Last night they had another of the now regular stories on the local news about the rising gasoline prices in the Lower Mainland. On my walk to work today I passed the local Shell station and looked up to see the gas price was $1.549 per liter. That is closing in on a record and apparently prices are still on the way up. According to Dan McTeague from Gasbuddy.com, gasoline will soon hit $1.60/L. Needless to say a lot of people are complaining about this with Dan pointing out on Global News that one way to see a decrease in gas prices would be to see the completion of the Trans Mountain Expansion Project (TMX).
I agree with Dan. My opinion is based on the National Energy Board (NEB) documents that describe how the TMX could eliminate the bottleneck for the shipment of refined fuels from the refineries near Edmonton to the West Coast. It will also free up space on the new pipeline so that Alberta’s new Sturgeon refinery can ship diesel to the coast. As such, I was a bit shocked by what came next in that Global News report. Specifically, it was a series of quotes from an academic from Simon Fraser University by the name of Dr. Perl. In the story he made a claim that
B.C. is unlikely to see any bargains from increased supply because of the cost of financing infrastructure like the Kinder Morgan pipeline expansion.
“They’re going to want their money back,” Perl told Global News.
“Not in 50 years, but in 15 years, and that means higher prices because of the higher return, higher interest rates, expected returns on that investment.”
Needless to say I was a bit shocked by that claim and the intention of this blog post is to put paid to these ridiculous claims by simply explaining the facts about the pipeline and our local gas prices. Once I do, I will leave it to you, the reader, to decide who is right and who is wrong on this topic.
Our local gas price has a lot of factors built into it. Let’s start with taxes. Provincially, in the lower mainland we pay 32.17 cents/L (c/L) of provincial taxes for every liter of gas, this can be broken down to:
- 17 c/L in TransLink Tax,
- 6.75 c/L in British Columbia Transportation Financing Authority Tax
- 1.75 c/L in Provincial Motor Fuel Tax, and
- 6.67 c/L in Carbon tax
The feds also get their pound of flesh. Federally we pay:
- 10 c/L federal excise tax and
- 5% GST on our total purchase price (or 7.5 c/L on our $1.549 gas)
Adding up all the taxes together we get 49.67 c/L for taxes. That leaves about $1.079 for non-tax sources. Now the problem with the gas business is that it is very opaque. The internal prices are kept private but one thing we are privy to is the rack price. The rack price is defined as:
the cost of the gas itself, as well as transportation, overhead, and profit costs. The price can vary from terminal to terminal and depends on the cost of crude oil and related refining costs. The rack price also depends upon the distance between the fuel retailer and wholesale terminal. A gas station located far from a terminal is going to pay a higher fuel rack price than one located just down the street.
That would be all the costs, exclusive of the dealer’s mark-up which pays for the retail facility and all its staff. Most oil companies publish their rack price somewhere. Here is a link to the Petro-Canada daily rack price for Canadian cities. In Edmonton today it was 69.4 c/L while in Vancouver it is 92 c/L. There is a 22.6 c/L difference in the rack rate. In Anacortes the rack price (converted to Canadian dollars) is 76.36 c/L so the difference is 15.64 c/L.
Assuming the rack price is pretty comparable between retailers (to simplify this discussion) then the dealer’s mark-up would be 12.33 c/L. So from our $1.549/L we end up with:
- $0.92 rack price
- $0.3217 provincial taxes
- $0.10 federal excise tax
- $0.075 GST
- $0.1233 dealer’s mark-up
We can’t do anything about the taxes and the retailer has a pretty small margin so let’s look at the rack price and the effect of the Trans Mountain pipeline on this price.
As discussed above, transportation costs are part of the daily rack price. Transportation costs vary by means of transportation but luckily we already know that the Trans Mountain benchmark rate (average rate for fuels running down the pipeline) is around 1.6 c/L – 1.7 c/L. Since gasoline is a lot easier to move down the pipeline than diluted bitumen it has a lower rate (called a “toll” in National Energy Board speak). Based on the most recent toll information gasoline shipped from Edmonton to Burnaby costs about 1.3 c/L (note gasoline is called “Super Light” on that chart). That is a pretty small part of the rack price so how would toll increases affect that number?
As part of the TMX discussion economist Robyn Allan calculated that the costs associated with building the pipeline could increase the benchmark rate by 2.2 c/L. Since her calculation is based on the benchmark the gasoline component (as a Super Light) will have a lower increase but for argument’s sake lets say the price will increase by 2 c/L for shipping.
The doesn’t sound like much but a little goes a long way as the opponents of the pipeline will tell you. As Economist Allan argues:
B.C. motorists buy about 4.7 billion litres of gasoline a year. At 2.2 cents a litre on gasoline sales of 4.7 billion litres, the financial drain from the wallets of B.C. consumers to the treasuries of multinational oil producers comes in at just over $100 million each year.
But that argument has a hole the size of Vancouver Island in it because it ignores the other features built into the rack price.
As discussed above the rack price in Vancouver is 22.6 c/L higher than Edmonton and 15.6 c/L higher than Anacortes. Most of that difference is due to the supply issues. To explain let’s go back to the Petro-Canada rack rate chart and look at similar markets that are not subject to our supply bottlenecks. The price difference between Edmonton and Saskatoon (525 km apart) is only $2. The price difference between Edmonton and Winnipeg (1300 km apart) is $2.70 and the difference between Edmonton and Toronto (3500 km apart) is $7.2. Notice a trend? Those communities without transportation issues have tiny differentials. The distance between Edmonton and Vancouver (1150 km) is less than the distance to Winnipeg but our mark-up is almost ten times theirs. If we eliminated the bottleneck it might result in an increase in 2 c/L in transportation costs but will likely eliminate the 10 c/L – 20 c/L mark-up caused by our transportation bottlenecks. An increase in 2 c/L that results in a decrease of up to 20 c/L…that is a trade I am willing to make any day of the week.
Having demonstrated that Ms. Allyn’s argument is faulty let’s look at the argument made by Dr. Perl in the Global News story that introduced this blog post. In the story Dr. Perl argued that our prices could increase stupendously if Kinder Morgan decided it wanted to amortize their pipeline over 15 years instead of over 50 years. Well if unicorns existed I would want one for a pet but I’m not making any plans for that either. The reason his suggestion is unbelievable is that the toll is set by the National Energy Board and they have to consider the national interest in their decisions. So unless Kinder Morgan can convince the NEB that it is in the national interest to change their amortization schedule then it is more likely that the NEB will maintain the rates right around where they have been for the last decade and where they were when the project was proposed and approved.
So let’s step back and look at that $1.549 gasoline at my local corner. A large percentage of that cost is the result of a shortage of capacity to move refined fuels across the province. Now let’s remind ourselves about the TMX. As I have written a couple times recently, the TMX has two major components:
- Line 1 would consist of existing pipeline segments (with pump upgrades) and could transport 350,000 b/d of refined petroleum products and light crude. It has the capability to carry bitumen but at a much reduced volume per day. Notice that absent the heavier bitumen it can carry an extra 50,000 b/d.
- The proposed Line 2 would have a capacity of 540,000 b/d and is allocated to the transportation of heavy crude oil. This new pipeline and configuration setup would, add 590,000 b/d to the existing system for a total capacity of 890,000 b/d.
As I have explained, Line 1 is intended to help mitigate the supply bottleneck that has Vancouver drivers paying such high prices for gasoline and diesel. It will supply more capacity to carry gasoline from the refineries near Edmonton to the west coast; it will provide new capacity to transport the diesel produced by the new Sturgeon Refinery (you know one of those refineries the activists insist we start building) and it provides capacity to supply the Parkland refinery (formerly known as the Chevron Refinery). The Parkland refinery historically got about half of its raw crude by rail (due to a shortage of capacity on the current Trans Mountain) [note: this paragraph has been changed to reflect info provided after the original blog post was posted].
Recognize that nothing I have written should come as a surprise to people like Robyn Allan or Dr. Perl and yet they have omitted this information in their submissions and their television/radio interviews. I am left to wonder why.
The best thing about a blog is when someone reads it and can provide help to make it better. In this case I received information from Parkland that updates the information that I have relied on from a previous source. In my earlier blog post I reported that that the Parkland refinery in Burnaby gets about half of its 55,000 b/d from the Trans Mountain and half by rail due to the lack of space on the existing pipeline. That reference is now out of date. I have been contacted by a representative from Parkland who informs me that Parkland now gets all its supply from the Trans Mountain. I will be editing my blog posts accordingly.
For those looking here is the NEB final document that many have asked about
Thanks for the information.
Allan’s been on this particular hobbyhorse for a year now. And people believe her. without questioning her “facts.” https://www.nationalobserver.com/2017/03/27/opinion/trans-mountain-expansion-will-cost-bc-motorists-over-100-million-year
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Allan is a stooge for the activist agenda and makes submissions to all oil and gas projects…
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To believe that fuel prices will go up requires you to believe that firms will spend a fortune to build a system that is more expensive than the current system.
If their new system is more expensive than their competitors’ they will make no sales, especially in a market where all petrol is identical to the consumer. Why would they do that? Spend all that money to not make sales?
I appreciate all the work you have put into this, but really any understanding of prices would suffice. They want a pipeline so they can undercut the alternatives.
The amortisation argument is particularly silly. Why do companies when they make a new factory not just put the price up so they can amortise the cost in one year, making themselves a fortune? Because they have to sell their product first! Which requires it be cheap.
There would be no need for the NEB to get involved if rapid amortisation it was pushing the price higher than the current price, as the petrol would not sell.
You really wonder if some Greens understand even the most basic concepts of price, supply and demand.
What is the ‘toll’ for rail shipments? Shifting hundreds of thousands b/d to cheaper transportation (pipeline) should be fairly easy to factor into the final price.
There is no “toll” for rail. Rail charges are based on a number of features including route, rail car availability and seasonality so easy calculations are not possible.
Just a heads up. In your break down of the $1.549 gas price, I think you meant to write $0.075 GST not $0.75 GST. Thanks for the enlightening post!
I expect that you’re aware that Parkland Burnaby’s feedstock transport varies? In addition to their rail offload using the tracks that run along Burrard Inlet, they also have a Langley facility that offloads railcars into trucks for transshipment (IIRC, Parkland can unload 24 trucks/day at Burnaby). As TMX allocations vary, those facilities are put to use. Chevron at one time wanted priority allocation on TMX, I believe (but can’t verify) that NEB declined.
Another issue I have with Ms Allan’s article is the failure to recognize that Imperial doesn’t use TMX for SWBC fuel. IOCO receives product from the Strathcona Refinery via rail and is currently removing the pipes that used to connect it to Burnaby Terminal.
Just a clarification, since 2015 Parkland has not needed to use oil-by-rail as they increased their allocation. By the looks of the graphs most of their increase came at the expense of marine shipments of heavy crudes.
If I have it correctly, (then) Chevron signed a long-term contract commencing June 2015 and hasn’t used road/rail since then. I’m curious what the shipments consist of now given the Parkland shutdown doesn’t seem to have caused the same price rise in diesel that it has in gasoline. TMX doesn’t appear to have released that data yet.
Should noted that the prices listed are not for “gasoline” but for “motor fuel” which is federally mandated to be diluted with 10% low energy ethanol. The only “gasoline” I have found available locally is Chevron and Shell premium at about $1.72/L at the moment. In $0.97/L refinery rich San Francisco from where a lot of the anti-pipeline money is pumped (or more likely a few miles south in $0.92/L Silicon Valley) the spread between regular and premium seems to be about 6 cents/L versus our 21 cents/L spread.
Do we import a lot of the required ethanol from the US where ag price supported corn farmers grow the 40% of their crop to make it…driving up food prices world wide?
Shell told me that the exact composition of the “mystery mix” I am pumping into my vehicle is unknown as the 10% blend ratio is “global” for Canada, hence the “may contain up to 10% ethanol” label. This sits incongruously next to the label noting the stringent government calibration (temperature corrected!) for the pumps volume delivery.
I look forward to buying milk with some uncertain quantity of the now rehabilitated fat content.
Now that KM has just suspended the project, perhaps it’s time for Notley to agree that pipelines are too dangerous and shut it down. Or maybe it could suddenly need a rigorous inspection?
Time to put tolls on everything that comes out of bc. Time to immediately shut down all fossil fuel energy to bc. All good. Blow up Canada
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Your argument hinges on the dubious assumption that oil companies will do what’s best for the common good. Line 1 is NOT “intended to help mitigate the supply bottleneck that has Vancouver drivers paying such high prices for gasoline and diesel.” It COULD do that, but whether it will or not depends on what products the shippers decide to send through the pipeline. The oil companies closed the refineries in BC and created a shortfall that now nets them millions of dollars a year in excess profits. If you think they’re in a hurry to solve that, you’re pathetically naive.