Gas Prices Too High?

on | Filed under Economics

So what could be done about them?

In the GTA these days, the price of gas at the pumps is around $1.00 per litre. We are being buffaloed into accepting dollar-a-litre gasoline (or $4.25 a gallon for us older folks) as “normal”.

It’s time we did to the oil industry what was done to the telephone industry in North America.

Remember the days, not so long ago, when the “talking heads” were telling us that nothing could be done about the high cost of telephony. That was just the way it was and always would be because there was just too much history/investment/specialized infrastructure/etc. to break up the big phone company monopolies. Besides, weren’t they doing a great job anyway? But lo and behold, when the retail side of the system was opened up, competition swarmed in and we now enjoy far better services and much lower prices. Even the big, bad old phone companies are doing well these days!

This is one arena where governments are not the major villains. Whether Arabian or Albertan, governments lucky enough to have jurisdiction over territory where a bunch of dinosaurs died tens of millions of years ago just sit back and collect fat royalty or excise taxes, and percentage taxes on profits, from all four levels of the pumping, transporting, refining and retailing system. Changes in tax practice have a marginal effect on pump prices.

[An argument could be made that it would be common-sensible for the Canadian government to remove its flat excise and “special temporary” taxes at the pump to permit retail pricing equivalent to the U.S. market. But, that’s another article.]

Occasionally, greedies in one or more of the OPEC governments decide they want to increase their take from the oil wells in their country. But, OPEC countries account for only 35% of the world’s oil output.

The actual costs of pumping oil out of the ground, anywhere in the world, have absolutely nothing to do with the base price North American companies use to determine their retail price of gas. ALL North American companies use the landed New York Harbour price for #1 light crude as their base price. These days, it’s in the mid-$60’s per barrel. The NYH #1 light price is a commodity price determined by a pack of speculators peering into entrails and changing their bets with every hourly newsflash. To repeat, the base price per barrel of oil has absolutely nothing to do with the costs of pumping it, royalties, taxes, transportation or any other “real” cost.

The root of the problem is that the major oil companies also own and operate, or control, the pumping, transporting, refining and retailing of most of the world’s oil-to-gasoline system. It’s as though Loblaws, Sobeys, Metro and Safeway owned and operated most of the farms that produced the raw foodstuffs and virtually all the processors that turned them into groceries. It’s a vertically integrated system.

Moreover, the world system is controlled by four gigantic worldwide corporations. There are some national corporations besides the four – e.g. Petrocan and Irving in Canada – but they are tiny compared to the global four.

There used to be seven – called “The Seven Sisters”. Now there are four: 1. EXXON (Esso) (Standard New Jersey) now owns and operates Mobil; 2. CHEVRON (Standard California), absorbed Gulf, and now owns and operates Texaco (and Caltex in southeast Asia); 3. ROYAL DUTCH SHELL (British/Dutch); and 4. BP (British).

By and large, it is the “Four Sisters” who run the world’s oil-to-gas system. They don’t own and operate everything, but they do control everything. They move – the rest follow. They ratchet up retail prices through the system by applying the same percentage markups to the base price as it varies. That’s why prices change through any given day and why you see identical prices at every station on any given corner.

It’s essential to remember that ALL the mega-billions of dollars that finance the system come from the car and truck driving consumer. When they feel like it/want more money in the system, the “Four Sisters” raise the price to the consumer at the gas pump in order to flow more dollars into the oil-to-gas system. The other players in the system happily follow suit.

The “Four Sisters” corporations use the dollars we spend at the pumps to pay themselves retail profits, retail operating costs and the wholesale price charged by their refineries. Their refineries use their wholesaling revenues to pay themselves refinery profits, refinery operating costs and transporting (tanker and/or pipeline) charges, which include a profit. The corporations pay themselves the wellhead price for oil which includes a pumping profit, the costs of operating the oil wells and paying government and other handouts. Thus, the “Four Sisters” realize profits from all four levels of the system they own and operate.

In North America, the “Four Sisters” have agreed to “rationalize” the oil-to-gas system in the interests of “orderly marketing” and “security of supply”. Every time the “Four Sisters” drive up prices, an orchestra of paid-up apologists warble on about the need to “let the market work”. Some market! We’re helpless sheep.

The answer is simple – precedents exist. Strip the retailing of gasoline away from the “Four Sisters” and every other oil refiner. Use the grocery business as a model. A host of pumpers (including the “Four Sisters”) would have their oil transported by independent and “Four Sisters” pipelines and vehicles to the few refiners (mainly the “Four Sisters”) who have the capacity to turn oil into its valuable components, including gas. Like General Foods, Kraft, Maple Leaf, Weston, etc., etc., the refiners would compete with each other to get their refined products listed with the many independents, chains and groups that would spring up to retail gas and accessories to the consumer. The facilities exist already. Only the signs and ownership would change. Logistically, it would be easier to do than breaking up the telephone oligopolies.

C.W. Conn, Mississauga
August 10,2007.