by Peter Fenwick
Last Friday could have been the start of the end for regulated oil prices in Newfoundland and Labrador.
Last Friday Western Petroleum forced the politically appointed Newfoundland oil pricing commissioner to increase the price of a litre of gasoline by 5.8 cents, a full two weeks early. It was only a brief reprieve for the largest independent gasoline chain in the province, but it may signal the end of the Petroleum Pricing Commission.
The commission was established two years ago to smooth out the price of oil products. Increasing the price a mere fortnight after the last five cent drop is anything but smooth and calls into question the need for the commission itself.
While the Petroleum Pricing Commission has its supporters, especially in St. John’s, many regions of the province feel the commission has raised prices of oil products in their area rather than regulated it. The Chamber of Commerce and the Stephenville Town Council have both questioned the Commissions’ prices. They cannot understand why gasoline is 2.3 cents a litre more expensive in Stephenville than in Corner Brook.
The oil companies’ margins are also closing up many rural gas stations. Unable to make a decent margin on their sales, many oil companies are cutting adrift their affiliates. In many areas of rural Newfoundland security of supply is the new worry as the number of gas stations continues to dwindle. Gas is not available at any price.
But if the Liberal government does not end the commission, the Tories will. The Progressive Conservatives under Danny Williams would replace the commission with an ombudsman whose function would be to make sure pricing decisions are transparent and justified.
In the meantime Western Petroleum had little choice but to fight. In mid-December the price of gasoline was cut by five cents. But a Venezuelan oil workers’ strike, and rumors of war in Iraq pushed the price of crude oil up to over $33 a barrel. Western lost money on every litre of oil it sold to its 60 affiliates. If Petroleum Pricing Commissioner George Saunders had not increased the price they would have cut off the predominately rural affiliates completely.
But Saunders was slow to respond. When informed of Western’s problem
Saunders initially refused to make an interim adjustment, in effect, forcing Western to sell below cost. But when gas stations in cabinet minister’s districts started receiving cut off notices he quickly changed his tune.
But Western’s problems aren’t over.
Ever since the price of oil was regulated Western has had problems making a go of it. Initially the wholesale prices were set so low that there was little left for the resellers. If the price of oil shoots up unexpectedly they do not have the deep pockets of the large integrated oil companies to help them through the lean times.
Yet Western and the other resellers have become critical components of the oil distribution system in the province. The major oil companies, faced with fixed and dwindling margins, are abandoning rural Newfoundland in droves. A whole flock of affiliates are being de-franchised in March. Western has picked up some of these operations and has increased the number of its gas stations by 50% in the last two years.
Overall the increase in independent gas stations is a good thing. Before the Grimes government brought in price controls, several studies urged a strengthening of the independents as a means of increasing competition. Ironically price fixing has undermined the independents, and lessened competition, especially in rural Newfoundland.
Which is why Western’s fight against imposed prices is important. Saunders and other free market critics put the unprecedented early increase down to a flaw in the regulations. The wholesale and retail prices are regulated, but the rack price is still set by the market for oil at Halifax. That price rose so quickly it passed the wholesale price that Western was allowed to charge its affiliates. Saunders is now looking at fixing the price the resellers pay for their oil from the large oil companies. But that will mean abandoning the rack price that influences the price of oil products all across Atlantic Canada.
While the Commissioner can legally impose price caps right up to the rack in Halifax, he cannot force oil companies to sell at that price. According to industry insiders many oil companies will simply stop delivering oil to the province if that were to occur. The next price shock is likely to see gas stations all across the province lock up their pumps.
Another solution for the resellers is to adjust the price more frequently. Instead of once a month, adjust the price weekly. Price changes that frequent would make a mockery out of the entire $600,000 a year bureaucracy set up to smooth out prices, but it would allow small resellers and retailers to avoid being bankrupted by sudden and unexpected oil shocks.
Ultimately the best solution is to eliminate the Petroleum Pricing Commissioner entirely. Gas prices would be set by the market, instead of a political bureaucracy. And as the resellers gain strength, competition should keep prices in line.
But if the government really wanted to reduce oil prices, all they have to do is to cut the 16.5 cents in taxes they currently impose on a litre of gas. The last tanker load Western sold they made less than $500 while they collected over $13,000 in taxes for the government.
Western Petroleum is a local home grown company that is trying to compete with some of the largest companies in the world. That in itself is difficult. But when you have to take on your own government in the guise of a politically appointed commissioner who wants you to sell for less than your costs, your job is that much harder.
Which is why their showdown with the commissioner was important, especially since they won. It should only be a matter of time now before the Commission is disbanded.
