Oil & economic development

In a new Leger poll of Canadians 49 per cent of respondents wanted petroleum resources nationalized while 43 per cent said they would like to see the same fate for gas companies.

At first glance, the nationalization of the oil industry doesn’t seem to be overly compatable with economic development, but the more I look at this issue, the more I think that something needs to be done.

Let’s be clear. The oil industry is monopolistic – the formal term is oligopolistic – basically they all collude to set prices. They justify this collusion by saying that gas, for example, is a commodity and therefore all supplier pricing has to be about the same or the lower priced guy would push everyone else out of business and then we would have a true monopoly.

Now, there are two main problems with the oil & gas industry at the retail level. One, the oil companies make record profits when the price of crude spikes. If you don’t believe me, check out the last few oil ‘shocks’ in recent years. This is, for me, unacceptable. Name me another industry that makes record profits when the cost of their raw materials goes up substantially. Imagine if the airline industry could just raise prices by 30% overnight – and all airlines would raise their prices to the same level. Or the auto industry. Or any industry. Again, don’t get me wrong. If their supply costs increase, they should pass at least some of that increase on to consumers – but record profit levels on the backs of overly burdened consumers – is totally out of line.

The second, and just as annoying issue, is the role of government in this. Government has decided to heavily tax gas used in our vehicles. Upwards of 40% of the price of gas is tax. Now, because this tax is a percentage of sales, the higher the price the more tax paid. So, governments reap windfall profits when the price goes up. So, what motivation have they to try and pressure oil companies to moderate price increases? It is true that the downward pressure on demand may limit their ‘windfall’ but I hardly think that government is in any position to be objective about this. And the New Brunswick government, aren’t they nice, are thinking about ‘rebates’ for the poorest of New Brunswickers. Isn’t that sweet. How about dropping your tax to a fixed amount – say 20 cents a litre -no matter what the price is? That would result in the government not gouging the consumer right along with the oil companies when there is a spike in prices.

But governments won’t. They want and crave the revenue. But in my books taxation should be structured to minimize negative economic impact. Imagine if your income tax rate actually increased the less money you made? That’s what this is like. Imagine losing your job and finding out you had to pay more tax. That’s what this is like. We have a 30%-40% increase in gas and the government helps out by adding its 15% on top of that.

So, without waxing on and on about this, I’ll conclude with a couple of points:1) Governments should be more serious about this industry. By serious I mean ensuring a competitive environment (no windfall profits during crisis, please) and by incentivizing the diversification of energy to lessen even the short term reliance on oil. This has major economic development issues. Almost every major recession since the second world war has been tied to some spike in the cost of oil.
2) Governments should also change their tax regime on retail gas and oil to a fixed amount. Charging 15% more on top of the 30% increase from the oil companies is egregious and the public should start making some noise.

And it would help if the media made the point a little more forcefully too. The taxes we pay on oil and gas are higher than auto insurance which we used to nearly oust the NB government. Now we are getting hammered once again – a little more indirectly.