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Many factors play with the price of diesel fuel

Diesel fuel prices were relatively - and I mean relatively - stable throughout much of the summer. However, despite some moderation from their peaks, they remain high compared to historical levels.And...


DAVID BRADLEY: Lobby leader
DAVID BRADLEY: Lobby leader

Diesel fuel prices were relatively – and I mean relatively – stable throughout much of the summer. However, despite some moderation from their peaks, they remain high compared to historical levels.

And, with the cooler temperatures of fall and winter just around the corner, when the demand for home heating oil will increase, it is likely that prices will be on the rise again.

We are told that the high fuel prices are in large part a reflection of higher world crude prices.

We are told it’s the law of supply and demand.

But, the fuel market is far from the perfect competitive market to which that law is supposed to apply.

The North American fuel market is dominated by relatively few large oil companies. It is an oligopoly.

This is not something we don’t already know. And, yes, fuel continues to be taxed in Canada as if it is a luxury, not a necessity and vital business input.

The oil companies are certainly entitled to reimburse themselves for higher costs associated with exploration and world crude prices.

But, while the trucking and other industries have been reeling from the high fuel prices, the major oil companies have been racking up some very handsome profit numbers.

The oil companies are profit-making entities. And, all businesses attempt to maximize profit. The issue of whether the oil companies wield too much market power or control has been debated and analyzed over and over and will likely continue to be for as long as any of us are around.

In the meantime, though, it is important for trucking companies and owner-operators to try and understand as best as possible what is happening in the oil industry, how that is impacting the price you pay for fuel, and using that information as best you can in negotiations with your fuel supplier and your customer.

There appears to be more a lot more at play here than world crude prices.

According to some oil industry observers, the oil companies have all changed their business practices in a way that has had an impact on fuel prices and profit margins.

As it has been relayed to me, until a year ago or so, the factors that went into determining fuel prices included the world price of crude, the costs of finding new oil, and even political considerations.

The oil companies essentially had two profit centers. They looked at the profits generated on their upstream operations (i.e., exploration) and the profit on their downstream operations (i.e., marketing). In the downstream business, refining was considered a cost center.

However, according to industry observers what has happened over the past year or so, is that the oil companies have created another profit opportunity in the refineries.

Whereas the refineries were once just a cost center, they are now selling downstream to the marketing departments as profit centers.

This has created a third profit opportunity – called the refinery margin.

Apparently, the impact of this change is an increase of three to 3.5 cents per litre in the price of diesel, arguably with no corresponding increase in costs.

If so, is this fair? Is this a reasonable use of market power? Is this an area where perhaps some form of regulation is warranted?

As I was putting the finishing touches on this article, a copy of the study conducted by the Conference Board for the Government of Canada finally arrived on my desk. (In case you had forgotten the government’s sole response to the public backlash to high fuel prices in the Spring of 2000 was to conduct a study).

In a section on diesel pricing the Conference Board identifies refiner margins as a factor. Interestingly, a major spike up in the refiner margin in the second half of 2000 is very evident in the accompanying charts.

According to the study, “the petroleum industry argued that this steep increase was the result of the low levels of crude oil and distillate inventories in North America, which resulted from delays in purchasing crude because of continued high prices on the world market … If the industry’s contention were correct, one would expect to see a decline in margins as the inventory situation returns to normal.”

Why not raise this with your fuel supplier next time you are talking to them. See what they have to say.

Also, consider raising this matter with your shipper next time you are trying to explain to your customer why it is that your fuel prices are going up despite some stability in crude prices. n

– David Bradley is president of the Ontario Trucking Association and chief executive officer of the Canadian Trucking Alliance.


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