This morning while getting ready for work, I heard Marc Lee from the Canadian Centre for Policy Alternatives on the radio with Stephen Quinn talking about the price of gas in the BC Lower Mainland. I understand he also spoke on Jon McComb’s program as well. The basis of this discussion was a new Policy note prepared by the CCPA titled: Turn off the taps? Alberta already has Vancouver over a barrel. This analysis purportedly explains why BC gas prices are too high (hint he blames price gouging) and proposes a solution (hint he proposes more regulation). Coincidentally, this weekend I wrote a post about this very topic so here it is:
I have listened to Mark Lee and read his analyses and remain amazed that someone with his Economics background can continually make arguments that seem so flawed to me. As I have listened, I have wondered to myself how what is he missing? and I think I have the answer: it has to be an incomplete Root Cause Analysis. In this blog post I will attempt to explain where I believe he is getting it wrong.
To start let me explain about Root Cause Analysis. Root Cause Analysis is a tool used in incident investigation to drill down to the root cause of an incident. One of the tools of Root Cause Analysis is the “multiple why” approach. In the “multiple why” approach you have to keep asking “why?” until you determine the root cause of the accident.
As an example consider a trip and fall incident. A worker tripped and fell. Asking “why?” you discover that the worker stepped on uneven ground when a safe path existed nearby. Asking “why?” you discover that the route was faster than the alternative. So the answer is laziness? Maybe, but maybe not, let’s keep drilling down. Ask another “why?” Why did the worker chose the faster route when a safer route existed? Because the worker felt pressured to get work done faster. Wait that is a totally different answer from the worker being lazy. Time for another “why?” Why did the worker feel the need to choose speed over safety? Maybe it is a corporate policy that emphasize output over safety?
As this simple example shows if you stop a multiple why analysis too early the investigator can come to the wrong conclusion. It wasn’t a lazy worker that caused the problem but a corporate policy that valued output over safety that was the root cause. Any solution to address this incident will only succeed if it addresses the root cause “valuing production over safety” in the final conclusion. A true root cause analysis can also come to a variety of independent root causes that all need to be fixed to avoid a repetition of the incident.
Going back to the Marc’s conclusion: that price gouging is to blame for our gasoline price woes. We can see that Marc stopped asking “why?” several questions too early and because he stops his analysis too early his solutions appear equally flawed. So let’s dig deeper.
The obvious question is “why are the refineries gouging (assuming they are)?” Well the clear answer is: because they can? So comes the question “why can they?” and that question brings us to the crux of the problem…the one any reasonable Economist should consider in their analysis but never seems to be considered by Marc in his analyses: supply and demand.
The simple truth of the matter is that the west coast is under-supplied in refined fuels. As I have written previously BC uses about 190,000 barrels per day (bpd) of refined fuels but we only get about 160,000 bpd from domestic supplies. The remainder we have to buy, at a premium, from the US.
According to the US Energy Information Administration (US EIA), the US sent British Columbia about 45,000 bpd of refined fuel in January (last month of available stats) with most of that being jet fuel (~15,000 bpd), diesel and fuel oil (~16,000 bpd) and gasoline (~9,000 bpd).
Now that 9,000 bpd of gasoline is the problem. To understand this problem I recommend you read a short but excellent blog by well-respected Economist Marv Schaffer. In it he explains the:
Puget Sound only supplies a small proportion of the gasoline and other refined petroleum product requirements in the province, but it is what economists call the ‘marginal source of supply’ – the source BC has to turn to when Alberta supply plus the limited local production is not sufficient to meet provincial requirements. Because Puget Sound refiners are the marginal source of supply, they effectively set the market price. Shippers from Alberta can charge the delivered Puget Sound price, even if it is well above their own cost, because they are still competitive with the only available alternative. And Puget Sound is the only available alternative because of limited pipeline capacity for additional deliveries from Alberta.
So once again it is not price gouging that is the cause of our high gasoline prices but the market features of supply and demand. We have too much demand and too little supply. This problem can only be addressed by either reducing our demand or increasing our supply. I have argued repeatedly that the way to address this problem is to build the Trans Mountain Expansion Project and reduce the bottle-neck in our refined fuel supply chain.
Marc has different ideas. Let’s take a moment to take a look at how Marc Lee argues we should deal with the supply shortage. This from his policy note:
There is no supply shortage of gasoline in Metro Vancouver. No vehicles have been turned away from a station because they ran out of gas. The demand for gasoline in Vancouver is very stable and predictable, and storage tanks exist to manage inventories of fuel.
It shouldn’t be too difficult for these companies to supply fuel at comparable prices to other parts of Canada, as they have historically. And if they won’t, the BC government should step in to regulate the market.
It is hard to believe how bad this “solution” really is but I will try.
Remember that the CCPA is a think tank that deals “issues of social, economic and environmental justice. with poverty“, so let’s consider this from a poverty perspective.
Imagine a different think tank like the Fraser Institute argued that: “the problem with the working poor is that they simply don’t save enough money in the bank. If the working poor only had bank accounts where they stored large supplies of extra money for a rainy day then they could deal with their daily needs and have extra money to deal with emergencies“.
Do you think the CCPA would agree with this analysis? Yet this is an exact analogy for the CCPAs argument about gasoline. Marc is arguing that in a market with a chronic shortage of gasoline the solution is for the wholesalers to maintain an excess supply of gasoline in storage facilities.
Can you see how ridiculous this argument really is? If there was enough excess gasoline in the market for the wholesalers to have tanks of the stuff lying around then we wouldn’t be in this problem in the first place. If the working poor had enough extra money at the end of the month that they could fill a bank account with scads of cash, then they wouldn’t be the working poor.
Going back to our Root Cause Analysis we can see that Marc’s analysis stopped a couple “whys” early and as such his “solutions” are equally useless.
In order to fill these tanks with spare gasoline the wholesalers would have to buy expensive gasoline off the world market. But we already know that doing so will cost them more than it costs to buy from the Puget Sound (or they would be doing it already) so that solution makes no sense. It will have no effect on the marginal source of supply and gasoline prices will remain sky-high.
As for the suggestion we regulate the price of gasoline. That only works in jurisdictions where there is an excess of supply. If the government regulated the price of gasoline on the West Coast it would have to do so at a price equivalent to the marginal source of supply. Were they to choose a lower price the suppliers would simply sell to other markets (in this case to Oregon and California). This would leave us with an approximately 9,000 – 10,000 bpd shortage of gasoline in our market. I don’t need to tell you what happens when you use more than you bring in every day? You end up with a shortfall and eventually run out altogether.
Thus the regulation of gasoline would only lock in the price at a price equivalent to the marginal source of supply or it would have to be accompanied with strict rationing to keep our demand equivalent to the supply that is coming in. This is Economics 101.
Arguing that the poor should simply save more money doesn’t work in a poverty discussion and a parallel argument doesn’t work in discussing gasoline prices in the lower mainland. The supply/demand equation has two sides. If you want to decrease price you either increase supply or decrease demand. Any approach that ignores this bedrock principle of Economics is guaranteed to fail. Unless we can address the marginal source of supply we will have over-priced gasoline in BC. This is not rocket science, it is Economics 101.
As for the suggestion we regulate the price of gasoline. … You end up with a shortfall and eventually run out altogether.
This is the Venezuelan solution under Chavez and Maduro. You’d think people would learn from lessons being played out in front of them.
Back in 2007, Mark Lee opined “You are right about oil driving Venezuela’s economy. But Chavez is channeling the benefits of oil to the poor. And I doubt the price of oil is going to plummet — if anything the long-term trend will be up up up.” Ooops!
He seems to see everything in terms of the scarcity of oil, rather than the universal laws of supply and demand. But oil is plentiful and we are extracting ever larger amounts of it. Sure, it’ll probably run out one day, but no time soon.
Well written, Blair.
Great analysis, Blair.
I agree with everything you said, but I would have been happy if it didn’t lead to simplistic “regulation bad” / “free market good” conclusions. You are ideologically consistent enough on this theme that it undermines your scientific objectivity.
Again, I agree with what you said. But what you did not discuss is whether it is actually good for the price of gas to go up and supply to go down. If you believe that climate change is almost entirely anthropogenic and is a significant enough threat that we need to finally start effective mitigation efforts, then you would have to agree that, yes, supply should go up and demand should go down.
Price gouging makes oil companies profitable, which puts an incentive on production, so that is not the best way to achieve that. One alternative is taxing carbon. This puts a damper on both supply and demand simultaneously. A revenue neutral carbon tax can be made to lessen the impact on the poor.
Climate change mitigation will require that we rapidly move toward arresting the growth of fossil fuel exploitation and then start scaling it back. The math of whether or not the trans mountain pipeline expansion should go ahead is entirely dependent on how quickly we need to achieve that, not the means by which we achieve it.
* Typo in 2nd paragraph – should be “price should go up and supply should go down” rather than “supply should go up and demand should go down”.
One alternative is taxing carbon.
The reason why most economists favour a carbon tax over other alternatives to reduce demand is precisely that it interferes least with the actions of supply and demand. It is the lightest possible regulation that achieves the goal. And it achieves the goal better because it allows markets to find the most efficient systems.
The Greens tend to favour heavy regulation, because for a lot of them government control of the economy is the aim, and climate change merely a useful stalking horse.
There is no reason why free market solutions are incompatible with restricting CO2 production. Unless you are opposed, in principle, to free markets that is. I think the fact that Blair isn’t reflexively opposed to free market solutions is precisely because he is much more objective on this matter than the vast bulk of people. He doesn’t automatically link the aims of the Green movement with the methods they insist on.
See also why the obvious solution to CO2 production — ramping up of nuclear power — is strongly discouraged by most greens. It achieves the climate goals without affecting the economic and political system much at all. And that will never do.
“It is the lightest possible regulation that achieves the goal.”
It imposes the biggest burden on the poor and elderly.
Why not make electric/hybrid cars mandatory for the top 5% earners in Canada ( and then a few years later 10% and then 15% etc)
Allow them to sublet the cars to poor people for cheap (if they really want a gas/diesel car)
That way the burden falls on the rich as a progressive tax system should.
The most effective path to climate change mitigation is a free market that is informed and motivated by the science of climate change (consumers, investors and voters are all the same people after all). A carbon tax is necessary because we don’t have that.
I’ve read quite a few of the posts on this site and, on balance, I find them well researched, thought through and articulated. But occasionally not (I was particularly offended by his departure from scientific integrity in this post: https://achemistinlangley.net/2018/08/15/looking-at-the-science-linking-forest-fires-to-climate-change-in-b-c/).
He IS more objective on this matter than the vast bulk of people, but that’s not saying much.
My complaint with this post is simply that he uses this as an argument to support the expansion of the trans mountain pipeline. There are many good arguments (many of which he has made in other posts) to support the expansion, but this isn’t one of them. The expansion should be done purely based on whether it is financially beneficial to Canadian tax payers (with some consideration to increased safety vs. rail) — the math being done after a clear analysis of the optimal progression towards reduction of fossil fuel exploitation in Albert is done.
If Green is anti-nuclear, NDP is in the pocket of big Labour, Conservative is populist, climate change dismissing nonsense and Liberal is wall-to-wall corruption, then I guess I have no party affiliation. When it comes time to vote, I will vote for the most clear articulation of evidence-based-policy.
Is that what you will do Chester Draws? Is that what Dr. Blair King will do?
He did not discuss it, because it is offtopic for this article, which is about lacking analysis to reach an incorrect conclusion, which he sets straight. Perhaps there might be a future article debating co2 goals and ways to accomplish them. If CCPA opined turning off the taps was a fine way to reach co2 targets, this might be a good criticism.
I should have been clearer in my original reply. Blair’s paragraph:
“So once again it is not price gouging that is the cause of our high gasoline prices but the market features of supply and demand. We have too much demand and too little supply. This problem can only be addressed by either reducing our demand or increasing our supply. I have argued repeatedly that the way to address this problem is to build the Trans Mountain Expansion Project and reduce the bottle-neck in our refined fuel supply chain.”
This clearly indicates his belief that expanding Trans Mountain is a proper response to the free market issue of supply and demand. It is extremely obvious that the expansion would increase supply. So, continuing the process of “multiple why”, we must ask, “why hasn’t the Trans Mountain Expansion already happened?”. That’s a complicated question and to Blair’s credit, he has written lots relevant to that question.
Blair coming to this conclusion without asking the more complex question makes it clear that he wants people to come to that conclusion regardless of what path they take to get there. That’s bias. This blog would be a more useful resource without the occasional displays of obvious bias.
“the US sent British Columbia about 45,000 bpd of refined fuel in January ”
By double hulled freighter escorted by two tugs?
Or by single hulled fuel barge with no escort?
Or by truck on the roads of the lower mainland?
Well … the jet fuel:
“Cherry Point ships fuel by barge to Westridge Terminal on Burrard Inlet. It is then shipped to YVR in the same pipeline that connects Chevron’s Burnaby refinery to YVR.
Since the late 1990s, tanker trucks from Cherry Point have been required to deliver additional fuel as YVR’s fuel needs exceeded the pipeline’s capacity, particularly during peak travel periods.”
If the cost of not having additional pipelines and tanker traffic is higher prices at the pump, then so be it! Why are people up in arms over the current price of YVR gas, anyway? The cost of petroleum in Europe is much higher. This is a relative (and hopefully temporary) problem as society needs to make substantial moves to renewable sources of energy ASAP.
sunshinehours1 your comment about the top 5% of earners need to drive electric cars really doesn’t work. One could similarly say the top 5% of the heaviest people need to be on diets. I may not have an immediate solution but further regulation is not the answer. Additionally, I work in an area up north where there are a high proportion of large wage earners – mostly due to location. That location is also the reason an electric car doesn’t cut it here at this time. There is no such thing as a charging station, and simply plugging in to a power connection is generally not available when you would want it. I certainly am open to finding alternatives however!
GarnetT : The carbon tax punishes the poor disproportionately. Forcing the rich to buy electric/hybrid cars is justified. It would be way less inconveniencing for them than some poor person commuting an hour every day in a beater because they can’t afford a new car or a home closer to their job. And don’t get me started on the health effects of expensive heating causing poor people to freeze in their homes.
If I didn’t know better I’d think you are just dropping these ridiculous comments simply to wind up people. But I’m quite sure its simply due to a lack of education on the topic.
Here is quite a nice article explaining how the ‘poorest’ 80% of households are getting back more than they actually pay. Lets start with that.
Collectivity is so bogus when it comes to a tax. You know that half the people will be above average and half below … right?
Imagine 10 people with a similar income and 2 of them commute long distances to work and 2 of them live in poorly insulated houses and have oil furnaces.
Those 4 people will get hurt financially compared to the other 6.
Individuals will be hurt financially. The rich won’t even notice. That’s why the trust fund kids don’t care. They won’t be hurt.
We a progressive tax system for a reason. The carbon tax is evil.
Why not make electric/hybrid cars mandatory for the top 5% earners in Canada ( and then a few years later 10% and then 15% etc)
You need to think through the unintended consequences, something that the fans of regulation tend not to do.
People don’t buy electric cars because they don’t meet their needs. I know this sounds obvious, but the reason we don’t use them is because we don’t want them. Forcing someone to use one will decrease their effective income. At the margins, it will be better to not be in the top 5%, and therefore not be forced to buy a vehicle you don’t want.
So regulating the top 5% of earners to do something they don’t want will make a significant number of them (and in particular those on the edge or those that will not be in successive years) to deliberately lower their income to avoid being forced into that situation. I know I would take a $5,000 pay cut rather than than be forced to use an electric car.
The consequences for the economy of lots of people deliberately lowering their income is not good.
Also an inflexible demand would be a signal for prices of EVs to rise rapidly. After all, the unfortunates would be forced to buy them.
Very quickly a market would build in cheap EVs purchased to meet the legal requirement, which were not used. The owners continuing to largely drive their ICE cars. And if you forbid rich people from owning ICE cars, a market in long term leasing would arise.
Sorry for the rant, but regulations are rarely a good solution, and particularly regulations that force people to do things that are inimical to their own good. Regulations that impede people significantly will be evaded. In free-market economies all the time. In Socialist economies as much as possible, given the lack of options available.
“So regulating the top 5% of earners to do something they don’t want … ”
No one wants it, but the rich can afford it better than the poor. And as time passes there will be a lot of cheaper USED electrics/hybrids.
The UK has set a 2030 deadline for ending ICE cars. BC has a 2040 deadline.
Someone has to lead the way. Let it be the rich.
It’s easy for politicians to sound virtuous by promising targets that someone else will have to meet — so that’s what they do. No-one actually thinks it is going to happen or the share price of the firms worst affected would already be plummeting.
Already we have seen Germany, when it became apparent that meeting their climate targets would impoverish themselves, simply renege on the goals.
The UK will renege on the 2030 deadline, you can be absolutely certain of that. They already don’t have enough electricity and need to import it. As France starts phasing out nuclear, the amount of cheap electricity for the UK to import will plummet. The UK simply cannot power an entirely electric fleet carbon-free without huge investment in nuclear.
No-one has to lead the way. If it were a good idea, we’d all be doing it already.
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