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.
