Gasoline prices have skyrocketed since the beginning of the year. Thus, in Montreal, it went from an average price of 1.136¢/litre last December to 1.859¢/litre on March 14, an increase of 63.6%. That’s a lot for a commodity whose use is associated with many of our daily activities.
Voices are being raised in favor of government intervention that would slow the progression of this price. The most common suggestion is to reduce taxes collected by provincial and federal governments on sales of gasoline and other refined products. Thus, Mr. Jason Kenney, Premier of Alberta, announced that he would withdraw the fuel tax from 1er April. On the other hand, Mr. François Legault indicated that he would not adopt such a measure while Mr. Doug Ford, Premier of Ontario, will lower the fuel tax if the federal government gives up the tax increase. on carbon already scheduled for April.
A price lower than the world price
Since Canada is more than self-sufficient in crude oil supply, it is also suggested that the federal government impose an internal price that would be lower than the world price. The following analysis shows that these two approaches aimed at reducing the impact of the price of oil on consumers have no economic basis and that on this basis they should not be applied.
The main factor underlying the rise in petroleum product prices is the growth in the price of crude oil, which jumped from US$72/barrel (Brent) on December 31 to US$129/barrel on March 8. This surge is linked to the invasion of Ukraine by Russia, which is a major producer of crude oil, ie 10 million barrels per day out of a world consumption of 100 million barrels per day. The increase in the price of crude oil tells us that the market fears a reduced availability of Russian oil in the near future. Market integration leads to the same price increase everywhere on the planet. Since the market anticipates a drop in availability, the quantity demanded will also have to drop, because the current level of demand can no longer be maintained. The increase in price is the mechanism that will restore the balance between supply and demand.
OPEC countries
Lower taxes on petroleum products collected by governments would run counter to this necessary adjustment, and the price of crude oil would need to rise further to restore balance to the global market. Oil producers would be the big winners.
Currently, 55% of the world’s oil production comes from the countries forming OPEC+ (Organization of the Petroleum Exporting Countries), whose main members are Saudi Arabia, Russia, Iran, Iraq, Kuwait and the United Arab Emirates. A greater increase in the price of oil would cause an additional transfer from importing countries to exporting countries, thus contributing to the latter’s oil income. In addition, a reduction in taxes on the consumption of petroleum products would apply to all users, whether rich or poor. In this context, it seems to me preferable to make a transfer intended only for the less well-off and to keep the price signal intact for all users.
Canada, which ranks 4th in the world as an oil producer, produced 5.13 million barrels per day and consumed 2.28 million barrels per day in 2020; it was therefore a net exporter of 2.85 million barrels per day. Based on this self-sufficiency, it is suggested that the federal government impose an internal price in Canada that would be lower than the world price. This price difference would not change the real cost of oil consumed in Canada, which would remain the world price, and thus, it would cause a net loss for the Canadian economy as a whole.
Controlling the internal price of crude oil was at the heart of the energy policy implemented by the Trudeau government in the context of the oil crises of 1973 and 1979. The economic effects were disastrous. In addition, this policy generated resentment that still persists in Alberta. To understand this resentment, you have to imagine the reaction aroused in Quebec by a federal policy that would force Hydro-Quebec to sell its electricity to neighboring provinces at a lower price than the price of sales to the American states, while the federal government appropriate this export price differential.
The rise in the price of oil is a global phenomenon and this price remains the real cost of its use in Canada. The two measures described above, which aim to lessen the impact on users, in no way change this real cost and result in an economic loss for all residents of a given territory. Direct transfers are the way to go to correct the real loss suffered by less well-off households.