.” If they’re not doing it, there must be a reason.
  • Wheat futures and gold and pork-belly prices slide up and down all day the same way gasoline prices do. You just don’t buy any of those commodities at retail the way you do gasoline.

Despite the protestations of Liberal MP Dan McTeague, who CP has saying the oil companies are screwing consumers who have no choice but to pay, consumers do have a choice.

Don’t buy the stuff the gas stations are selling. Free yourself from the tether of the pump-hose. Take the bus. Carpool. Bike. Walk to the grocery store. Consider, in all seriousness, moving someplace where these options are more appealing. Because this problem ain’t going away.

Update: The Oil Drum examines much the same issue on an international scale, responding to the Financial Times’ description of bringing oil to market as a “responsibility”:

Their responsibility? Their responsibility? As in a duty? As in a duty to supply us our fix? As in an imperative obligation to supply us before they supply their own needs?


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