Tuesday, November 12, 2019

On the BCUC Gasoline Pricing Inquiry Report

Though it does feed populist outrage over the high price of gasoline in the Lower Mainland, the BC Utility Commission (BCUC) fixation in its original and latest gasoline pricing inquiry report on an unexplained differential between Vancouver wholesale gasoline prices and spot prices in the Pacific Northwest (PNW) is misplaced and not very helpful.

As industry experts, most economists and the BCUC itself would agree, wholesale gasoline prices in Vancouver are not based on the actual cost of supply. Rather they are based on the delivered cost of the marginal or most expensive source of supply. For Vancouver the marginal source of supply is generally considered to be the PNW, which is why the BCUC determined that Vancouver wholesale gasoline prices should reflect delivered prices from that region. Yet apparently they don’t – they have been some 10 to 13 cents per litre higher than that this past year.

Industry counters that the marginal source of supply can be more expensive than the PNW prices the BCUC calculated. It may be the cost of PNW gasoline delivered by truck, not the less expensive cost of delivery by barge. When supply is tight, as it has been much of this past year, the marginal source of supply could be California or other more distant US refiners – again with higher costs than what the BCUC calculated for its assumed marginal source of supply.

But while the back and forth in the latest BCUC report is interesting to read (at least if you are desperate for reading material because it is too windy today to stand-up board here in central Baja), that debate misses the much larger point. The PNW spot price, even without an unexplained differential of some magnitude on top of that, is itself much higher than the cost of gasoline produced in BC or the large amount that is produced and delivered from Alberta.

The issue government can and should address isn’t whether Vancouver wholesale gasoline prices are even higher than the cost of PNW supply; the issue is why prices should be based on PNW prices in the first place. What British Columbia needs and could greatly benefit from is for gasoline prices to reflect the delivered cost of Alberta supply (adjusted for differences in carbon content standards, distribution costs and taxes) just like the rest of western Canada.

What we need, in effect, is for the marginal source of supply in the Lower Mainland to be more product from Alberta, not high cost imports from the U.S.

The government’s response to the BCUC findings appears to be a requirement for more transparency from the oil companies on the source and cost of their supply.  And the BCUC appears to suggest that some type of regulation may be called for.

But while transparency may be helpful for public shaming and perhaps some moral suasion, and BCUC regulation of pump prices would almost certainly be time consuming, expensive and largely ineffectual, there are steps government can take to move the marginal source of supply from the PNW to much lower cost Alberta supply.

More than anything, government needs to support coops and other independents to secure pipeline capacity for gasoline deliveries from Alberta, something that will be facilitated by the Trans Mountain expansion project should that go ahead as planned. And it needs to ensure that coops and independents have non-discriminatory access to the terminal and storage capacity they  need to increase purchases from Alberta.

The goal is to support the competition and possible expansion by coops and independents to force everyone in the Vancouver market to base their prices on the delivered cost of Alberta supply.  That goal should not be lost in the political effort to find out if we are currently paying even more than unnecessarily high PNW prices would suggest.

Tuesday, June 11, 2019

The revenue neutrality part of a revenue-neutral carbon tax

Though commonly recommended as a means of gaining political acceptability, I’ve never been a fan of the revenue-neutral part of a ‘revenue-neutral carbon tax’. That’s the notion that the revenues carbon taxes generate should be offset by reductions in income or other taxation. The goal of a revenue-neutral carbon tax is simply to provide an incentive to reduce the amount of greenhouse gases (GHGs) we emit in what we produce and consume. It is not to increase the so-called burden of government taxation.

Notwithstanding the protests of Premiers Kenney, Ford and other Conservative leaders in Canada, the problem with a revenue-neutral carbon tax is not the tax itself, which after all is doing the right thing just not enough of it. The problem is that the call for revenue neutrality ignores the fact that addressing climate change requires more than just incentives to change behaviour.

Meaningfully addressing the challenges of climate change will require major commitments of government resources both to deal with the impacts we are already experiencing and to accelerate the speed and lower the cost of reducing GHG emissions over the longer term.

In British Columbia and Alberta there is the immediate need to increase efforts in wildfire prevention, suppression, damage assessment and affected community support. Here and elsewhere there is need for more planning and investment in flood control. Measures to prepare for and mitigate the risks and damage from severe storms are required. All of this requires resources.

For the longer term, there is the need for government investments in transportation infrastructure, electricity supply, building design and other areas in order to support and enhance the energy consumption and other behavioural changes we need. There is also the need to support research in alternative energy, carbon capture, and other areas that may be critical in mitigating the extent and impacts of climate change.

In short, the needs are great and the required commitment of resources very large. The question is: how will those requirements be funded.

Some would argue that government should simply reallocate the tax revenues it already collects. But that ignores the other pressing needs government must address – in child care, housing, health care, K-12 and post-secondary education. And it ignores the structural deficits that jurisdictions like Alberta are already facing.

Responsibly dedicating the resources needed to address climate change requires more tax revenue. There are of course many ways government can raise revenues. It could increase income, general sales or value added taxes. Local governments could increase property taxes. Public utilities can increase rates. But the question I have is: why shouldn’t government direct some or all of the revenues it collects from carbon taxes to the measures it must undertake to address the immediate and long run challenges that the carbon emissions give rise to. Why look to other sources of tax revenues when you have a potential source that is directly linked to the problems and challenges you have to address?

The answer to Premier Kenney’s flippant rejection of carbon taxes –“they wouldn’t prevent the forest fires that have plagued Alberta these past weeks” – is: “yes, but they would provide the financial resources  you need to suppress those fires, to support affected communities and begin the major efforts needed to reduce the incidence and severity of future fires. Even if you don’t accept the near universal advice of economists that carbon taxes are an  efficient way to reduce GHG emissions, you need to do more to protect Albertans right now and you don’t have the financial resources to do that without putting Alberta further into debt”.

Carbon taxes can and should be an integral part of government policy to address climate change, but they will most effectively and immediately do that if not constrained to be revenue-neutral.

Saturday, April 27, 2019

More Refining Capacity In Alberta Won't Solve BC's Gasoline Price Problem

Dealing with the sky-high price of gasoline in British Columbia is a policy conundrum.

On the one hand, higher gasoline prices are exactly what the government’s greenhouse gas policy calls for. They will reduce the demand for gasoline, discourage the purchase of gas-guzzling trucks and SUVs, and hasten the shift to electric vehicles.

On the other hand, the high prices are a significant economic burden, particularly for low and middle income families. The major jump in prices in recent months is like a very regressive tax, reducing the amount of disposable income households have to meet their other basic needs.

It is clear the government sees the need to act. The only problem is that it does not appear to know what to do. 

The Premier’s call to build more refining capacity in Alberta clearly is not the answer. Firstly, Alberta will not support the construction of additional refining capacity in its province with all the financial and environmental costs that entails in order to address a gasoline pricing problem in BC. More importantly, building more refining capacity in Alberta won’t solve the problem. It isn’t a shortage of refined petroleum product supply in Alberta that is driving up prices in BC; the problem is constraints on the delivery of Alberta supply to BC.  

For many years now, BC has relied on Alberta to meet much of its demand for gasoline and other refined petroleum products. It was more efficient for the oil companies to refine in large-scale Alberta facilities serving Western Canada and to ship the product to BC than to refine here. And what was good for the oil companies would have been good for BC consumers except for one very unfortunate fact. The price of gasoline and other refined petroleum products in BC is not based on the cost of refining in Alberta plus shipping to BC. Rather, it is based on the much higher cost of supply from the major alternative source of supply for BC consumers – deliveries from Puget Sound refiners.

Puget Sound only supplies a small proportion of the gasoline and other refined petroleum product requirements in the province, but it is what economists call the ‘marginal source of supply’ – the source BC has to turn to when Alberta supply plus the limited local production is not sufficient to meet provincial requirements.  Because Puget Sound refiners are the marginal source of supply, they effectively set the market price. 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. And Puget Sound is the only available alternative because of limited pipeline capacity for additional deliveries from Alberta.

That Alberta supply (and the relatively small amount produced in BC) sells well above its cost is very evident from the data on refining and marketing margins in BC versus elsewhere in Western Canada. The refining and marketing margin indicates the difference between the before-tax selling price of gasoline and the cost of crude oil – it is a measure of the gross profit from sales. The margin the oil companies realized from gasoline sales in Vancouver in March 2019 (when gasoline prices averaged a mere $1.50 per litre) was 54 cents/litre, some 20 cents per litre higher than the margin for sales in Calgary and Winnipeg which were 33 cents and 34 cents respectively. 

Puget Sound wouldn’t be the price-setting marginal source of supply for BC if there was sufficient pipeline capacity available for gasoline and refined petroleum product deliveries from Alberta. But, as we know from another story, pipeline capacity is limited and efforts to increase capacity have been frustrated by BC government, First Nation and other opposition.

Ironically, what BC needs more than anything else to bring down gasoline prices in the province is more refined product pipeline capacity, and the TransMountain pipeline expansion project that the province has relentlessly opposed could help solve that problem. Short of that expansion project going ahead, along with some assurances about the competitive access to capacity for gasoline and other refined petroleum product deliveries, there is no simple solution in sight. Accepting the economically troubling but environmentally pleasing exorbitant prices could well be the answer, along with further government initiatives to support low and middle income families to ease the disproportionate burden of excessively high energy prices.