Behind the Gas Price Increases--Op-Ed Piece

Behind the Gas Price Increases by Neil LeBlanc, Minister of Finance

It's the focus of debate in the coffee shops, on the open-line radio shows, on the front pages of newspapers and in the letters to the editor.

Soaring fuel prices. Nova Scotians are angered about the higher prices at the pumps and alarmed at the prospect of paying more to heat their homes.

Understandably, people want to know what is causing this surge in the price of gas, home heating fuel and diesel. And why doesn't government do something to stop it? Unfortunately, there are just as many misconceptions as there are questions.

Let me respond to the questions and offer some explanations on behalf of the provincial government.

First, why are we paying more in Nova Scotia? The overwhelming reason is the surging price of crude oil. A year and a half ago, crude oil was being sold for about $12 (U.S.) a barrel. Today it's over $30. The credit (or blame) for that 250 per cent jump rests with Organization of Petroleum Exporting Countries, or OPEC, and the most basic law of economics: supply and demand. The world's leading oil producers are limiting oil production in a bid to limit supply and force prices up. Their plan worked, just as it achieved the same result in the 1970s.

Nova Scotia is not alone, as consumers across North America and the world are paying more for gas these days. For example, gas prices in Maine are up the equivalent of 24 cents Canadian per litre--just about the same increase as here.

Obviously, Nova Scotia has no control over the decisions of OPEC. Now, that's not to say the provincial government doesn't contribute to the price of gas. Taxes do make up a big part of gas prices; but the tax rate has not caused the skyrocketing price increases at the pumps.

Let me offer an explanation. Whether you pay 53, 66, or 81 cents a litre for gas, 10 cents of the price is the federal excise tax and 13.5 cents is the provincial fuel tax. Those figures are the same no matter what the cost per litre. The rest of the price at the pump comes from buying, refining and marketing the crude oil, and HST. The HST does increase as the price of gas increases, but it is a small part of the total increase.

In an effort to explain high gas prices, oil companies have focused attention on tax as a component of the price. In fact, with higher prices today, consumers are paying a lower percentage of tax than they were a year ago. For example, when gas was 57 cents per litre, the percentage of tax rang in at about 51 per cent. Today, at about 80 cents per litre, tax makes up less than 42 per cent of the total price (in Britain, tax constitutes 76 per cent of the price of a litre of gas). Here's another way to look at it--of the approximately 23 cents per litre more we pay at the pump, 20 cents goes to the oil companies and only three cents goes to government. That three cents is then about evenly split between the federal and provincial governments. Even if we were to lower the tax on fuel, it is questionable whether the decrease would ever see its way into the pockets of Nova Scotians. It is the cost of crude oil, and crude oil alone, that has driven the price up so dramatically.

In spite of this evidence, critics will accuse government of reaping a gas tax windfall on the backs of hard-working Nova Scotians. This is just not true. According to consumption comparisons, Nova Scotians have purchased 2.3 per cent less gas so far this year than they did in 1999. That translates into a $3.7 million loss in fuel tax revenue. Clearly, there is no windfall.

Some say we could wrestle gas prices to the ground by retreating to the old system of regulating fuel prices. That system was abandoned in 1991 as an unnecessary government intrusion into the economy, an intrusion that cost Nova Scotians millions of dollars a year.

This government believes an unregulated market is the best choice for consumers. We are not alone. Every province in the country except Prince Edward Island has an unregulated system. It is important to keep in mind that P.E.I.'s system does not prevent gas prices from rising. It's merely a delay. The oil companies can apply for an increase every two months. No matter how much P.E.I. might want to hold the line on increases, it cannot. The regulatory board is not allowed to prevent oil companies--like any other business--from passing their costs along to consumers. In the long run, a free market is always the best for consumers.

Crude oil prices are also the reason home heating fuel is on the rise. There are no imbedded taxes on home heating oil, only the HST. We have asked the oil companies to be flexible in their delivery arrangements with their customers. Last year, most companies responded very favourably and did their best to accommodate smaller-volume deliveries. Nova Scotians can expect their fuel bills to be higher this year. Knowing this increases the importance of preparing in advance. For example, this might well be the time to have your furnace checked to make sure you are getting maximum fuel efficiency.

It is clear that OPEC nations realize the potential damage their actions may cause economies throughout the world. Regrettably, the people who are least able to influence these events are the ones who suffer the most. In this case, these people are individual Nova Scotians and all people who heat their homes with oil.