Regulation cost consumers millions: think-tank

Everton McLean
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Oil and gas

More than $65 million in extra money has been pumped out of Newfoundland and Labrador drivers' pockets and into oil company coffers due to regulated gas prices, according to a marketing think-tank.

In the report, "What's missing from your wallets?," Bobby O'Keefe of the Atlantic Institute for Market Studies (AIMS) says regulating gas prices has cost the consumer more money in each of the Atlantic provinces.

More than $65 million in extra money has been pumped out of Newfoundland and Labrador drivers' pockets and into oil company coffers due to regulated gas prices, according to a marketing think-tank.

In the report, "What's missing from your wallets?," Bobby O'Keefe of the Atlantic Institute for Market Studies (AIMS) says regulating gas prices has cost the consumer more money in each of the Atlantic provinces.

O'Keefe said that an analysis of gas prices before and after regulation showed prices were higher in relation to benchmark oil prices after the legislation was introduced rather than under an unregulated system.

O'Keefe noted the regulated prices are maximums, and gas stations could technically sell for lower, but that seldom happens.

"We found regulated prices were approximately, on average, 1.3 cents higher in Newfoundland and Labrador after regulation than they were before," he said.

That adds up to about $65,306,400 in extra money spent by consumers in this province since regulation started in 2001. Prince Edward Island, which has had regulation much longer, has seen an extra $63 million go to the gas companies, according to AIMS, while Nova Scotia and New Brunswick drivers have paid an extra $18 million and $9 million respectively since regulating gas prices in 2006.

O'Keefe said a small amount of extra money also goes to the government through extra taxes earned from higher prices.

He said some provincial governments recognize that regulating gas prices doesn't make gasoline cheaper, but they choose it because it offers stability.

However, he said the volatility of world prices that set the gas prices mitigates the benefit.

He admitted regulation means it may take a little longer for prices to change at the pumps, but it also can mean steeper hikes and deeper troughs when the change does come about.

"Instead of getting three five-cent changes, you get one 15-cent change," he said.

Officials with the provincial Department of Government Services said the minister was not available for comment Monday because more time was needed to assess the report.

However, George Murphy of the Consumer Group for Fair Gas Prices criticized the AIMS report, saying AIMS used numbers that were far too high. He estimated the cost of regulation for the province is about $500,000.

He also questioned the use of information from the Canadian Association of Petroleum Producers, a group representing oil companies.

"It's not the first time they've spouted off on the costs of regulation, but we have yet to hear the constructive arguments from them on what to do to get some free competition going in the province - the chief reason why we have regulation in the first place," Murphy said in a release.

But O'Keefe said the report isn't advocating anything - it's simply giving information to consumers.

"We're looking at what appears to be a core public policy and we're showing people that it has a cost," he said. "It's up to consumers to decide if that extra cost is worth it."

emclean@thetelegram.com

Organizations: Atlantic Institute for Market Studies, Government Services, Consumer Group for Fair Gas Prices Canadian Association of Petroleum Producers

Geographic location: Newfoundland and Labrador, Prince Edward Island, Nova Scotia New Brunswick

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Recent comments

  • Sean
    July 02, 2010 - 13:30

    Everton McLean, the CBC, and NTV need to do some critical analysis here. AIMS is a right wing, conservative think tank. Their whole reason for existence is the promotion of deregulation and a strong belief in the free market. They are a BIASED organization who clearly started with a conclusion and published a study to support it. They would never publish a study supporting regulation in any form, even if all of the evidence pointed that way. Why are they being quoted as if they are a totally independent-minded group? I am personally not wedded to the idea of gas price regulation, but I would love to see a study by an independent, impartial source, rather than AIMS.

  • Dave
    July 02, 2010 - 13:27

    Oil companies are oligopolies. Banks fall into this category. These organizations have learnt a long time ago that price competition is a futile exercise. Every member of the oligopoly loses.The overall price of the product is determined by demand in the marketplace. They must differentiate their business based on service or other offerings.

    Oil companies love the Guaranteed Profit Model run by the bureaucracy in Newfoundland. There is no need to worry about any aspect of pricing. The bureaucracy builds the pricing model based on input from the oil companies. The bureaucrats create nice government jobs and the oil companies have a controlled profit margin. The only loser is Joe Newfoundlander.

    Then, out of the sea rises the oracle - George Murphy who predicts the price of oil products by keying known inputs into the known pricing model. Wow, what a great forecaster!

    Where are the educated Newfoundlanders who will raise their voices against such bureaucratic insensibilities. They must be too busy being educated at Joey's university.

  • Dave in NL
    July 02, 2010 - 13:23

    Price regulation causes consumers to pay more for petroleum products. Period. It is the only regulatory instrument that does not cause furor among the oil companies, which should be one indicator of whom it benefits. The real cost to Newfoundland, which I cannot believe has not been recognized, are the lost jobs. Since price regulation has been implemented, most marine and bulk fuel terminals in the province have been closed, major marketing companies have exited the province, all management/headquaters' positions for the majors were eliminated, and I could go on. Witness the home heating fuel business on the west coast....from eight players down to one. Well done!
    There is a reason, only three jurisdictions in North America have adopted price regulation and in these instances it was done as part of a political campaign - which is hardly a good foundation for any regulation. The only people that have benefited from price regulation in NL are a retired teacher and a taxi driver.
    For a province so dependent on oil revenues for fiscal management, get rid of price regulation and pray for $1.25/litre gasoline (based on New York Harbor prices..not greedy independent retailers).

  • Mark
    July 02, 2010 - 13:08

    I agree with the AIMS study, and I consider myself left-of-center and would be the last to defend unfettered capitalism. Since gas price regulation came into effect, I have used the Petroleum Pricing Commissions' own information to develop a formula myself for what the local price of gas would be so that I could time my fill-ups for the rises and falls that happened when the price was set.

    I quickly saw that gas price regulation protected us from very rare and unusual price spikes (like when hurricane Katrina hit), but where it is an average, with an interruption formula, rather than price that is set daily, the downside is that we never see the price of gasoline fall very quickly. I soon saw that if the local price of gas was allowed to float daily, based on the NY Harbor spot price, then we'd pay a lot less than that which is averaged out over a week or two.

    The numbers tell the truth. You add into that the cost of the government bureaucracy for regulation, and the cost to the gas stations to have to go along with all this, along with the cost for consumers having to wait for the price to fall, you can see how it all ads up. Meanwhile, the bureaucracy cannot keep up with market conditions and consumer demand. We just have to look to the Labrador coast price freeze problem this year to see the predicament. We only have to look to those independent and rural gas stations that have closed, to see where small business owners cannot tweak the prices to match their local needs and customers who might be willing to pay a little extra to keep a local gas station open.

    Personally, I would favor a system whereby the PUB randomly sampled gas-station prices monthly and checked them against a formula to see if they were charging fair-market value, rather than imposing regulation.

    But, in the end, it is up to the people whether they want to pay this extra cost. While we pay more for gasoline, we also get predictability and price stability and can thus budget.

  • Sean
    July 01, 2010 - 20:18

    Everton McLean, the CBC, and NTV need to do some critical analysis here. AIMS is a right wing, conservative think tank. Their whole reason for existence is the promotion of deregulation and a strong belief in the free market. They are a BIASED organization who clearly started with a conclusion and published a study to support it. They would never publish a study supporting regulation in any form, even if all of the evidence pointed that way. Why are they being quoted as if they are a totally independent-minded group? I am personally not wedded to the idea of gas price regulation, but I would love to see a study by an independent, impartial source, rather than AIMS.

  • Dave
    July 01, 2010 - 20:14

    Oil companies are oligopolies. Banks fall into this category. These organizations have learnt a long time ago that price competition is a futile exercise. Every member of the oligopoly loses.The overall price of the product is determined by demand in the marketplace. They must differentiate their business based on service or other offerings.

    Oil companies love the Guaranteed Profit Model run by the bureaucracy in Newfoundland. There is no need to worry about any aspect of pricing. The bureaucracy builds the pricing model based on input from the oil companies. The bureaucrats create nice government jobs and the oil companies have a controlled profit margin. The only loser is Joe Newfoundlander.

    Then, out of the sea rises the oracle - George Murphy who predicts the price of oil products by keying known inputs into the known pricing model. Wow, what a great forecaster!

    Where are the educated Newfoundlanders who will raise their voices against such bureaucratic insensibilities. They must be too busy being educated at Joey's university.

  • Dave in NL
    July 01, 2010 - 20:07

    Price regulation causes consumers to pay more for petroleum products. Period. It is the only regulatory instrument that does not cause furor among the oil companies, which should be one indicator of whom it benefits. The real cost to Newfoundland, which I cannot believe has not been recognized, are the lost jobs. Since price regulation has been implemented, most marine and bulk fuel terminals in the province have been closed, major marketing companies have exited the province, all management/headquaters' positions for the majors were eliminated, and I could go on. Witness the home heating fuel business on the west coast....from eight players down to one. Well done!
    There is a reason, only three jurisdictions in North America have adopted price regulation and in these instances it was done as part of a political campaign - which is hardly a good foundation for any regulation. The only people that have benefited from price regulation in NL are a retired teacher and a taxi driver.
    For a province so dependent on oil revenues for fiscal management, get rid of price regulation and pray for $1.25/litre gasoline (based on New York Harbor prices..not greedy independent retailers).

  • Mark
    July 01, 2010 - 19:43

    I agree with the AIMS study, and I consider myself left-of-center and would be the last to defend unfettered capitalism. Since gas price regulation came into effect, I have used the Petroleum Pricing Commissions' own information to develop a formula myself for what the local price of gas would be so that I could time my fill-ups for the rises and falls that happened when the price was set.

    I quickly saw that gas price regulation protected us from very rare and unusual price spikes (like when hurricane Katrina hit), but where it is an average, with an interruption formula, rather than price that is set daily, the downside is that we never see the price of gasoline fall very quickly. I soon saw that if the local price of gas was allowed to float daily, based on the NY Harbor spot price, then we'd pay a lot less than that which is averaged out over a week or two.

    The numbers tell the truth. You add into that the cost of the government bureaucracy for regulation, and the cost to the gas stations to have to go along with all this, along with the cost for consumers having to wait for the price to fall, you can see how it all ads up. Meanwhile, the bureaucracy cannot keep up with market conditions and consumer demand. We just have to look to the Labrador coast price freeze problem this year to see the predicament. We only have to look to those independent and rural gas stations that have closed, to see where small business owners cannot tweak the prices to match their local needs and customers who might be willing to pay a little extra to keep a local gas station open.

    Personally, I would favor a system whereby the PUB randomly sampled gas-station prices monthly and checked them against a formula to see if they were charging fair-market value, rather than imposing regulation.

    But, in the end, it is up to the people whether they want to pay this extra cost. While we pay more for gasoline, we also get predictability and price stability and can thus budget.