The problem is oil company gouging, not higher prices

May 22, 2007

In the many conversations I’ve had about gasoline prices since a short report I wrote for the Canadian Centre for Policy Alternatives was released in early May (Gas Price Gouge), I’ve heard just about every justification for high gas prices one could imagine.

Labour disruptions in Nigeria. Escalating violence in Baghdad. Hugo Chavez. The fact that we had a warm winter. The fact that we had a cold winter. Problems with refineries in Oklahoma. Catch-up maintenance left over from Hurricane Katrina in 2005. High wholesale prices in New York harbour. Explanations that range from the intriguing – if it’s the New York price, why are Canadian wholesale prices consistently 5-6 cents higher than New York prices? – to the outlandish – Nigeria and profit margins on gasoline refining? – to the plausible but unhelpful – Shortage of refining capacity? Why? And who benefits from the shortage?

All of the explanations offered have one thing in common. They are in varying degrees opportunistic. But the justification that wins the prize is the claim that we shouldn’t be upset about paying higher prices for gasoline because higher prices will lead to reduced consumption, and that will be good for the environment.

Allow your gag reflex to recover from hearing that argument from the oil industry, of all places, and then let’s unpack the argument.

To begin with, it is clear that when you take the environmental costs associated with gasoline consumption into account, we should be paying more for gasoline. But that’s not the same thing as saying that the proceeds of higher gasoline should end up further lining the pockets of the wealthiest corporations on the planet. Indeed, the environmental costs associated with gasoline consumption are borne by society at large, and any compensation for those costs should go to society as a whole, not to the industry that already benefits the most from that consumption.

This view squares perfectly with the views of Canadians, who tell pollsters regularly that they would be prepared to pay more for products that cause environmental damage if the additional revenue bought change. Canadians are prepared to pay more to see greater investment in alternative sources of energy, alternatives to the private automobile as a means of transportation, and investments to repair the damage we’ve caused. But they’re not prepared to support being soaked at the pumps for the benefit of an already-bloated oil industry.

And they are rightly skeptical of claims by the companies that control the refining industry that a shortage of refining capacity is to blame for the inflated prices we are now being forced to pay.

As self-serving and outrageous as the argument may be, however, it does raise some interesting questions about how we pursue an energy conservation strategy.

Can we in fact count on higher prices to lead to lower consumption? The uncontrolled experiment in higher prices that we’ve been living through in Canada for nearly two years suggests that we can’t. And in fact, the oil industry itself is counting on higher prices not leading to lower consumption.

In Canada, the additional price we’re paying at the pumps today is about equivalent to what we’d be paying if the industry were making normal margins for refining and marketing and provincial gasoline taxes were double what they are today. And yet gasoline consumption has changed very little.

Two observations arise from these facts. First, market-based measures will not, by themselves, produce the advances in energy efficiency we need to achieve our environmental goals. Consumers can’t choose efficiency if the alternatives aren’t available. We need a strong regulatory regime to ensure that the products on offer from the automobile industry contribute to those goals. And we need to invest in efficient mobility alternatives like better public transit.

Second, if we are to pay more for gasoline, how the proceeds of higher prices are spent may be more important – at least in the short term – than the direct impact of higher prices on consumption.

Neither of these observations leads to the conclusion that we should sit on the sidelines while the oil industry exploits its market power in refining to drive consumer prices through the roof.

We’d be much better off if higher prices were captured by the public in the form of higher taxes, and then put back to use in the public interest – investing in public transit, energy conservation initiatives, and providing tax credits to the low-income households that can least afford to pay for higher gas prices. Fighting climate change is going to be tough, and there’s no point simply sending windfall profits to the very corporations that have spent the better part of the last decade denying the need for action.

Hugh Mackenzie is a Research Associate with the Canadian Centre for Policy Alternatives (

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