Financial advisers suggest that part of being responsible with our money involves creating realistic monthly budgets, and then, sticking to them. So, we go about creating our budget… usually beginning with things like rent/mortgage, heat, hydro, groceries, internet, phone, clothing, etc, etc… and at some point we arrive at “Transportation Costs”. This is an extremely difficult cost to budget for… not because the price of insurance changes, not because our car payments change, but because the price of the liquid gold we put into our gas tanks can change dramatically in a very short period of time!
The more your family relies on it’s vehicle/vehicles, the greater the possible fluctuation in this portion of your budget. Now, there are ways to go about controlling this cost to an absolute fixed rate… for example, you may live in an urban area where you can purchase monthly bus, subway or street car passes. These costs typically go up only slightly on an annual basis, and typically no more than 2% a year. But, what if you live in the suburbs, or the countryside? What if your daily commute to and from work is 100, 200, or 300 km a day? For these folks, the swing in gasoline costs can be downright dangerous for their monthly budgets! There is nothing predictable about the price of gasoline, other than to predict that it is most likely you will see unpredictable swings in the price. For a family putting 500 to 1000 km a week on their vehicle, a 10% swing in gasoline prices can have serious repercussions for the budget. To put this into perspective, lets say that you are a family of 4 with two vehicles. You each drive into the city to work each day and you each travel approximately 120km a day round trip to work and back. Each vehicle is driving about 600km per week.
Now, lets say the average vehicle gets approximately 600km per tank of gasoline, and the tank in those vehicles is usually around 65 litres. So, at today’s price of $1.20/litre, it would cost your family approximately $156.00 per week in gasoline to operate your two vehicles JUST to drive to work and back for the week. Now, lets not forget that while you are not at work, you are still likely to put km on your vehicles doing every day things like groceries, eating out, catching a movie, driving the kids to the mall, sports practice, etc. etc. I think it would be fair to assume that between the two vehicles, you would probably go through at least one more tank of gas (1/2 a tank per car), adding an additional $78.00 per week of fuel to your budget. So, in total you are using approximately $234/week in gas, and if you were to budget this amount into a monthly figure, you would be looking at approximately $1002/month in gasoline charges! BUT, what would happen if the price of gasoline jumped 10%, or about 12 cents per litre? It’s not that uncommon to see a jump like this… think about it… I typically see on a week to week basis the price of gasoline on a Tuesday might be $1.21 per litre, but on Wednesday morning it has jumped up to $1.29 per litre! Ok, so now the gasoline is $1.32 per litre – how will this now affect your budget? Well, it will now cost you approximately $257.00 per week, or approximately $1101 per month! That’s a difference of nearly $100/month that you didn’t budget for, and quite frankly, $100 is a pretty significant number! For a $100, you could have taken the family to a movie with all the snacks, or a nice dinner, or purchased a new pair of athletic shoes or a nice pair of jeans… or, if you were really wise, perhaps put that into a RESP or other investment vehicle that would help out with your childrens’ education or perhaps your retirement fund! Either way, it’s a significant amount of money that is not always easily absorbed into the average families monthly budget.
So what about those Gasoline companies? Are they setting fair prices at the pumps, or are they gouging consumers at every opportunity they get? Why don’t we take a look at a few statistics, and you decide if Gasoline companies are to be trusted to set prices on a product that should be treated similar to the way governments regulate essential services… essentially legislating that those services must not be interrupted for any reason because of the extreme importance of those services to society (ie, health care workers, public transportation, airlines, etc.). A strong case could be made showing the absolute importance of gasoline to society, and the importance of a sustainable and affordable supply. So, are the petroleum companies acting with integrity and setting prices in a fair way? Or are they simply continuing to push the limits in order to maximize profits? At this point, I could ask the question of “Why do gasoline prices always jump significantly before a long weekend?”. Why do gasoline prices rise during the summer time when historically the price of oil is highest during the winter months? These are both valid questions and call into question the integrity of gasoline companies. But more interestingly, I would like to know why over the past 4 years, the price of gasoline has been wildly out of whack with the price of oil?
Four years ago, just before the big bust of 2008, the price of a barrel of oil was running at all time highs of just over $146.00 USD/barrel. At the time, the average price of gasoline in Canada was running at approximately $1.32/litre. One year later, oil had fallen to approximately $43 USD/barrel (a 70% drop from what it had been the year earlier), but gasoline had only dropped to approximately $1.02 per litre (representing a drop of just 23%)! Why such a large discrepancy between the two prices? Furthermore, why is it that during the period of 1983 to 2004 did the price of oil trade well below $35 per barrel – a stretch of 21 years, but in the last 8 years, the price of a barrel of oil has jumped to trading consistently at or above $100/barrel?
Were oil companies just not making enough money during the 21 years of 1983 to 2004 and thus determined that they needed to raise prices 4 fold? Was the rise in price necessary to the survival of the oil industry, or is it a simple case of greed and corporate profits? Oil companies and gasoline companies are quick to point at Wall Street to blame those trading in futures for the volatile oil prices, but ultimately, oil – like any other product in the market is impacted by the simple economic laws of supply and demand. If demand outstrips supply, prices go up… if demand lags supply, prices go down… and oil producing companies have been using these economic theories to greatly increase the value of their product! The oil producing countries that make up OPEC (The Organization of Petroleum Exporting Countries), are responsible for approximately 60% of international oil exports, and they decide how much or how little oil is produced at any given time… essentially controlling the price of gasoline by attempting to control supply and demand. Rather than countries producing and providing as much oil as they would like, they are told by OPEC exactly how many barrels of oil per day they can produce and therefore, they control how much oil is available to the market… essentially restricting supply in order to control price. It’s possibly the biggest price fixing scheme in the world! Just how well are oil companies doing? Well, back in 2001, the BIG 5 Oil companies (BP, Chevron, ConocoPhillips, ExxonMobil, and Royal Dutch Shell) made a combined profit of over $40 BILLION! That’s profit! After all of their expenses have been paid! However, fast forward just 10 years to 2011, and the combined profits of the same BIG 5 Oil companies has jumped to nearly $140 BILLION! All the while, ordinary families have been struggling through the last 4 years of recession, forced to pay ever increasing costs at the pump! Not because they can necessarily afford to, but because they simply can’t afford not to. While many employees have been receiving record low raises as corporations struggle through the recession, the cost of gasoline has continued to rise, and oil companies show no signs of letting up on the gas pedal of record breaking profits!
So, now we come to the idea of government regulation! Why won’t governments simply regulate the price of gasoline at the pumps in order to help stabilize the budgets of ordinary Canadian families struggling to make all ends meet? Do you think for one second that the gasoline companies in Canada would simply close up shop if the government regulated prices at say $1 per litre? The simple answer is no! But, the bigger issue at hand is that governments are unwilling to try and regulate prices for the simple fact that as the price of gasoline goes up, so too does the tax revenue collected on those gasoline sales… and governments are not about to give up this EXTREMELY lucrative source of revenue! Gas taxes account for nearly 40% of the over all cost of gasoline! This represents BILLIONS of dollars in additional tax revenue for governments, and thus, higher prices at the pump means greater amounts of money into the government coffers! If we do some quick math, an average Canadian making approximately $50,000 per year would pay approximately $12,000 per year in income tax. Now, if the average Canadian spends $5000 per year on gasoline, $2000 of that amount is paid to governments in the form of gasoline taxes. With approximately 10,000,000 drivers on the road, that represents additional tax revenues of… wait for it… $20,000,000,000! Yes, you read that right… $20 BILLION dollars in revenue, or approximately $665 per year from every man, woman and child living in Canada today – whether they drive or not!
After reviewing the numbers, I am not optimistic about the ongoing fluctuations in my monthly budget, or the possibilities of government regulation… perhaps the only logical thing to do would be to sink a bunch of money into the shares of Big Oil companies so that I can get a small piece of the profits! At least then I could take solace in the growth of my investment portfolio whilst my monthly expenditures continue to rise as a result of corporate greed! Does this mean that I am against corporations making good profits? Absolutely not! Profits create jobs, profits create growth… but when it comes to Big Oil, they completely control the market price… eliminating fair competition, eliminating true supply and demand… and therefore, they aren’t making these ridiculous profits competing in an open and fair market. Instead, they are operating with a stacked deck equivalent to a Black Jack dealer that always flops 21… while the rest of us sit at the table and just repeat “Hit Me”, “Hit Me”… until we go bust!