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Biggest Comment Ever - The Response

Biggest Comment Ever - I had to post it.

You could call it: PumpTalk - The Exam Question. 

Below is a comment from Rob, who has asked a number of questions on this site over the last year or so.  I've answered some and watched as others stepped in on occasion.  This time he's come back with a number of detailed questions about our decal.  If you've ever stared at our pie-chart pump decal while filling up, you may have asked yourself the same things.  So, rather than respond in a tucked-away comment section, I've posted his comment below.  I will then post a response as soon as I can pull up some data.  I'm already getting exam flashbacks of sweat pants, all-nighters and Jolt Cola....

This has not been edited in any way.... 

Hi Jon,

Lets take another tack, and ask some pointed questions that you might be able to provide some honest numerical answers to...

From those small stickers on the pumps - "Understanding Gas Prices XXXX Canadian Average Pump Price", where XXXX is the year in question...

As a starter, I can't remember when the first of these went up, but I think it was 04 or 05.  Anyhow, they usually show up in the earlier part of the year, so when is the '08 sticker going to come out?

Now the background for my questions:

On all the pumps now, the '07 sticker is the one that shows, and the pricing split is as follows (at least for here in Ontario):
48% Crude Costs
17% Refining & Marketing Costs
32% Taxes
2% Profit
(the fine print at the bottom of the sticker states specifically that this is "Petro-Canada Refining & Marketing Profit". 

However, last week I happened on a pump that still had the 2005 sticker up - any guesses on the changes???
47% Crude Costs
16% Refining & Marketing Costs
35% Taxes
2% Profit.

Now for the questions:

1. Between '05 & '07, the PC Refining & Marketing PROFIT went up by 50% (2% - 3%).  What does this represent as a dollar figure?  (and it seems to me like that's one heck of a growth rate on the back of the consumers wallet)
2. Also, the fraction of Crude Costs went up by 1 percentage point (47% - 48%).  Does Petro Canada, as a complete corporate entity, not just the Refining & Marketing arm, earn any profit on Crude which is contained within either the Crude Costs or Refining & Marketing Costs portion of the pie?
3.  Assuming that answer to the above question is yes, what is the %Petro Can Profit on Crude Costs portion of the pie alone?  And what is the fractional increase from '05 - '07 both as a percentage and as a dollar figure?
4.  Given the massive price fluctuations during '08, I'm guessing that we might not actually see a pump side sticker this year as the Profit piece of the pie would show another drastic increase.  Can you provide any of the '08 numbers here?

Finally, looking at the pie chart on the stickers, it becomes apparent that the stickers are meant to draw attention to how much Tax we pay on gas, as this is the only portion of the pie which is cut away from the rest.  I gather this is meant to try and deflect the anger we feel at the pump when the prices fluctuate so wildly.  However, of the 32% that makes up the taxes portion of the pie (2007), in Ontario the taxes consist of a $0.10/l Fed. Excise Tax (fixed), plus a $ 0.147/l Provincial Tax (fixed), plus GST - the ONLY variable tax... So when during a given year the price fluctuates from the $0.85/l range up to the $1.40 range, what's the actual tax fluctuation??? only the GST, which if at 5% means a for a change of $0.85 - $1.40, an increase of $0.55/l, only $0.0275/l of that change is related to taxes - the rest is ALL attributed to the remainder of the pie chart, a significant portion of which I can only assume is PC profit (and again, I don't just mean Ref & Marketing, but PC as a complete entity).  I have to admit that every time I look at that sticker on the pump, I only get more annoyed with PetroCan, not the government, because of what is clearly a veiled attempt to pull the wool over the eyes of the customer.

Perhaps it might prove beneficial to us, if you were to show an example of profit (again PC Corporate, not just Ref & Marketing) on two daily price examples, one at $0.85 per litre, and the other at $1.40 per litre, rather than as an annual average breakdown.

Rob

Comments

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Rob

Hi Jon,
Two quick things - one my mistake - the profit % on the '07 chart is 3%, on-re-reading I think I mis-typed 2% for the '07 breakdown. Also - I'm a first time poster - so not the same Rob who's posted before (not that it really matters).
--Rob (Oakville, ON)

Jon

Sorry Rob. My fault. The software showed all comments from the same 'Rob' but the emails were different. I'll correct that in my response...which I am working on.

Jon

Al Ennis

I would like to comment on on Rob's letter. Firstly, the percentage break down on the pie graph on the pump does not reflect on the pump price that is shown on the pump at any given time. It is average break down over the year. There are many times when prices are low that the profit is in a minus figure.

I think a better way to explain the companies profit would be to relate it to return on capital employed. It would seem to me to be a better way to justify the companies profits. If the oil companies were making such high profits as most people think they are then their stock would sky rocket which is not the case. As I have said to many people who complain about gasoline prices. If you think the oil companies are making so much money then why don't you buy shares and share in the excess profits.

My last comment is to relate gasoline prices to the bottled water that many people buy on a regular bases. The water company put a filter on the city water and put it in a plastic bottle and deliver it to the store. Cost of product is next to nothing compared to crude cost. There is no tax and very limited capital investment as compared to the oil companies investment. People will pay double the price for 500 ML as they pay for a Liter of gasoline and not complain about the price. The bottom line is they could have gone and had a drink from the tap for next to nothing and in some cases the tap water is better for them than the bottled water.

I don't like paying the price for gasoline either but you have to put it into prospective.

Al

Rob

Hi Jon,

To respond to Al...

I understood all along that this was the "average" annual pump price & profit - as is stipulated in the Decal title, which I also quoted above, "Understanding Gas Prices .... Canadian 'AVERAGE' Pump Price".

So while yes you are correct that it does not necessarily state the profit at any given point in time, I would hazard a guess that the PC Refining and Marketing Profit is never in a Negative condition as you suggest, but rather more or less consistently hovers near the annual average +/- 1-2 percentage points. The profit number that would actually fluctuate wildly from day to day, week to week, month to month etc, would not be the refining and marketing profit, but the profit associated to the Crude drilling / production arm of PC - the profit number hidden in the "Crude Costs" part of the pie. Perhaps Jon's numbers will flesh this out for us.

Let's take a look at two potential sources of Crude for PC (there may be several others but these two will serve for the example):

One source is the Crude they may have to buy from outside sources or partners which they don't own in order to make up any shortfall that may occur between what they themselves can produce and current pump demand. Here they are limited to paying the market price per barrel, subject to any bulk discounts or long term contract discounts they may have. Accordingly they would likely only add a specific % margin to the cost of that barrel, with that % margin likely being relatively fixed through the year.

The other Crude source would be that which they produce say from conventional drilled wells, tar sands production, or off shore platforms which they own outright. Each of these types of sources has a roughly fixed cost to produce, meaning it costs $XX per barrel to get it out of mother earth. This cost for the most part is relatively steady for a given source type (other than for off shore platforms which are more subject to weather shut downs / re-start costs). So while the cost to produce remains relatively constant, the sell price on the open market goes up and down with the world price per barrel. And my guess is that, though this is just internal accounting, the PC Crude production arm of the company, while having relatively fixed costs per barrel to produce, actually "sells" this crude to PC Ref. & Marketing at the current market prices. In this way, the Ref & Marketing profit level will appear to be low (2-3%) and remain relatively constant, even though the pump price has fluctuated greatly over a given year.

Let's say just for the sake of example, that it costs PC approx. $ 35 per barrel to extract oil from the tar sands, if the market price per barrel rises from $ 48 to $58, the approx profit per barrel goes up by $10, but the costs don't (ignoring the fact that it would cost more to buy the gasoline to run any gas powered equipment used to get the oil out of the ground). And my guess is that any such profit margin, as far as the Ref. & Marketing decal in question goes, is hidden in the "Crude Costs" part of the pie.

As to why I don't invest... if I had the disposable income to do so, I would.

Rob

Chris

I have to admit, I have had much the same questions as Rob. What exactly is covered in the "profit" slice, just the gas station's profit? Since Petro-Canada basically pays itself for the Crude costs and the Refining costs, are there profits lumped in there as well? If so, the total profit going towards Petro-Canada as a corporate entity would seem to be much higher than the 3% shown at the pumps.

pat sommers

I was just wondering why the gas prices have gone up in the past two months seeing is how many more people are losing there jobs I know that they say theres a high demand for gas but if you think about it over 200,000 people in ontario have lost there jobs and many dont need to fill up so why the jump in price theres really not in lots of candians eyes

Tom from Burlington

I don't care what anybody says and try to justify the high price of gas at the pump, the truth of the matter is that when the price of oil was at 140 dollars per barrel, we were paying 1.40 dollars per liter at the pump, now oil is at 72 dollars per barrel and we're paying 1.02 dollars per liter, if one did the math, we would discover that we are paying twice the price we should be paying, and if the oil companies were not making a killing, how did they manage to post record high profits for 2008 when everybody else lost money? I think THE OIL COMPANIES STARTING WITH PETROCAN BEING THE WORST ARE RAPING US EACH TIME WE FILL OUR TANKS!!!!!!!!!!

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