Politics and gas prices
Posted in Commentary on May 5th, 2007 by Sacha PeterI’ve noticed an increasingly large amount of banter from politicians complaining about gas prices. Every “solution” that I have heard will result in increasing the price of gasoline. This includes NDP proposed legislation for regulating the price of gasoline. Thankfully this legislation won’t stand a chance of passing since the government has no obligation to consider members’ bills.
The economics of gasoline are fairly simple to describe, but the politics surrounding it is complicated. The reason why this is such an immensely political issue is because gasoline prices are something most consumers see very periodically in their lives – anybody with car will be able to tell you what the price of gasoline is. If instead I asked you what the price of a pound of red peppers are, or the price of a 4 litre bucket of ice cream, people don’t notice and thus don’t get so uptight when these products do exhibit price fluctuations. Just as an experiment, I would suggest noting the price of red peppers and ice cream every time you go into the supermarket – it’s just as volatile as gasoline, but for different reasons.
Gas prices depend on the price of oil. Oil has to be transported to refineries and then reformulated to comply with local regulations (each jurisdiction typically has a list of additives that are required). Then this fuel is transported to local stations where you buy it. Each step along the way adds an incremental cost to gasoline. Finally when you pay for gasoline at the pump, the government adds on about 40% worth of taxes and the actual gas station owner makes two or three percent profit per litre.
When you consider the value-added processes that go into gasoline refining, it is amazing to think that the profit margins through the entire value chain are as low as they are – the 1L carton of milk you buy at the supermarket has more embedded profitability than a litre of gasoline. Ask yourself how much a litre of Starbucks coffee would cost you versus the cost it actually took to produce it and then compare it to the cost of a litre of gasoline.
If politicians were serious about taking direct action (opposed to indirect – i.e. permitting more refineries to operate) to lower the price of gasoline, they’d reduce gasoline taxes. The Ralph Goodale argument of “if we lower the gas tax by a penny, gasoline stations will raise prices by a penny” is garbage (in reality the consumer would see about 70% of a tax drop, but this is a subtle economic point beyond this post), but people will believe it since they never consider “if we raise the gas tax by a penny, gasoline stations will drop prices by a penny”. One just needs to look at the price difference between Abbotsford and Langley to see the impact that the GVRD/Translink gas tax has on gasoline prices – why aren’t those stations in Abbotsford jacking up their prices?
Finally, I hope our provincial government is not even considering screw-ball legislation to fix gas prices like the Atlantic provinces. The best case scenario is that you will be guaranteed to always get the high price in the cycle of gasoline prices. So right now, for example, you’d see a low of $1.15/litre and a high of $1.25/litre – you’re not going to get $1.20/litre when such legislation is enacted. You’re going to get $1.25/litre, all the time. If the government legislates the price too high, the consumer gets robbed (what was the point of enacting the legislation in the first place?). If the government legislates the price too low, service stations will just shut their doors and/or choose not to serve gasoline as it would be unprofitable for them. This means you can’t find gasoline or you have to get in queue to access supply. This is most definitely an area where USSR-style central planning would work against people when the market is already serving up the best practical solution.
My “cold hard” advice on gasoline is the following – suck it up and pay. Try to time the lows and take solace in the fact that if high gas prices are getting people out of their cars, it just leaves more room on the road for yourself.