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The elephant in the room


If you thought that one elephant in the room was a, ‘what’s-that-thing-doing-in-the-room?’ conversation topic, how about two of them?

No insult by inference, but this week’s 8 cents or so gasoline pump price spike that was levied on consumers across the Prairies and Vaincouver (not a typo), has drawn sweat beads and Frothy Mouth Syndrome from the, (for a little while longer) Premier of B.C. John Horgan. Horgan claims that these increases are clearly price gouging by the oil companies and not due to higher taxes, and he wants the government to investigate and stop this pump robbery.

Umm… but, he IS the government! Unless he wants his new buddy in Ottawa, (if it doesn’t move, nationalize it), to intervene and drop the GST, and the federal excise tax; and while he’s at it maybe the prime minister could set up controls, or, dare I say, caps on refining margins, retailer pump margins, and why stop there… world crude prices.

What Mr. Horgan could do all by himself is drop the 7.8 cents per litre carbon tax, which is no longer revenue neutral, but now in revenue overdrive to the government coffers.

The second elephant is what politicians can’t see with these “criminal” actions by evil oil.

Prices spiked, in my opinion, because there has been a price war raging in the west for two months now, which has been centered around pump margins, which are the gross margins that retailers need to cover all expenses, leaving what’s left as profit. These margins have been in and around 4 to 6 cents per litre in all areas except Vaincouver.

The national average is 12 cents so the market corrected itself as retailers waved the white flag to end the war and put food on the table again.

There may be more correction on the way that will bring more pain at the pump because of the shutdown of the 360,000 bpd Syncrude operation in Edmonton.

As mentioned in last week’s report, this volume of crude normally ends up in Cushing, OK, the holding tanks for the WTI futures contracts. A drop in supply of this magnitude will lower futures inventories and force crude, rack, and pump prices up as a consequence.

With the Syncrude supply cut off, this does however, free up pipeline space for WCS, which is good news for western producers as it will cut the WCS to WTI discount.

On the flip side, a key ingredient in the crude oil pricing formulation built into pump and rack prices is WCS, so the higher WCS price will be bounced into those prices. This could increase prices from B.C. to Ontario, but have no influence on prices in Quebec and the Maritimes because these areas use Brent as the pricing co-efficient, not WCS/Syncrude blend.

A change in government in Ontario will see the cap and trade program evaporate.

With most of the country seeing higher prices in the immediate future for gasoline and diesel racks, such will not be the case in Ontario where prices will fall by 4.2 and 6.0 cents respectively.

Seems to me you can just be the elephant in the room and do nothing for the consumer, or the smartest elephant in the room like the one in Ontario.

Signed,

The Grouch


Roger McKnight

Roger McKnight

Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc. Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.
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