Saturday, May 12, 2007

Corcoran on Mackenzie's Report

I read Mackenzie's report when it came out a couple days ago, and I called it "low level research".

Although I don't agree with Corcoran about gasoline tax, he made some very good comments on Mackenzie's report.

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Ripped off by poor research; Market forces are driving gas prices, not greed

National Post
Terence Corcoran
May 11, 2007

Dumb is easy, and of all the dumb stories in the media world, the easiest by far is the robotic visit to a gas station to plumb popular outrage over gasoline prices. A moron could do it, especially when equipped with the even dumber piece of junk research issued yesterday by the Canadian Centre for Policy Alternatives.

Or, as we call it around here, the Canadian Centre for Alternatives to Good Policy. Gas Price Gouge: The Sequel, said the centre's little three-page piece by consultant Hugh Mackenzie. It created a sensation on its release, as all-news radio teams and other media fanned out for ritual gas-pump reactions from consumers.

Reporter: "A new report shows you're being gouged. Are you outraged by this?"

Motorist: "I'm outraged by this!"

Reporter: "Thank you. Back to you, Peter."

The "report" turns out to be a thin bit in which Mr. Mackenzie -- who has emerged recently as an all-purpose anti-markets lefty at the centre -- announces that by his calculation, the current price of gasoline is way above what it should be. In Ontario, he said, gasoline is 15% or more above the "normal price."

As Mr. Mackenzie figures it, the "normal" price is what gasoline would sell for if the price were set as a simple formula off the price of crude oil. The price of crude, plus refining and marketing costs, plus taxes, should lead today in Southern Ontario to a "normal" price of 88.3¢ a litre. "Compared with prices in the $1.05 to $1.10 range in Southern Ontario at the beginning of May, 2007, that's an excess profit to the gasoline industry of 16¢ to 21¢ per litre."

According to Mr. Mackenzie, this gap between his normal price and the actual price "could not be explained." And if it can't be explained, then by gosh there's only one explanation: We're being gouged! The oil companies are ripping us off, racking up "excess profits" of up to $45- million a day.

There actually is, of course, an explanation for all this. The first one is Mr. Mackenzie's bullheaded and, one assumes, deliberate ignorance of the role of supply and demand. No commodity in the world, indeed no product in the world, is priced the way Mr. Mackenzie wants to price gasoline -- as an automatic variable based on the cost of production.

The cost-plus fantasy is a favourite of leftists and often of corporations who would rather not have to deal with market forces.

The price of everything, even when fixed by government, eventually comes around to market forces. The actual cost is, mostly, irrelevant.

Mick Jagger, no dummy, figured that out. The actual cost of putting on a Rolling Stones concert bears no relationship to the price of a concert ticket. Asked by a British rock magazine just before the group's A Bigger Bang tour if Stones tickets "are too expensive," Mr. Jagger said: "They're like fish ... market price."

The market price for gasoline is actually set in the market, not in Hugh Mackenzie's head.

The main price-setting venue for much of Eastern Canada is in New York, where the benchmark spot price is set for regular unleaded gasoline. The New York spot price one day this week was 63.1¢ per litre. The Canadian wholesale price was 67.5¢, a 4.4¢ difference that's about standard for the Canadian wholesale price over the past two years.

As you can see from the graphs nearby, the Toronto retail gasoline price follows the Toronto wholesale price, which in turn follows the New York spot price, which in turn follows the thousands of market forces that are bearing down on the supply of oil and gasoline across much of North America.

The Toronto wholesale price, plus taxes and retail margins, pretty well determines the final retail price. The chain is pretty solid, and aside from some lags here and there it's clear nobody is gouging anybody. If anything, the price of gasoline in Canada, certainly in Eastern Canada, has been surprisingly low over the past few months.

Supply and demand means that when supplies get tight, prices rise. That's what happened during Hurricane Katrina -- the big spike in the charts -- when price rocketed, sending consumers a signal to cut back on consumption. That sent the price up to $1.40 a litre, generating profits and incentives for companies to ratchet up supply.

Mr. Mackenzie, swinging his ideological axe, views this not as a functioning market but as an oil industry capitalizing on a disaster to move the price of gas up over the $1-a-litre barrier. Katrina was just a "price-gouging opportunity," he says, a story "peddled" by the oil industry to establish the $1 mark as a legitimate price.

How odd, though, that when Southern Ontario suffered a refinery shock earlier this year, the price of gasoline in Ontario actually failed to spike beyond a few cents above the New York spot price. Could this be a sign the market worked? Or, heaven forbid, that the oil companies in Canada conspired to keep prices low?

We really don't know what's moving the market for gasoline at all times. Mr. Mackenzie regurgitates all the usual non-evidence of the oil industry's "price-gouging strategies."

Prices go up and down, daily and weekly, hourly and monthly, at noon and at midnight, in New York and Alberta, in Toronto and Oklahoma -- and none of the prices are the same as Mr. Mackenzie's formulaic "normal price."

What's the explanation? It's market price ... like fish and Stones concerts. But don't ask Mr. Mackenzie. He has no idea.

2 Comments:

Blogger Grant said...

Jeez Daniel! you keep hitting the nail on the head.

Instead of lashing out at "the man" or the oil companies. We as individuals have to look at the market with perspective.

We love to say that a "price" is affecting us. But we tend to not look at the big picture, distribution lines, resource supply, refining capacity, market price etc.

How many of our neighbors think that groceries come from "the store"? Too many!

We live in a world economy people!
We buy our resources on the world market.

Based on the gas consumers mentality I should be eating bread for free on the prairies because that is where the wheat is grown!

Hey! I am from Vancouver but Salmon costs as much or more there than anywhere else.

Bread, by the way, still costs the same in Saskatoon as it does in Toronto. Sometimes it even costs more because we are a smaller market.

A private note, did you get the global warming video I sent you? The market at work!

http://video.google.com/videoplay?docid=4499562022478442170&hl=en-CA

5/12/2007 7:12 p.m.  
Blogger X said...

The best analogy I can find is if you are about to buy a house or a piece of property in Vancouver or Calgary or Toronto, do you assume that the builder only makes X% for profit? And anything more than that is "price gouging" by the seller/builder??

And yes, I got that link from you about global warming, I just have to find time to watch it. Probably after this week.

5/14/2007 11:20 p.m.  

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