Blurb: Like most companies, oil distributors will gladly grab extra cash from consumers if they can. But competition curbs most of the excess.

Feeling gouged by gas prices?

By Peter Diekmeyer o Bankrate.com

Gas prices are one of Canadians' favorite conversation topics, especially when they are on the upswing, as they have been in recent months.

As any Canadian how much a barrel of heating oil costs and you're likely to get a blank look. But ask them the price of a liter of gas, and they'll tell you how down to the decimal point. But few areas of public policy are so little understood. And as the old joke goes, the fewer the facts available, the greater the argument.

Pump prices at historically high levels
In recent weeks gas prices have hit historically high levels. According to data collected by MJ Ervin & Associates, a Calgary based petroleum marketing consulting firm, the average price of a liter of regular unleaded hit 94.1 cents in late April 2005, an increase of 26.6%, from the 74.3 cents charged in early April 2004.

Canadian drivers have a reason to be angry and they are not shy about expressing their feelings. "About 40 percent of my customers notice every move in gas prices," said one retailer who asked not to be named. (Gas station employees at major retailers are forbidden to talk to the press).

Complaints against the petroleum products industry, which tend to increase in times of high prices, range from price fixing, to being to quick to pass on crude price increases to customers. Governments are criticized for being too dependent on the tax revenue generated by the industry, which causes them to look the other way at alleged price gouging.

The oil and gas industry point of view
But as in most arguments there are two sides. While gas prices do fluctuate and gas retailers and will try to rake as much out of consumers as they can, industry defenders make some valid points.

"We always charge a market price for our gas, that takes into consideration both production cost and the price of oil on international markets," said Andrew Pelletier, a spokesman for Petro-Canada. "Gasoline distribution is competitive right now and margins are tight for everybody."

How gas prices are arrived at
According to data supplied by Niels Veldhuis, an economist with the pro-business Fraser Institute, the oil industry has little room to maneuver. "When you consider their production costs and taxes they pay, the dealer margins are quite modest," Veludhuis said. The Fraser Institute supplied data shows the cost breakdown of a liter of gas as follows:

Crude oils costs 47%
Taxes, (excise, sales etc...) 36%
Refining and distribution expenses 12%
Dealer margins 5%
Total 100%

According to industry advocates, gas price increases in recent years, have been largely due to tightening crude oil supplies on world markets caused by the thirst for energy in developing economies like China and India, which are racing to reach Western standards of living. For example the price of the benchmark West Texas Intermediate Crude, has risen almost 50%, in the past year to $56 a barrel in recent weeks.

If oil companies are using crude increase to charge customers a little extra, it's unlikely they are doing so any more than companies in any other industry. For example Petro-Canada's return on equity for 2004 (20.1%) was only a couple of percentage points higher than that of Loblaws, (17.8%), and no one complains that food prices are too high. Nor do many Canadian flinch at the markups created when they spend $100 on a pair of jeans that cost less than $10 to make in China.

Furthermore industry advocates say, most of the large profits Canadian petroleum companies have been making in recent years have come from the oil production side of the business, as opposed to the distribution.

We notice what we see
So if both Petro-Canada and Loblaws are making good profits, why do we only complain about the former?

One likely reason for their fixation on gas prices is that when consumers fill up their tanks, they have to stand around for several minutes, with nothing to look at except the per-liter price, which is posted on the pump. As a result, they have plenty of time to study the per-liter price and to think about how it will effect their finances. Yet when consumers shop for groceries, they only look at individual product's price for a second or two, before throwing it into the cart. Who remembers how much they paid per pound for the bananas they bought last week?

Another interesting parallel is home heating oil. Many Canadians spend as much on home heating oil as they do on gas. But because, Canadians don't have to pump the oil into their tank themselves, few have any clue how much its costs, and there are far fewer complaints.

If the petroleum industry really wanted to stifle complaints, they should install television sets beside the gas pumps, so Canadians wouldn't have to stare at those darn per-liter prices while they are pumping.

 

Peter Diekmeyer (http://www.peterdiekmeyer.com/) is a Montreal based business writer.

 

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