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Here We Go Again

Prime Minister Paul Martin is apparently so concerned about sky-high fuel prices that he was raising the issue at the June 6-8 G8 meeting in the U.S. just as Motortruck was going to press.


Prime Minister Paul Martin is apparently so concerned about sky-high fuel prices that he was raising the issue at the June 6-8 G8 meeting in the U.S. just as Motortruck was going to press.

He was planning to stress to his G8 counterparts the necessity of asking OPEC to increase production, thus reducing prices by increasing supply. He was quick to acknowledge, of course, there would be no quick fix on fuel prices. But he would also be asking the federal and provincial competition bureaus to examine the possibility of collusion among oil companies.

Here we go again.

With enraged motorists, not to mention truckers, threatening to make fuel prices the sleeper issue of the federal election campaign, I don’t blame Martin for taking action, or at least seeming to do so. But as the leader of a country as reliant on transportation as Canada, he should find a more innovative approach to the problem.

The leaders of the G8 nations may indeed carry enough political clout internationally to coax some of the OPEC countries to turn on the taps and keep them going long enough to provide some pricing relief. But does OPEC have the capacity to handle the long-term demand for oil from strengthening western economies coupled with the ballooning demand in China? Some OPEC members are quietly admitting they have little excess production capacity. Major oil companies such as Shell have recently had to “revise” their reserve figures.

Whether the capacity exists or not, as long as the demand for oil exceeds supply, prices will remain high and the oil producers will make a killing. So where’s the incentive to increase production over the long term?

Martin’s call for the federal and provincial competition bureaus to examine the possibility of collusion bugs me more – a lot more. Why? Because although in our frustration we are all admittedly blaming the oil companies, the economic reality is that prices are not set by them but by traders at North America’s stock exchanges acting on their perception of international supply and demand dynamics. These are dynamics that are beyond the knowledge of most members of the public and probably beyond the control of government.

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, 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.

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. If crude prices climb steadily, the price of diesel rises accordingly.

Martin knows these facts. But that didn’t stop him from travelling down the well-worn path of yet another pointless review.

How many have there been now, anyway? I lost track after number 13, conducted in 2000 by the federal Competition Bureau at the behest of the same Liberal government. After spending $600,000 of taxpayers’ money, that six-month investigation into allegations of fuel price fixing released a report exonerating the oil companies. In fact, the other dozen or so such investigations of oil pricing over the past two decades have 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.

If Mr. Martin is truly concerned about fuel pricing he would be better off concentrating on the only lever Ottawa can use to influence pricing: taxation. Eliminating the GST on fuel purchases after prices reach a certain level would help ease the burden, but Martin has already rejected the idea, preferring to use the projected $230 million federal tax windfall from rising fuel prices to pay for hospital equipment.

Another option is to help provide industry with more choices by bringing in smart subsidies and progressive tax shifting that favor conservation and promote the growth of alternative fuels.

Both those options would be a lot better than another pointless review.


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