Lethbridge, Alberta
T1K 4P5
September 21, 2005.
Federal Committee on Gas Prices
Attn: Mr. Brent St.Denis, M.P.
Mr. St. Denis and Members of the Committee,
I have served as the spokesperson for a group in Lethbridge, Alberta loosely known as Action Against High Gas Prices (AAHGP).
We have monitored gasoline pricing behaviour for six years in the Lethbridge region and throughout Alberta.
The focus of our concern had been relatively high gas prices in Lethbridge versus those available in other communities but we have accumulated information based on data and our observations relevant to any study of gasoline pricing.
Pricing Behaviour and Competition
We noted some behaviour patterns which can still be objectively verified using data still available for specific periods (the period from April 1, 2002 to September 30, 2002 being the most blatant). Notably, gasoline consumers in Lethbridge were consistently paying higher prices than consumers in other communities.
The retail pricing behaviour that continually re-occurred was that price increases were consistently initiated by Shell or PetroCanada owned gas stations. It is no secret that price increases are directed from their regional offices in Calgary.
We have observed that these companies are slow to lower prices also. Recently a Medicine Hat Shell station owner divulged to the Medicine Hat News that Shell does not permit lowering of prices in any market unless a competitor does first.
It seems ironic and unfair that price increases can be directed to the retail outlets but price reductions rarely are. There would seem to be a built in bias towards maintaining high prices.
In Lethbridge, we regularly compare our retail gasoline prices to those available in the nearby communities of Fort MacLeod and Claresholm. These communities are located on major highways that are used to travel to Calgary from Lethbridge.
Prices are inevitably and consistently lower in these communities than they are in Lethbridge. The difference is often 5 to 10 cents per litre even though Fort MacLeod and Claresholm are just 50 and 80 kilometers away.
The gasoline retail outlets in Fort MacLeod and Claresholm include those of the major refiners (Shell, PetroCanada and Imperial Oil) so it is difficult for consumers to understand the large pricing discrepancies.
As I write this submission, the price for regular gasoline in Fort MacLeod and Claresholm is $0.989 per litre while prices in Lethbridge are posted at $1.069.
While our prices are lower than that available elsewhere in Canada, we believe our experience and our data consistently demonstrate a predatory pricing behaviour practiced by the major gasoline refiners.
Profits
The major refining companies will tell anyone that retail gasoline profit margins are razor thin. That is very true. In my view, thin retail profit margins allow the refiners to effectively control the selling price. They control the wholesale price and are guaranteed a profit from internal transfer pricing. They also control the overall supply of refined petroleum and can make public pronouncements about shortages and limited refining capacity in order to justify price increases. These public pronouncements are difficult to believe and harder to verify.
The three major refining companies are on track to make $ 2 Billion each in profit this year in Canada. The recent profit trend for these companies needs to be scrutinized going back five and ten years. These seem like obscene profit levels and would appear to reflect a significant transfer of wealth from consumers to the major refiners.
While I am employed by a profit-making corporation and do not believe that profits are necessarily bad, I believe that current profit levels for the three major gasoline refiners are obscene. They are more indicative of greed and exploitation than market factors.
And when one examines the evidence of profit trends in recent years, it appears that the increases in wholesale gasoline pricing cannot be justified based on need.
Furthermore, it appears that the dramatically high profits will not be invested in expanding gasoline refining capacity. One might conclude that expanding refinery capacity and gasoline supply might not be in the best interests of the refining companies.
I note that the Canadian Independent Petroleum Marketers Association (CIPMA), shares my views regarding market control by the refiners. I also have no doubt that independent retailers are the most vulnerable to high wholesale gasoline prices and thin retail margins. By controlling the price and supply at the wholesale level the refiners effectively also control the independents to a large degree.
As further evidence, we observed that in 2003 after almost eight months of high prices in Lethbridge compared to other communities, some independents began offering lower prices. A major price war ensued, where prices offered by the retail outlets owned by the major gasoline refiners dropped to as low as $0.19 per litre. At that time the cost of refined gasoline delivered to Lethbridge was about $0.55 per litre. One could easily observe the local independent retailers dropping their price for regular gas to $0.55 per litre, while Shell and PetroCanada were selling gasoline for process well below that level for up to two weeks. This pricing action by the major refining companies appeared to be intended to intimidate and discipline the independent retailers in our market.
“Independent” Market Analysts
The committee should be wary of so-called “independent” market analysts. I have had interactions with several of them. Generally, they act as apologists for the oil industry. These people and organizations are far from independent. It is often the case that the majority of their income is derived by compiling and selling data to governments and to the large oil refiners and retailers. With the oil companies as their clients, the opinions offered from these sources can not be considered to be truly independent.
A question should be asked of any presenter to the government committee regarding the proportion and extent of their income that originates from oil companies.
Conclusion and Recommendations
In conclusion, I strongly support the submission by Mr. Don Tremblay of Calgary, Alberta. I have reviewed his material and find it to be consistent with what we have observed in Lethbridge.
I would urge the committee to make strong and bold recommendations. Consumers need a stronger voice and pricing review mechanism. The following are my recommendations:
1. The complaint process through the Competition Bureau needs to be replaced with an organization with a high proportion of consumer representation that investigates complaints on a timely basis. Past investigations have been hampered by the requirement to prove collusion between market participants. Investigations take too long and reports and findings are slow in coming. A new organization needs to have the power to intercede in any market when price-gouging and profiteering can be seen to occur.
2. Profiteering by the refiners through the wholesale rack pricing system should penalized through a system of penalties, including jail terms for C.E.O.s Greed and exploitation are fed by a corporate culture that encourages that behaviour through profit sharing. Nothing changes corporate culture faster than the threat of jail terms for C.E.O.s. Corporate culture is driven by corporate leaders. Imposing penalties for C.E.O.s could quickly eliminate undesirable pricing behaviour that manifests itself as greed, exploitation and price gouging.
3. Refiners should be required to give 15 days notice of wholesale price increases. The petroleum that is refined takes four to six weeks to reach the retail marketplace. A 15 day waiting period for wholesale price increases would reduce profiteering and windfall profits that are being achieved at the wholesale level. Recently, we saw retail prices quickly rising in reaction to natural disasters although it was not possible for the rising price of raw crude to be directly connected to the actual gasoline being sold.
If this recommendation were implemented, the retail market would be protected from panic buying because there would be an inherent notice period. Consumers would be insulated from shock retail increases since retail prices would not need to respond to dramatic increases in the wholesale price and the world price of crude oil.
4. Penalties for retailers should be substantial and should remove the incentive to price-gouge. A fine equal to double the amount of the profit obtained from price-gouging would provide a significant disincentive for retailers. If profiteering by retailers is identified and verified by the agency overseeing gasoline pricing, they would have the power to estimate the profit realized from the illegal practice and levy a fine equal to double the estimated profit.
Consumers lose confidence in their government when regulatory bodies (i.e. Competition Bureau) are ineffective and undesirable market behaviours remain unchecked and go unpunished.
They also lose confidence when parliamentary committees meet, make recommendations and then nothing changes. Parliamentary committees have met in 1998 and 2003 in recent times. Recommendations were made and never implemented. This committee must ask itself : “What will be different this time?” and “How will these recommendations be fast-tracked?”
I encourage parliamentary committee to use this opportunity to make meaningful changes that will truly change industry behaviour that will level the playing filed and be in the best interests of Canadian consumers and taxpayers.
Chris Spearman
Spokesman
Action Against High Gas Prices
74 Ryerson Place West
Lethbridge, Alberta
T1K 4P5
Appendix 1
Gasoline Prices in Canada: Report of the Standing Committee on Industry, Science and Technology
The price of gasoline at the pump has been a source of confusion and concern for Canadians for some time now. The Standing Committee on Industry, Science and Technology studied the causes of the recent increase in the price of gasoline, and the significant negative effects that the increase is having on the economy. Contents: · Review of the data on gasoline prices - retail, rack (wholesale) and crude - in Canada during 2003, as well as over the longer term, and in comparison to prices in the U.S. and elsewhere · Examination of the industry's structure, performance and profitability, including the competitive aspects of the vertically integrated companies, the regional marketers and the independent retailers · Assessment of the explanations given for the recent price increases and other related pricing issues The report calls for the creation of an independent monitoring agency charged with collecting industry data, disseminating that data to the public and reporting annually to Parliament on the competitive performance of the industry. The Committee believes that such a monitoring agency will help to resolve public confusion and misconceptions on gasoline pricing issues while ensuring public supervision over all aspects of gasoline pricing.Committee chaired by Walt Lastewka, M.P. Report tabled November 2003. Produced by the House of Commons. Published by Canadian Government Publishing, 2003.
Catalogue No. XC39-372-1-1-02
Appendix 2
Some Canadians wake to gas at $2 a litre
Globe and Mail Update
Thursday, September 22, 2005
On the same day that a Commons industry committee held a hearing on fuel and gasoline prices, some consumers awoke in Ontario to find that gas prices had leapt up past $2 per litre.
Two stations in Stratford, Ont. opened on Tuesday charging $2.
From the Globe and Mail.
Thursday, April 7, 2005.
Jane Savage, executive vice-president of the Canadian Independent Petroleum Marketers Association (CIPMA), said the federal competition watchdog should investigate what is happening to gas prices at the refinery level.
“We have been pushing the Competition Bureau to look at wholesale prices in Canada, which are higher than American whole sale prices. But the Competition Bureau continuously only looks at the retail level — the gas station end.”
Just last week, the Competition Bureau ruled that pump prices have soared in the last year because of low inventories and high crude prices, and not because of any price-fixing by oil companies. The ruling marks the fifth time in the past 15 years that the agency has investigated pump prices.
They allege that Canadians are already paying high prices at the pump and the situation will only get worse if the independent retailers — which make up 25 per cent of the Canadian retail gasoline market — are forced out of business.
“Strong good efficient independents need to be protected from egregious activities that hurt competition. That is what we look to our Competition Bureau to do and right now, they are not doing it,” Ms. Savage said.
The wholesale price of fuel is often actually higher than the retail price of fuel, which is the price that customers pay when filling up, she said. Independent gas companies are those who buy fuel from major oil refiners at wholesale prices, then sell gas at the retail level.
“Major refiners are making a ton on money, not just on crude oil, but also on wholesale. In public reporting, they don't segregate their earnings between wholesale and retail so no one knows they are making all this money at the wholesale level,” Ms. Savage said.
