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I bet the federal government is pretty proud of itself for ordering a $600,000 study to examine pricing practices in Canada's oil and gas industry. Considering how upset the public, not to mention tru...

I bet the federal government is pretty proud of itself for ordering a $600,000 study to examine pricing practices in Canada’s oil and gas industry. Considering how upset the public, not to mention truckers, are about the highest fuel prices in a decade, it’s the responsible thing to do. Isn’t it?

After all, “every one knows” that oil companies are in cahoots to pad their profit levels by raising prices, right? Clearly that’s evident in the fact they all charge basically the same price at about the same time. If that’s not collusion what is? And with the public and truckers alike chocking on the highest fuel prices in a decade, it’s about time the government did something about it, is that not so?

For those more interested at pointing fingers than understanding market realities I suspect such reasoning is as good as any. But after covering the rising fuel price issue in depth over the last eight months I think the Liberals’ study has a lot more to do with with irresponsible and thinly veiled political opportunism than being responsible to the voting public.

The federal government is smart enough to know that fuel pricing practices are based on international market conditions generally beyond its control. But why let the public know that when it can spend $600,000 of our money over the course of the year to pretend otherwise? It is a political path well traveled. The federal Competition Bureau recently completed a six-month investigation of allegations of fuel price fixing and released a report exonerating the oil companies In fact, there have been more than a dozen such investigations into oil pricing over the past two decades and they’ve all come to the same basic conclusions: 1. There is no evidence of collusion; and 2. It’s not against the law to watch what your competitors are doing and match their price movements.

What does drive fuel pricing? Back in the 1980s, oil companies used to base their pricing on the cost of crude plus their costs to refine, store and transport the fuel. However, they were finding that the price of crude wasn’t always the factor driving prices. Since then they’ve moved to a more sophisticated pricing mechanism that takes into account a series of factors.

In eastern Canada, the proximity of major U.S. centres has a major impact on pricing. Canada’s oil companies can sell their fuel on the U.S. market if prices are better there, so they don’t have to cut Canadians a deal. The main driver of eastern oil prices on both sides of the border is the commodity cash price of #2 fuel oil (furnace oil), which is very similar to diesel. On December 30th, the New York Harbour commodity cash price for #2 fuel oil was $27.09 per litre. By February 8th, the unexpected cold snap in the U.S. caused a shortage of #2 fuel oil that drove its price to $46.18 per litre. The demand for furnace oil also meant there was less distillate available to make diesel. The net effect: the spike in diesel prices that drove owner/operators to protests. By March 16th, however, with the heating season just about over, the price of #2 fuel oil had dropped back to $28.63 per litre and in response diesel prices started coming down. That trend should continue.

It’s a different story out west where there are no major U.S. centres to affect pricing (Seattle, which is close enough to impact Vancouver pricing is the exception.) Here oil companies continue to base their pricing on the value of crude. Crude prices have climbed steadily since last year but they didn’t experience the sudden jump that #2 fuel oil did in the east. In turn diesel pricing in the west did not climb to the extreme levels it did in the east. But it’s also unlikely to start dropping till the end of summer as crude prices are expected to remain high till then.

The only role Ottawa plays in these pricing mechanisms is through taxation. But I doubt it would want to call attention to that.

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