A Little Perspective
September 18, 2008
In the last week we have seen gas prices rise and fall quite dramatically. As a result, the events surrounding Hurricane Ike have generated a lot of discussion on this blog and in many other arenas. Much of the discussion revolves around the impact of the markets on the price at the pump. Like in anything, not everyone agrees.
A few years ago, Hurricane's Katrina and Rita unleashed a path of devastation and human tragedy that is still hard to fully comprehend to this day. As we all learned through that event, the US Gulf Coast is home to a large portion of the American refining sector along with many oil platforms. In the days that followed, gas prices rose and many accusations were leveled against the industry. This site didn't exist then, but I did many media interviews to try and explain what was going on and respond to the accusations of unseemly behaviour. As we all know, pump prices came back down and most people moved on.
In the days that followed, two reports were issued on the subject with little fanfare. One from the Competition Bureau of Canada and another from the Federal Trade Commission in the US that are worth looking at, especially in light of the events of the past week. Please read on.
The situation we've been through with respect to Hurricane Ike is certainly less traumatic than what occured following the devastation of Katrina and Rita. Many of the refineries learned from that experience and shut down their facilities in advance of the hurricane to minimize damage. Supply concerns can have an impact on the market and before Ike hit land, about 20% of the US refining capacity was already dark. Hopefully, these measures will allow the facilities to re-start with minimal issues once they gain access to reliable power.
One similarity though, is the heated discussion regarding what may or may not be occuring with respect to gas prices. Just check out the comments on my last post. Those same accusations were made the last time Hurricanes Katrina and Rita topped the news. When the facts came out afterwards, most everyone had moved on. No suprise there. But the work that was completed and released in 2005/2006 provides some great perspective that is as relevant today as it was back then. You can find the full Competition Bureau of Canada report here and the Federal Trade Commission's report here.
While I encourage anyone with strong views to take a look at the reports, I offer up a few unedited excerpts for your review.
From the Competition Bureau of Canada report:
What did the Competition Bureau find?
The Bureau found that the major reasons for the price shock were uncertainty over supply caused by a lack of data immediately following Hurricane Katrina, the closure of several refineries in the Gulf Coast region, and damage to pipelines that supply oil from the Gulf Coast to other refineries in the U.S. According to the Energy Information Administration in the U.S., 10% - 15% of total U.S. gasoline production was halted as a result of the hurricane.
The supply interruption broke down the normal relationship between crude and wholesale prices. With a lack of refined product available to North America, prices increased dramatically even though the cost of crude did not change. Price increases are a normal outcome when supply is reduced and demand remains constant. Market forces increase the price in response to a shortage of gasoline. At significantly higher prices, consumers will consume less gasoline, which will reduce the likelihood of shortages.
In addition, historical data suggest that estimated gross refining margins are similar between Canada and the U.S. Right after Hurricane Katrina, there were short-lived differences between the two countries. Statistical analysis showed there was a lag on wholesale prices and gross refiner margins between selected Canadian and northern U.S. cities. However, the prices and margins quickly re-adjusted and converged to similar levels after mid-September. If Canadian refiners were engaging in an anticompetitive fashion, we would expect to see a protracted major deviation in wholesale prices and margins between Canada and the U.S. The data did not support an allegation of a co-ordinated practice of anticompetitive acts.
From the US report (which is almost 200 pages long):
Based on well-established economic principles, the price increases were roughly in line with increases predicted by the standard supply and demand paradigm of a competitive market. The regions with the largest price increases were those where supply was most greatly affected by the hurricanes, and the regional price differences were consistent with both the reduction of supply to particular regions and the cost of diverting supply from one region to another. Inventory levels dropped as suppliers increased gasoline sales to the market. Capacity utilization went up as refiners deferred refinery maintenance. Imports increased as suppliers brought additional supplies to the United States. Moreover, the effects of the hurricanes on prices largely disappeared within four weeks after Rita. Staff found no evidence suggesting that the recovery should have occurred in a shorter timeframe; indeed, in light of the extent of the destruction, the evidence indicates that suppliers responded quickly to the supply disruptions caused by the hurricanes. p.62
I certainly understand the frustration when the price at the pump goes up. If you are looking for answers, there is no shortage of people prepared to step forward and offer one. We have been consistent in our efforts and explanations, as boring or complicated as they may be. Unfortunately, despite readily-available evidence to the contrary, the same people are still making the same accusations they made the last time.
It is great to site reports from a few years back, but all most folks seem to want is a simple and honest explanation. I believe what frustrates most people is the apparent lack of honesty and belittling response from Oil Companies.
Example: Recent events with the storm season in the US and the gas shortage in Alberta due to the problems with Edmonton Refinery.
On one hand, the hurricane resulted in a decrease in capacity in the US (creating a perceived supply shortage). Assuming demand stays constant, price should go up. But the big assumption is that we (in Canada, and for the purposes of this example, in Alberta) belong to this "big market".
If that was true, then why, when Edmonton Refinery's Cat Cracker went down, and there was a shortage of gas (clearly observed by the gas stations running out of gas), there was no change in gas price. Furthermore, if we are apart of this great market, why didn't Petro-Canada simply buy gas from the US.
The fact is, Alberta doesn't buy or sell gasoline to the US. Is that not why the gas stations ran dry? Therefore, we must not be so connected in the "big market" as Petro-Canada has claimed. So what is the justification for the gas price rise during Hurricane Ike?
This is where I believe people get frustrated. The responses from Oil Companies do not appear to be honest. People do not like to be fooled. It creates an adversarial environment. Pumptalk or other PR forums can't work in this environment.
I think most people would respect a response from Petro-Canada if it was honest, even if they didn't necessarily like the answer. If Petro-Canada woudl simply say "we are a corporation that is legally bound to create value for our shareholders and that means attempting to make as much money as possible including charging at the pump whatever you the consumer is willing to pay" then at least it is honest.
One can site as many reports as one would like, until Petro-Canada can be honest and straight forward, no one is going to trust a word they say. I don't need a report to prove that.
Posted by: Markus | September 18, 2008 at 10:35 AM
How's this for a little perspective?
Petro-Canada is a corporation. As a corporation, its mandate is to generate the highest amount of profit possible, which will benefit its shareholders with higher stock prices and dividend payments. In order to do that, the corporation must make decisions based on sound economic theory.
A corporation cannot cut prices and reduce prices 'out of the goodness of its heart' - it is simply not set up that way, and in fact would be in breach of corporate laws by doing so.
So, to all you people who are complaining about high gas prices, the corporation is doing what it was designed to do - what it has been mandated by society over the last 100 or so years to do.
If you want this to change, may I suggest buying shares in Petro-Canada and start pressuring the board, as a shareholder, to change its focus from what is good for the shareholders, to what is good for society as a whole. Naturally, this will mean you’ll have to settle for less than $0.20 per $34.34 share. And be prepared for your shares to keep dropping in value – they were worth $48 a few weeks back, and $61.85 a few months ago. By the way, when stock prices go down, it doesn’t typically mean that the company is making record profits off of you.
Or, perhaps you would be more successful in pressuring your MP’s to include elements of providing and promoting social and societal well-being in corporate law. Even then, it may be that higher gas prices, though inconvenient, promote alternative methods of transportation that are deemed to be at least as important as the car.
Cheap gas helped shape our society into what it is today. The days of cheap gas may be ending. Petro-Canada’s gas prices are only the messenger of this change. Don’t shoot the messenger because you don’t like the message.
Will Jackson, Etobicoke, ON
Posted by: Craig Jackson | September 18, 2008 at 02:58 PM
Wow Will, how long ago did you send your resume in to Petro Can?
I like how if a ordinary citizen convinces someone that a car/house/(insert item here) is more valuable by deceipt, they can face criminal charges for fraud. When a company, especially oil companies, do it, its called "corporate law" and "providing value to the shareholders". Call it all the nice words you want, its gouging.
Here is a word to go with those, its called "responsibility". To make billions upon billions upon billions of profits every quarter while people go hungry so they can afford gas to get to work is, well, I cant find a way to say it without using vulgarity so make up your own response.
Posted by: Ross | September 18, 2008 at 03:58 PM
@Markus
I am an employee of Petro-Canada, but I don't speak on behalf of the company and everything below is my personal understanding and views.
We do live in a big market.
Take on this analogy:
Assume I sold apples from the tree in my back along with all my neighbors on my block. We can generally keep up with demand for apples in my city.
What if a hailstorm destroys the apple crop in the next city and the demand for apples is still the same there? They need apples, and because EVERYONE out there knows that the hailstorm killed the apple crop, nobody blinks an eyelash to higher apple prices.
What's to stop them from coming over and buying my apples out for the price I happen to sell them here for?
No borders impede that movement, and some agreements between the cities encourage it.
The only thing I can do to protect my market and ensure that the people who come to my apple stand can still get apples is to charge more.
I may be able to give my most loyal and frequent customers a discount, but I still have a family to feed and bills to pay.
Now, if some lightning storm hit my apple tree and killed it, but all my neighbors were still selling apples, there might be a slight raise in their prices, but nothing so significant that people would notice. The price of apples won't rise or fall significantly on the back of single producer in a single market.
--------
Petro-Canada could, theoretically, sell lower-priced Alberta gas to US distributors, leaving us out to dry. Instead they chose to sell their gas at the market prices, give me a discount because I am a loyal customer, and probably earn less profit from overhead than a bulk sale.
At my local gas station, gas was 123.9 when the cracker went down in Alberta. I gased up on Friday where the posted price was 119.9. Not the 20 cent leap from Ike, but it still had an impact.
I think that people forget when dealing with big corporations that the things they do aren't malicious. Petro-Canada doesn't charge what it charges because they hate humanity; they're charging the price that the market would support.
I think that the PumpTalk blog has been extremely straightforward about a very complex topic. People only see the posted price of gas but there are so many factors to that price.
As far as being "straightforward", Petro-Canada has been extremely clear about its mandate to create shareholder value as a company - have a look through the "Investors" section of the Petro-Canada website.
That said, it's not the only value that drives the company.
The point of the blog isn't to tell you how and why Petro-Canada will drive its profit this year from gas prices. The point is to demystify why gas prices are what they are and what factors are driving that price.
And I've been particularly proud of how the company has approached that subject.
Posted by: Theresa Litorco | September 22, 2008 at 02:13 PM
1. Sadly Petro Canada missleads consumers about the profits that they make. Specifically they separate their crude production business from the pumping business. If they disclosed the profits on the crude production and pumping services thier profits would be higher.
2. Myth number 2 is that oil and gas prices are based on demand for oil and gas. The US congress has shown that market speculation has contributed significantly to the rise of oil and gas prices.
3. Myth number 3 is that current crude prices should influence pump prices. The gas at the pump was bought months ago and has been in refineries and transportation for months as well. Understandably the crude used to make gas has to be replaced but if gas companies were not gouging consumers they would not be reporting obscene profits now would they...
Posted by: Dan | September 27, 2008 at 11:01 AM
Dan
Thanks for your comment but I need to challenge a few of your "myths"
Our Annual Report and financial information is available for free at www.petro-canada.ca under the Investors Section. It tells the complete story.
We do operate our businesses seperately as we have to compete at each level - refining, wholesale, retail, etc - as there are companies who operate in only one area of the business. That's a fair way to operate and a good way to run a business.
#2 Canada has resources, but nowhere near enough to have any influence over price. Commodity prices are set by the markets and we are a price taker. There are many differing opinions on why commodity prices have gone up. The bottom line is both gasoline and crude oil are commodities that are influenced by many global factors.
#3 Crude oil. I've posted on this before. I'd find the link for you, but my time on this library computer is about to expire and the kids are getting hungry.
Talk to you later.
Jon Hamilton
Posted by: Jon Hamilton | September 27, 2008 at 04:41 PM
I have read the above posts and have also parused the PetroCan Site. Throughout all of this, I have seen no mention of what impact the different exchange rates of the various curencies have on the Gasoline pump price. In Canada's case, there is usually more than a 20% differential between the Cdn. and US dollar. It is my experience, that in disecting pump prices, I am able to account for all of the common variables, which effect Gasoline prices, and still the pump price in Canada remains much higher than at nearby stations in the
USA. However; Even when I calculate the exchange rate into the gas price, Canadian consumers are still paying more than our Southern cousins at the pump.
Now my view of the exchange rate and it's ties to international-trade and corporate enterprise is that Canada's low dollar aids the Cdn. producers, to sell more of
their goods to the USA. So, if they are marketing Canadian product to the US for 75/80 cents US... why are they then turning around and selling the same product (apperantly worth 75/80 cents US)to Canadian consumers (exchange added) for about $1.20/$1.35 Cdn.
Jean
Posted by: Jean H. Broeckx | February 12, 2009 at 02:19 PM