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.

Correction:

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.