Gouging, government policies blamed for B.C. gas price spikes

Experts file reports with utilities commission citing laundry list of explanations for how much we pay at the pump

It seems to be a recurring pattern in B.C.

Gas prices suddenly spike $0.10 per litre in the spring, but spike much higher in Vancouver than elsewhere, leading to suspicions Big Oil is sticking it to British Columbians in some price-gouging scheme.

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So a B.C. NDP government asks the BC Utilities Commission (BCUC) to find just what the heck is going on.

The commissioner issues a report concluding that, although there appears to be some “price discrimination” in B.C., there is no evidence of illegal price fixing or collusion.

Sound familiar?

This isn’t a description of a current BCUC inquiry into high gas prices, but rather a BCUC inquiry from 1996.

Back then, after a dramatic price spike in April of that year, the Glen Clark NDP government asked then BCUC commissioner Mark Jaccard — now a sustainable-energy economist at Simon Fraser University — to find out why gas prices spike so much higher in B.C. than elsewhere in Canada.

More recently, after gas prices shot up $0.12 per litre at the beginning of April this year and then hit highs of $1.72 — breaking North American records for the second year in a row — another NDP premier, John Horgan, announced he would ask the BCUC to, once again, conduct an inquiry into B.C.’s high gas prices.

In other words, we’ve seen this movie before. But it’s one that’s worth watching again, especially given that in the sequel there’s now a pipeline expansion subplot.

That expansion will either make more refined fuels available in B.C. — generally lowering prices — or push prices even higher, depending on which expert you listen to.

“If there was a pipeline joining Edmonton to Vancouver that had the capacity to supply as much as the market needed, you’d see the wholesale price drop down to parity with Edmonton, with the only differential being the rather small pipeline transportation cost, pure and simple,” said Michael Ervin, a senior petroleum analyst for Kent Group, one of the many consulting firms that have submitted analyses to the BCUC.

Robyn Allan and Marc Eliesen counter in their joint report to the BCUC that the expansion of the Trans Mountain pipeline may raise gasoline prices, due to a tripling of toll charges.

They say Vancouver’s high gas prices are the result of price gouging by the petroleum industry, and recommend that both retail and wholesale gas prices be regulated by the BCUC — something other experts warn could backfire.

“The weight of evidence indicates that the price ceiling regulations have not resulted in lower prices for consumers, though the conclusions are not unanimous,” says a report by Navius Research, one of two consulting groups asked to provide technical reports to the BCUC. The other is the Deetken Group.

Reports by a variety of experts offer dozens of explanations for why Vancouver has the highest gasoline prices in North America.

The simplest explanation is that Vancouver has some of the highest gasoline taxes in Canada although Montreal is pretty much on par with Vancouver, and does not seem to suffer from the kind of intense price spikes that Vancouver does.

Among the factors affecting gas prices in B.C. are high land costs in Vancouver, higher gasoline taxes, pipeline constraints, limited local refining capacity, crude oil prices, low-carbon fuel standards, refining outages, seasonal refinery turnarounds and exchange rates. Even higher credit card processing fees are offered (by Deetken) as a factor.

One thing most of the experts agree on is that it’s not the retail prices that are out of whack with the rest of Canada, but rather the wholesale price.

The rack price is about $0.20 per litre higher in Vancouver than in Seattle, whereas the difference between Winnipeg and Chicago or Toronto and New York is zero to $0.06 per litre, according to petroleum analyst Dan McTeague.

There are two main theories battling it out to account for the unusually high spread in rack prices in B.C. One is the limited pipeline and refining capacity in the Pacific Northwest. The other is a lack of competition, leading to price gouging by the wholesalers.

The wholesale or rack price is what companies like Shell Canada, Suncor Energy Inc. and Imperial Oil Ltd. charge retailers for refined fuels (gasoline and diesel).

“A comparison of B.C. to other parts of Western Canada reveals that wholesale gasoline prices in B.C. have risen above historical price differentials,” a report prepared for the BCUC by the Deetken Group states. “Prices in the Vancouver area have experienced a more significant increase when compared to an average of prices found in other Western Canadian cities.”

The only single explanation that makes sense, according to Allan and Eliesen, is a lack of competition and deliberate price gouging.

“The more concentrated a market, the more likely suppliers to that market will be able to engage in anticompetitive behaviour and raise prices above those that would be expected to exist in a competitive market,” Allan and Eliesen write.

Jaccard called it something else in his 1996 report — “price discrimination.” Navius calls it “conscious parallelism.”

The Navius report does not conclude one way or another if conscious parallelism is at work in B.C. but merely explains how it works:

“If there is lack of competition prices can be the result of ‘conscious parallelism’ that can occur in a market with few players and a repeated process of price setting. Over time, firms may observe that if they do not lower their prices, other firms will likely not lower their prices.

“The market may reach an equilibrium where prices are higher than they would be in a fully competitive market, with each firm conscious of the fact that lowering their prices could trigger a price war, where their margins will decline without materially increasing their market share.

“Conscious parallelism is not purposely organized, nor is it illegal.”

If there were deliberate price fixing, the Competition Bureau of Canada would have something to say about it.

“But gas prices that rise and fall in step are not in themselves evidence of price-fixing and, in fact, can actually be evidence of competition functioning as it should,” the bureau states.

With four companies supplying 80 per cent to 90 per cent of the refined fuels here, B.C. qualifies as a highly concentrated market. That can lead to a lack of competition. If the BCUC determines that the B.C. market is too concentrated, Navius recommends ways of controlling price swings, although it cautions that regulating prices does not necessarily always result in lower gas prices.

A submission by the Atlantic Institute for Market Studies says regulated prices in four Atlantic provinces have resulted in consumers in Atlantic Canada paying more for gasoline.

Navius counters that, while retail price regulations in Nova Scotia failed to reduce prices there, regulations in New Brunswick did.

Full pipeline

In response to questions from the BCUC, companies like Parkland Fuel Corp. and Suncor offer whole laundry lists of reasons why it costs more to deliver refined fuels in B.C., including reasons the BCUC is not supposed to consider — government taxes and policies.

But they also point to constraints on the Trans Mountain pipeline. The amount of refined fuels flowing on the Trans Mountain pipeline has, at times, shrunk, as crude exports increased.

Trans Mountain is a batched pipeline. The less crude oil that flows on it, the more capacity there is for refined fuels like gasoline and diesel.

Last year, low Alberta crude prices created arbitrage opportunities that resulted in increased exports of crude, including to China. That reduced the amount of refined fuels that could flow on the pipeline, forcing more refined fuels to come in by rail, truck and barge, which is more expensive.

“The Trans Mountain Pipeline … has decreased its line space [capacity] allocated to finished products [gasoline and diesel] delivered to Suncor’s terminals in British Columbia by approximately 30-36 [millilitres] per month, which resulted in an increase in the more costly transportation of these products by rail and truck,” Suncor tells the BCUC.

Parkland likewise says the Trans Mountain pipeline is “constrained.”

“Constraints increase our refining costs,” it says.

Allan and Eliesen dispute that there is a lack of capacity on the Trans Mountain pipeline. They say there was a capacity of more than 50,000 barrels per day available that wasn’t used around the time gas prices were spiking.

While it’s true that the pipeline physically has more than adequate capacity to supply all the refined fuels B.C. needs, the fact is that more than half of the product that moves on the pipeline is crude oil destined for Washington-state refineries.

A question of refinement

Ervin said it’s not that hard to understand why the wholesale margins are higher for B.C. than elsewhere in Canada. When “crack spreads” (refinery profit margins) widen periodically, it is often related to refinery issues — either planned or unplanned refinery shutdowns, Ervin said.

“It’s a well-known fact that supply options — getting product into B.C. — are pretty constrained, by the pipeline, by the fact that the two refineries in B.C. are amongst the smallest in the country, and by the fact that the U.S. northwest [refiners] are basically chockablock with respect to their supply obligations to existing contract buyers.

“It is, to my mind, a pretty simple explanation as to why we see the high wholesale prices relative to Eastern Canada.”

refinery outages
Unplanned refinery outages in California appeared to have significant impact on wholesale prices in B.C. Source: BRG

But how does a refinery outage in California or Washington state affect gas prices in B.C.? After all, the amount of gasoline and diesel that B.C. imports from Washington, the U.S. Midwest or even Asia is very small. Most of the refined fuels B.C. uses comes from Alberta.

According to marginal-source-of-supply dynamics, however, when buyers need to go outside of their usual market to make up a shortfall of a commodity — whether it’s gasoline or apples — that marginal supply typically comes at a higher cost.

And that cost ends up setting the price for all other suppliers. They all end up charging the higher price that the marginal supplier charges because buyers sent the signal that that’s how much they are prepared to pay.

In Vancouver’s case, this marginal-source-of-supply factor may play a role in price spikes. B.C. is part of PADD 5 — the Pacific Northwest petroleum region. It is a highly isolated region.

It does not have the kind of pipeline access that other petroleum regions in North America do, so when refiners in that region can’t adequately supply the market, it must bring in refined fuels by rail, truck or tanker, which is more expensive than pipeline deliveries.

In Vancouver’s case, the marginal source of supply is typically refiners in Puget Sound, although the Deetken report suggests refined fuels have sometimes come to B.C., by truck or rail, from as far away as the U.S. Midwest.

“Because Puget Sound refiners are the marginal source of supply, they effectively set the market price,” Marvin Shaffer, an economist at Simon Fraser University’s School of Public Policy, has explained in a blog post.

“Shippers from Alberta can charge the delivered Puget Sound price, even if it is well above their own cost, because they are still competitive with the only available alternative.”

Allan and Eliesen argue that refinery outages, planned or unplanned, should have no impact on gasoline prices in B.C.

“Refinery outages in foreign markets are not a reason for price increases, they are a rationalization,” they contend in their report.

Government policies you’re not supposed to hear about

B.C. wasn’t alone in experiencing painful price spikes in April and May. California had them as well. They were less pronounced in Washington, however.

B.C. has something in common with California that it doesn’t have with Washington. Both B.C. and California have carbon pricing and low-carbon fuel standards; Washington doesn’t.

Taxes and other policies, like B.C.’s low-carbon fuel standard (LCFS), appear to have coincided with higher wholesale prices overall, according to the Kent Group, and companies like Suncor and Parkland Fuel Corp.  say there’s no question it adds to their costs.

In a comparison of Vancouver and Seattle wholesale prices, the Kent Group report notes two significant wholesale price increases for Vancouver, one occurring after B.C. introduced its carbon tax in 2008, and another after 2013, when B.C.’s low-carbon fuel standard took effect.

price comparison
Source: Kent Group

But correlation is not causation, and Ervin said it is difficult to say to what extent the LCFS is responsible for the higher wholesale margin in B.C.

“Nobody knows, because it’s not a tax — it’s not transparent,” Ervin said. “But certainly for refiners and suppliers that are under the LCFS, there’s a cost. There’s a cost to getting low-carbon fuels there.”

Suncor says B.C.’s LCFS adds to its refining costs.

“The main changes over the last 3-5 years relate to the implementation of the British Columbia Low Carbon Fuel Requirements … and preparation for the implementation of the British Columbia Clean Fuel Standards,” Suncor tells the BCUC.

Suncor adds those policies have also resulted in the company having to reallocate space at its storage terminals in B.C. in order to store and blend biofuels, “thereby causing storage constraints.”

Parkland Fuel likewise points to the LCFS as a cost driver, but it doesn’t say how much it adds to the cost of fuel.

Jaccard and researcher Nic Rivers at the University of Ottawa have calculated that B.C.’s low-carbon fuel standard adds only $0.02 to $0.03 per litre to the cost of fuel — a far cry from the $0.15 per litre that some analysts have suggested.

“Yes, the LCFS increases gasoline prices,” Jaccard told Business in Vancouver by email. “But its revenue decreases the costs of alternatives — which we desperately need.”

Even if the LCFS were a significant contributing factor, the BCUC has been expressly forbidden to consider it. Horgan’s mandate to the BCUC was to ignore any government policies such as tax rates.

That hasn’t stopped the authors of various reports from pointing to it, including the Deetken Group.

“The provincial Low Carbon Fuel Regulation may drive some additional costs in B.C.,” it says. “However, the maximum impact is low in relation to the overall differential between B.C., Seattle, and Edmonton.”

The BCUC will produce a final report and submission to the provincial government at the end of August.

nbennett@biv.com

@nbennett_biv

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