Posted by: ~KC~ | May 22, 2008

The Roof Is Not Yet On Fire…

Old Iron over at Bar Slaves, in spite of his frustrations, made some very valuable points that I think many of us were not aware of about our ever increasing costs of fuel and crude oil in this blog posting. I strongly encourage you to read his posting and filter thru perhaps some of his words of frustrations to see the points he is trying to make.

It helps that he is in the industry and can explain it from an insider’s perspective… and lay blame where the blame should truly lie. I can only really speak about it from a Canadian perspective… but this is a global issue at the end of the day.

Perspective is needed. Stepping outside of ourselves and trying to see it differently might actually help. It might not quench many of our financial worries… or it just might help us make more educated choices, making different choices than the ones we’ve all become accustomed. Transition periods are hard. And we are in the midst of a big economic shift and we are all in one way or another, feeling it.

So here is a different perspective from what we think we know, much of it is supporting Old Iron’s expressed opinion in his blog posting.

Before we get set in panic mode… perhaps we ought to stop blaming others and look at ways that we can cut back and make small changes in our lifestyles in order to feel the pinch a little less. And look at our government officials to stop blowing air up our collective asses when they say there is nothing they can do to help out the situation… and demand they do something real. Afterall, when 28-32% of your fuel price is taxes in Canada… you best believe they can do something more than reduce the GST by 2%.

CALGARY – Oil prices have doubled from where they were a year ago, surpassing yet another record of US$133 on commodities markets Wednesday.

Yet the prices at the pump – while painfully high – have not risen in tandem. According to this week’s pump price survey by energy consulting firm MJ Ervin, Canadians paid on average $1.27 to fill up their gas tanks. Last May the average price was about $1.12 per litre.

It’s a significant increase, but not nearly as dramatic as that of crude oil, which was only worth US$66 a barrel last May.

“There are other costs involved in the processing of fossil fuels into gasoline. You wouldn’t get a one-for-one increase in prices,” said Derek Burleton, an economist with TD Bank Financial Group.

The increasingly expensive raw product is an important part of the equation for gasoline. But taxes as well as refining and marketing costs are also key factors in the final pump price.

The fact that the Canadian dollar is around parity with its U.S. counterpart also helps keep pump prices relatively tame, since oil is denominated in American currency.

While it may be cold comfort for drivers sick of spending a fortune to fill up their tanks, gasoline retailers have not hiked their pump prices higher because they have to stay competitive.

“In today’s market, they’re not free to keep pushing up prices forever. At some point you will get some demand destruction,” Burleton said.

Most gasoline in Canada is sold by integrated oil companies – players that have interests in the production, refining and marketing segments of the industry.

Companies like Petro-Canada (TSX:PCA) and Imperial Oil Ltd. (TSX:IMO) have made weak margins on their downstream – or refining and marketing – business this past quarter. But those declines have been offset by the fact that the products they produce have been grabbing such a high price.

“They’re benefiting from their upstream operations and that makes it a little more palatable. Overall their financial performance is still in excellent shape,” Burleton said.

“The downstream operations are obviously struggling at the moment.”

“It’s still a profitable business and otherwise we wouldn’t be in it. But the cost of the raw commodity going up and up has really pinched anyone that’s in the retail gasoline business whether you’re big or you’re small,” Hamilton said.

TD’s Burleton said there’s no real fundamental reason to support crude oil’s 50 per cent ramp up since February, and that prices will likely recede in a few months.

“I do think the market is getting ahead of itself. Even though the U.S. dollar has fallen, I just think the market’s climbed too far too fast and I would be looking for an adjustment,” he said.

“The trigger could be just seasonal. At this time of year, there’s anxiousness about the summer driving season and the impact on supplies but once we move into the summer I think there’s a good chance that we’re going to get quite a correction.”

Toronto-area Liberal MP Dan McTeague said that if the price of crude oil were riding on supply and demand fundamentals, it would be worth much less – between US$50 and US$75 a barrel.

“There is no doubt that the supply situation is stable. And demand may very well have tapered off a slight bit with these prices,” said McTeague, a long-time gasoline price watchdog.

“The problem is not supply. The problem is a distortion that originates from various and sundry hedge funds and investors who are basically chasing the idea that oil is king.”

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Responses

  1. He has excellent points there. What I will add to it is from my years working for a gasoline wholesaler is that many people do not understand how much the refineries factor into the problem. We aren’t building new refineries (I don’t want that in my backyard syndrome), trying to retrofit old ones to meet the environment requirements and expecting it to be done on the cheap. I cut and paste this from Wikipedia…

    In the United States, there is strong pressure to prevent the development of new refineries, and no major refinery has been built in the country since Marathon’s Garyville, Louisiana facility in 1976. However, many existing refineries have been expanded during that time. Environmental restrictions and pressure to prevent construction of new refineries may have also contributed to rising fuel prices in the United States.[8] Additionally, many refineries (over 100 since the 1980s) have closed due to obsolescence and/or merger activity within the industry itself. This activity has been reported to Congress and in specialized studies not widely publicised.

    Let me tell you from the wholesaler POV, when a portion of a refinery goes down for maintenance, the price of fuel charged by the fuel companies to the wholesalers jumps a lot. Then the wholesaler has to pass that expense to the street (the stores). And the wholesaler is still locked into his one or two cent a gallon profit margin. The biggest margins are realized by the fuel companies and sometimes the street.

  2. Thanks for coming over and adding to the… well, I can’t call it a “debate”, per se, but logical discussion.

    Good to meet someone else that is a part of the industry!


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