09 July 2009

The Great NL Gasoline Price Fixing Scheme: Summer 2009 edition

Gasoline prices in Newfoundland and Labrador are set by the provincial government.

While gasoline prices across North America have been dropping recently, the government’s price fixing mechanism hasn’t kept pace.

ch.gaschart To give an idea of the consequences, take a look at this chart.  It shows the average Canadian price per litre (blue) and the average price in Newfoundland (red).

Look closely at that blue line which has been on a steady downward trend since June 20.  The average stands at $1.01 per litre on July 9, down from  $1.06 at peak.

In Newfoundland, the number has pretty much been a steady average above the current average $1.12 per litre since June 20. There were even a couple of upticks in the Newfoundland number during the period.  The current average prices is less than two cents down from the peak.

If none of the previous arguments against government-controlled prices worked, then surely this chart should cause you to sit up and wonder why gas in this province is 11 cents per litre above the Canadian average. 

There’s obviously something wrong.

Seriously wrong.

There have been two big winners from gas price regulation in Newfoundland and Labrador and neither of them is the average consumer.

Gasoline retailers have been gifted with steady and predictable profit margins. They buy at market prices and sell at the government price.  As you can see from the charts below, that can be pretty sweet.

The provincial government also wins.  Its taxes are buried in the price and when the price stays high based on the vagaries of some contrived formula, its tax haul stays nice and fat.

Not surprisingly, there aren’t any politicians calling for the elimination of gas price fixing by the provincial government. In fact, one of the guys who pushed hardest for this scheme – St. John’s mayor Dennis O’Keefe – has been conspicuously silent about the whole issue.

And it’s not like this is a new phenomenon.

ch2.gaschart Over the past four years not only have prices been substantially above the Canadian average, there are too many occasions where the local prices have bucked the downward trend.  And on some of the upward trends the local price jumps have been disproportionately highly compared to the national average.

Just for good measure, let’s look at the trending over six years.

ch3.gaschart

 

More of the same.

The only astonishing thing in this has been the dead silence from consumers, let alone from the various self-appointed consumer advocates out there, one of whom has managed to find himself a sweet job leading a Great Sittee.

If you didn’t think there was a reason to scrap the government-dictated gasoline price scheme in this province, surely the events this week and this evidence should make you sit up and take notice of what is a fairly obvious problem.

-srbp-

18 comments:

Anonymous said...

Does the Canadian average include Newfoundland & Labrador? If it does then it doesn't show the true gap as NL raises the average for Canada.

Edward G. Hollett said...

It also doesn't include labrador prices, apprently since those really show up the gap between NL and the national average.

The gap is wide enough. in particular, though, I'd suggest people look very closely at the movement in the Cdn average versus the Nl price. You'll see these inexplicable leaps upward at times when the Cdn average is stable or in a downward period.

And that downward period includes the NL price.

Anonymous said...

Ed:

what would be interesting is the percentage spread of average Cdn gas prices versus avg Nfld prices prior to gas regulation. We would then see whether this spread today that exists is reasonable or not.

Edward G. Hollett said...

it would be interesting but I haven't been able to find the data so far.

As I've said before, though, I just look at the variation in average price where most prices are not fixed by government compared to the one here that is.

Somethings become pretty obvious.

We were told this price fixing would benefit the consumer.

Evidently it doesn't benefit the consumer if we don't see the benefit of price reductions that are occuring elsewhere but see primarily the increases.

There are several points where you can see that the NL price drop was lower over time compared to the average and that, as prices went back up elsewhere, the local price went up again, even though we'd never seen the full benefit of the price drops.

On the flip side of that we don't see any places where the price increases were held back to the same degree When you look at the spikes where the increases occured despite drops overall and where the spikes were markedly higher than elsewhere you can see nothing of benefit to local consumers.

And if you look at the overall price variation, there is no flattening of the peaks and troughs so that on average consumers do better.

They clearly don't.

We know price fixing doesn't lower prices and it doesn't stabilise them so that voer time, the consumer benefits from stability.

At best price fixing replicates the market fluctuations. In that case, there is no benefit to the consumer. The current system is no more transparent than the market one and in some respects is far less transparent.

At worst, consumers are paying more, over time, than they would otherwise. in that case consumers are screwed.

The local consumer was sold a bill of goods. The thing is a flop and should be done away with.

Edward G. Hollett said...

Tim:

The only thing that gets a comment deleted these days is spam.

Plugging your own product and website without contributing to the discussion is spam.

That's why your comment has been removed.

best of luck with your project.

Anonymous said...

Ed:

There is and was always a apread between prices on the mainland versus Nfld. I am just unsure that the spread was less or more than it is today. That is why it would be interesting to see whether the spread is consistent verus the past. That would give us a better idea whether this regulator is a good idea or not. It would also give us an idea whether we were really getting gouged years ago or not as that was part of the rationale of this regulator to begin with.

I am going to sit on the fence on this one right now. Price regulation hurts on the way down for sure and I think it helps a bit on the way up but whether we are consistently paying more (especially when the volatility is lessened) would be greatly helped by data supporting the spread over time between Nfld prices and mainland prices.

Edward G. Hollett said...

Where on the six year chart is there any evidence to support the contentions that government price fixing "helps on the way up" and somehow provides that "volatility is lessened"?

If anything, it shows we aren't helped on the way up and we damn well aren't helped on the way down. As for volatility, you need only look at the price jumps when everyone else is going down to realise there is no less a tendency to volatility than in a system without government price fixing.

In the years before government price fixing, we were told we were being gouged and not one shred of evidence was presented to back up that point before government price fixing started.

Why should we continued to be screwed when the evidence is in front of our faces simply because no one has data from the 1990s ready to hand?

At least before price fixing, Geroge Murphy was right every week.

Since price fixing started, he's pointed to price reductions but - because of the convoluted and secretive pricing system - somehow the breaks never seem to get to the consumer on many more occasions than used to be the case.

Incidentally, how many times has Grorge predicted an increase and it didn't happen?

That would be an interesting stat compared to the number of times we have come within fractions of a cent of hitting the magic interruptor formula (like this week) and wind up paying too much for gas for another week?

WJM said...

I'd like to see an index-chart version of this same data.

herringchoker said...

Hi Ed,

You losing sight of the forest for the trees I think. Regulation or not, NL is always going to have higher than average fuel prices because it has higher than average taxes on fuel. (That was the case before regulation as well.)

NL has the second highest road tax (16.5 cents per litre on gasoline) in the country. Only BC (16.8 cents) has a higher tax. NL also enjoys the effect of the full HST being charged on gasoline, whereas in most of the country only the GST (5%) applies.

What's the effect of higher taxes? Well, according to this week's MJ Ervin price survey, St. John's prices were 12.2 cents above the national average (its an off-week in a falling market) taxes in. But 7.4 cents of that was due to higher taxes. Going back to June 16th. St. John's prices were 3.4 cents above the national average, but they were 3 cents below the average on an extax basis.

Regulation or no, NL's always going to have higher fuel prices so long as the taxes stay where they are.

Edward G. Hollett said...

The domestic tax issue is another matter altogether herringchoker but you make a good point.

Prices here will be higher due to provincial taxes and, if I recall correctly, one of the single largest hikes in prices before regulation came when the Harmonised Sales Tax hit gasoline.

They will be higher in some areas of the province for reasons of delivery cost etc and other factors.

But with all that to one side, the government price fixing scheme seems to have the effect of holding prices even higher than they might otherwise be as a result of all those other factors.

AIMS recently pegged it at about 1.5 cents per litre on average. Some have disputed this but on the face of it, there seems to be some support for their conclusion from the long-term comparison of pricing.

Ervin's rack price survey shows that local retail is subject to the same wholesale cost of gasoline as other jurisdictions.

There's been a five cent per litre drop in the same period where the local retail price has moved downward about one cent or so.

Taxes account for some of the retail price variation but, as I made the point in the main article, local consumers are not seeing ANY benefit of the lowered wholesale cost.

Essentially, the government price fixing scheme has done what all price fixing schemes do: they eliminate competition. There is no incentive for anyone to sell gasoline for less than the legal maximum.

We are seeing just in the past two weeks the direct result of this: wholesale costs go down but the retail price stays roughly where it was when gas was about five cents a litre higher in wholesale cost.

That's a nice spot for the retailer and the taxman but it sucks to be a consumer in such an environment.

herringchoker said...

Well there's actually plenty of incentive for individual retailers to lower their price. They can increase their market share by taking a smaller slice of the margin on each litre sold. Higher throughputs should lead to higher overall sales and, correspondingly, higher pofits for that retailer. As it doesn't appear that any retailers are reducing prices, even though they have plenty of room to do so, I have to agree that there doesn't appear to be any competition in the marketplace. And markets without competition are exactly the ones that need to be regulated.

Edward G. Hollett said...

Absolute rubbish.

Your argument is this: because the current system fixes prices and eliminates competition, we need regulation to keep an eye on the price fixing and control the competition.

You've identified the cause of the problem as the solution.

In the current environment there is no incentive to try and gain a larger market share since everyone can take a guaranteed slice of the price-fixed pie and go away happy.

They can reduce service (as they have done by cutting back on the number of stores) and thereby increase the profitability of each one remaining.

In a competitive environment (the one that existed before), there is the incentive to do as you suggest.

In a system of price fixing, competition is - by collusion - eliminated.

The only difference between the system in Newfoundland and Labrador and what the old combines act used to fight against is that the scheme here is established, blessed and controlled by government and endorsed by people who make arguments like yours.

We had people claiming there was collusion and price fixing but had no evidence of it.

Their solution to their perceived problem was to bring in a system which guaranteed price fixing and that blessed it by law.

Holy crap.

And then your argument is that because there is price fixing today run by government and competition is gone, we must keep the source of the problem to keep an eye on things because there is price fixing and no competition.

Evidently you are a fan of Kafka.

herringchoker said...

Actually I was just having a bit of fun with you.

However I believe my original point still stands. If Newfoundlanders are ever going to see real savings at the pump it will have to come from lower excise taxes. Price regulation, even if you don't like it, might drive fuel costs up be a penny per litre. (I wouldn't rely too closely on anything AIMS puts out, or the Centre for Policy Alternatives, for that matter. They both have glaring problems with their methodology for arriving at fair prices). Governments take many times that on each and every litre. So if savings are to be found, look to the fellow who's pocketing one-third the revenue every time you fill up the tank (its not the refiner or the retailer).

Also, you've fallen into that favourite technique of journalists of picking a point in time and generalising the results. If petroleum margins are high now (which, I agree, they are) its only because wholesale commodity prices have fallen away since that last time the PUB set prices. That's what happens when any market tops out in price. The same thing happens when markets reach bottom and start to rise again, except in that case its the consumer that benefits. In a regulated market consumers benefit when prices are rising, industry makes it back when prices are falling.

Edward G. Hollett said...

You'ree absolutely right that the tax component needs to be lower to rbing it in line with the rest of the country. It's part of the busines sof being competitive.

As for picking a point in time, I've been writing about this for some time now. This was just the latest point in time. After the second one, you start to wonder what is going on.

I'd disagree on the consumers win and then the retailers win. If you look at the pricing trends, there are fewer instances I can see where prices went up elsewhere and didn't jump here as well in short order, versus the current situation where costs have dropped but prices haven't.

Then you have to look at the instances over the course of time where prices were stable or dropped elsewhere but went up here.

Your argument is the common one used to justify regulation: consumers win on the way up and then retailers win on the way down. When I look at the experience over six years, I just don't see that at all.

To back to your earlier argument about retailers being able to drop prices and make more by selling a larger volume, I can hopefully take a game of silly bugger with the best of them.

Your argument though, missed a fairly noticeable trend in the St. John's area. Since regulation, the number of gas retailers appears to have dropped. I haven't studied it in detail but there appears to ne a noticeable number of operations that have shut down.

By the same token, I don't notice that retailers have built new stations, at least in the same areas.

I suspect this as a conscious decision to improve the profitability of the operations by cutting down on overhead.

In a regulated environment, retailers can operate fewer, larger locations, sell as much or more gasoline at a guaranteed higher margin overall and thereby improve their bottom line.

Cutting costs is as effective a way to improve profitability as anything else.

herringchoker said...

Well....actually....the long-term trend is for fewer retail outlets with higher throughputs at each station. It's a continent-wide phenomenon, although I expect the same thing is happening in Europe.
It's been happening irrespective of regulation, although there is an argument that reguilation is an attempt to slow the decline in retail outlets by keeping marginal stations profitable through higher prices. (That's actually the stated purpose of regulation in NS.)

Evidence? We don't need no stinking evidence in cyberspace, but I was able to dig up a few nuggets. See slide 14 here: http://tinyurl.com/lzfdyd.

My own information (sadly I don't have a link) says that the number of outlets in NL has fallen from 484 in 2005 to 439 in 2008. Comparable numbers for Canada are 14,054 in 2005 and 12,684 in 2008. As you will see, there were about 20,000 outlets nationwide in 1991 so the trend supports your suspicions, although I might argue that fewer outlets is a sign that there isn't any money left in petroleum retailing anymore, because the margins are too small. Witness PetroCanada's decision to quit NL entirely.

Is the trend affected by regulation? Not really. Over the same three year period (2005-2008) Ontario, an unregulated province, lost 400 retail outlets, falling to about 3400, or more than 10%. But Alberta actually saw an increase in the number of stations, so go figure.

Cheers

Edward G. Hollett said...

Interesting.

I am going to have to take a much closer look at those slides. Any chance you have the presentation that goes with it?

herringchoker said...

Well, obviously the presentation was done by Michael Ervin of MJ Ervin. I pulled it down from the CPPI website here (http://www.cppi.ca/index_e.php?p=28).

I didn't actually see this presentation, I just got lucky when looking for some data. Slide 16 is particularly interesting as it shows where margins have been going over the past two decades. However, I should note that margins tend to be compressed in regulated markets and higher in unregulated markets; which may help explain why Alberta has more outlets than it did three years ago.

Edward G. Hollett said...

That last conclusion might be true except that there are more unregulated than regulated provinces in Canada.

As such, if the number of retailers has been dropping consistently since 1991, that would mean something else or some combination of somethings is driving the decline.

It would also mean something else is driving any growth in Alberta.

Supposedly "narrower margins" in regulated provinces isn't shown anywhere in this chart, but it is interesting to note that regulation occurs in the smallest markets (PEI, NL and NS).

These are not places that tend to drive Canada trends by any stretch and the margins in these small markets are not evidently enough to affect profitability nationally.

In other words, all those comments of yours might be true except for what we already know.

We also don't know that those margins are narrower in regulated areas, as you state. The slide you referred to shows a pretty wild set of fluctations on the refiner side but that margins nationally on average are certainly not dropping.

That of course brings us back to regulation. Margins aren't going to drop when the wholesale price goes down five cents and the regulation (government price fixing) delivers an extra four cents in gross profit compared to what you could get in an unregulated market.

That's actually something we do know since it is the environment right in front of us now, today, and demonstrated based on both government and private sector sources.

And that brings us back to Slide 3, the public perceptions of fuel prices.

Put that with your comment about the explanation of price fixing in Nova Scotia.

Governments explain things different ways and policy isn't always based on logic and rationality.

In both NS and NL, government controlled price fixing came in with parties looking to curry favour with voters in advance of an election.

There was a very vocal lobby here, led by people like Doc O'Keefe, who played on these perceptions without any evidence they were real. They didn't need evidence; they were a political lobby.

Before that goverment had rejected regulation flatly because there was no evidence it did anything positive. And since government in a province can't impose fair controls (dictating wholesale AND retail price) then the whole thing was something between a farce and a fraud.

What we wound up with in both NS and NL was a farce and a fraud delivered by politicians looking for a quickie boost. It's nothing more than that.

The thing stays not because it works but because there's no pressure to get rid of it.

Government makes money and retailers make money. Consumers don't bitch, except maybe at oil companies. Cabinet ministers like Kevin O'Brien make stupid comments about the cost of regulation, largely because they have no idea what they are talking about. They just read the prepared briefing notes.

Therefore we are consistently screwed across Newfoundland and really screwed in Labrador.

And some people step forward to explain why we are better off getting screwed.