Gas prices make perfect sense

There are so many letters about the disparity between the pump prices and what oil companies are getting for their well production.

There are so many letters about the disparity between the pump prices and what oil companies are getting for their well production. I always cringe that people can be so naive about market forces, taxes, the drifting worth of the dollar and the bottleneck effect when you have a ton of supply of a raw material but not enough manufacturing to convert it to a consumer product. All the following article is based on being an ardent reader of the business and financial sections of newspapers and the Economist.

Let’s deal with Alberta and their immense reserves of oil sands. Right now they are getting an extremely low price for their product, some $10 below the world price for Texas or Brent crude. This is because there is a glut of crude in the world, Alberta’s oil is more difficult to process and they cannot get it out of the province easily because of a paucity of transport systems. Not only is there a lack of transport, there is a lack of processors. Refineries are a NIMBY in the extreme, right up there with nuclear power plants. No new refineries have been built in ages and recently quite a few were offline while they did upgrades and major maintenance. Premier Notley wants to alleviate the bottleneck by building more refineries in the Edmonton area.

Next is market forces in that if you have something everyone wants but you can barely keep it in supply, then that means you get to charge what you want, since the price is minor compared to the need. This is where gasoline is right now; there are not enough refineries so they sell every ounce they make. For years refineries had a low margin between their supply and their end product but now they are enjoying a boom time; the supply prices have plummeted and the end product has declined only slightly, just enough to escape the price gouging label.

The lower price is quite evident in the States but in Canada, just as crude prices plummeted, Canada’s dollar also did so. So if you can get a litre of gas in the States for say 65 cents (about $2.50 a U.S. gallon), then that equates to 88 cents here but then you have to add all the extra taxes we have in Canada. There is the road tax, provincial tax, sometimes a city tax and the carbon tax plus the GST and PST put on those taxes as well as the product.

One more thing, just like there are wheat farmers and there are bakeries, the same mostly applies in the oil business. You have the companies that look for and develop drilling sites, companies that supply tools to those companies and you have the refining companies and then there are the retailers. Just like a wheat farmer can have a bumper crop just when everyone else does and gets a low price per bushel yet as a consumer you still pay the same for bread, the same thing happens with oil made into gasoline. That is, except the baker can vary his product line to suit sales, the refinery is hamstrung by the chemistry of his supply. Refineries have gotten better at turning crude into more desirable products but they still have to make the stuff that has a lower demand, such as furnace oil, in the summertime. This is because crude has various volatiles and oils in it that have to be separated in the fracturing tower and can’t be converted into highly desirable consumer liquids.

Five years ago the Canadian dollar was at $1.02 American, oil was $130 a barrel and the pump price here was $1.35 a litre. That fuel would cost you $1.82 a litre with today’s dollar so given that, $1.13/litre seems pretty good.

Jeremy Barnes