INST Committee Report

The price of gasoline at the pump has been a source of confusion and concern for Canadians for some time now. The reasons for this concern are many, but most often it has to do with retail prices that fluctuate frequently, often significantly, and in what appears to be an almost too systematic fashion across many retail outlets in many local markets. A competitive explanation is readily available: since prices are posted on large signs at each station in full view of the motoring public, who have shown a willingness to travel great distances to get even the smallest of discounts, price changes are usually rapid and pervasive (for fear of losing not only market share but possibly one’s entire market) — a phenomenon that is unique to the retail gasoline marketplace. On the other hand, anticompetitive price-fixing among retailers would also be a potential explanation for the retail pricing patterns witnessed (i.e., almost identical prices at each retail outlet, or identical price differentials among rival outlets due to different levels or types of service, in each local market, and price increases executed at roughly the same time). The primary difference would be the level of those prices, with the competitive prices being much less than those that are fixed by agreement amongst suppliers. Therefore, the distinctive way of advertising retail gasoline prices by signage combined with the next-to-costless shopping behaviour of the motoring public could potentially mask a conspiracy to raise prices. Independent and interdependent decision-making on prices — price being the dominant, and sometimes the only, margin on which rival retail outlets compete — are not easily distinguished.

The forces that drive crude, rack (wholesale) and retail gasoline prices are also complex. One of these forces involves the status of international crude oil inventories, some of which are built and held in politically unstable regions. The recent uncertainty surrounding potential supply disruptions caused by a looming war in Iraq and political and labour unrest in Venezuela and Nigeria highlights the vulnerability of the West’s crude oil supply sources and its impact on the price of crude. Another key force that drives prices is abnormal temperature and climatic conditions. A winter that is much colder than forecast (as was the case in Eastern and Central Canada and the Northeast United States in 2002-2003) will lead to the drawdown of crude oil inventories and imbalanced refined petroleum product slates (e.g., heating fuel, gasoline, diesel, kerosene, lubricants, etc.) relative to demand. This situation will result in price increases across the slate of petroleum products, which will cascade from the wholesale to the retail level. Such price increases perform the socially desirable function of equilibrating demand and supply — stimulating both increased conservation by consumers and increased production throughout the energy supply chain — and ensure that shortages or stock-outs do not develop. At the same time, however, rising profitability within the industry due to an impending rather than an actual supply disruption (price increases may have reflected worse-case scenario predictions that did not materialize) or unexpected seasonal demand spikes engenders a suspicious public.

Finally, the reported high corporate concentration within the oil and gas sector, along with the very diverse economic profile of industry participants, is also a major concern of the public. The retail sector is characterized by a wide range of supplier types that include a handful of large vertically integrated oil and gas companies, a number of mid-sized national chains, a half-dozen regional refiner-marketers, a few large mass merchants and many small (one-station) independent retailers. Such a diverse field of players bodes well for competition based on different organizational designs and innovative retail formats. However, competitive prices at each stage in the supply chain may not necessarily follow, given the possibility that vertically integrated suppliers might squeeze retail margins to discipline or eliminate independent retailers in a predatory fashion. In such a case, a high degree of corporate concentration at the refining stage might lead to rack prices above competitive levels so that a disproportionate share of industry profits will be taken at the refining stage and at the expense of the marketing margins of independent retailers.

The Committee has organized this report in the following way. In Chapter 1, the Committee reviews the data on gasoline prices — retail, rack and crude — in Canada over the past 10 months (the critical period when prices soared), as well as over the longer term and in comparison to those in the United States and elsewhere. In Chapter 2, the Committee examines the industry’s structure, performance and profitability, focusing on the “downstream” sector. The Committee also studies the competitive aspects of the vertically integrated companies, the regional marketers and the independent retailers. In Chapter 3, the Committee assesses the explanations given for the recent price increases and other related pricing issues. In the Conclusion and Recommendation, the Committee summarizes its findings and offers a single recommendation to government for the creation of an independent 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.