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Rising gas prices: collusion or competition?

The signs are all around us, literally -- gasoline prices are on the rise again. The latest Weekly Pump Price Survey from MJ Ervin & Associates, a Calgary-based industry consultant, shows that gas prices in Canada averaged $1.16 per litre last week, ranging from $1.28 in Kelowna, B.C., to $1.03 in Thunder Bay, Ont. Prices that were once considered off the charts are now commonplace, and fuel-efficient cars are touted as much for their economic benefits as their environmental ones.

Still, we're a fuel-hungry nation, consuming more than 36.6 billion litres of gasoline in 2006. Perhaps surprisingly, smashing the dollar-per-litre price barrier hasn't slowed demand: SUVs are still guzzling and 75 percent of Canadians still drive to work. Meanwhile, Imperial Oil Ltd., Canada's largest oil company, recently reported a 31 percent increase in profits.

So when does healthy competition stop and price gouging start? A recent report released by the Canadian Centre for Policy Alternatives (CCPA) says Canadians have been paying too much for gas for almost two years. Since August 2005, prices have consistently exceeded levels that would be justified on the basis of costs and normal profits, suggests Hugh Mackenzie, author of the report.

He argues that the oil industry's explanations for high pump prices -- rising crude oil prices, refinery problems and geopolitical events -- are merely "after the fact rationalizations for the price-gouging opportunities."

The Canadian Petroleum Products Institute (CPPI), which represents the gas industry, categorically rejects the report on the grounds that it was "simplistic" and "ignored market realities." A recent investigation by the federal Competition Bureau concluded that there's no national conspiracy by retailers for price fixing after Hurricane Katrina.

And yet, the Consumers' Association of Canada recently dismissed industry explanations as "trite" excuses and called for a new government investigation of gasoline prices.

"Part of the difficulty, why there is a lot of suspicion over prices, is that it's a very complicated market to explain," says Michael J. Ervin, of MJ Ervin & Associates.

Making sense of the oil and gas market
Most consumers understand that the price of crude oil fluctuates on the world market due to increasing demand from Asia or events that compromise or reduce supply, such as the U.S. invasion of Iraq in 2003 or Hurricane Katrina in 2005, but it's not always in tandem with changing pump prices: Crude oil prices are actually 5 cents per litre lower this year than they were in 2006. To complicate matters further, wholesale gasoline prices (the price marketers pay to refiners for the finished or refined product) are tied to U.S. prices because of NAFTA and the nature of the North American marketplace.

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"If an oil company in Canada was to arbitrarily reduce the wholesale price of gasoline to be nice or in response to political pressure, the simple consequence is that all the cheap gasoline would flow into the States," says Ervin. Pump prices would be at 85 cents, but there'd be no gas to pump.

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