Gas Price Regulation

[cybercoma]

The NB Provincial Government is about to put a ceiling on the price at the pumps. As if gas prices out here aren't high enough already, the government is going to make things worse. Oil companies will likely raise their prices to the maximum, which will end up costing an already economically weak region.

Almost 50% of the per litre price of gas goes to the government in the form of taxes. If they really want to affect gas prices, they should reduce the taxes on it. Of course, they won't do this because of the effect it will have on revenues.

So why is it ok for the government to restrict the revenue of oil companies? Irving employs many Atlantic Canadians and with these restrictions the government is only hurting the people they're trying to help.

Not only will pump prices be higher, but the cost to oil companies on the east coast is going to hurt those employed in one of the precious few industries out here.

I think the New Brunswick provincial government is making a big mistake following in the footsteps of Nova Scotia and PEI. I just wish more people out here would take a stance against this horribly flawed piece of legislation.

[geoffrey]

Bring on the shortages. If gas prices elsewhere rise above the limit, NB will be without gas, simple as that. It's way more profitable to sell it elsewhere.

Demand for gas is inelastic, and thats why prices are high... demand never decreases. So with demand steady... prices steady in NB... and high prices elsewhere, they won't have gas.

Does anyone not remember the NEP or have not at least read about it? Price controls never work, ever.

[BubberMiley]

High gas prices are the best thing that can happen to us, because it spurs research and makes affordable alternative sources of energy. It's the only thing that will pull us from the teat of big oil and make us plan for the inevitable day when we have to start reducing our consumption because production is down. Better they should go up gradually, as they have been, than very suddenly.

[cybercoma]

I just can't believe that it's a Conservative government that is putting this through.

[Charles Anthony]

High gas prices are the best thing that can happen to us, because it spurs research and makes affordable alternative sources of energy.

That is correct. There are alternative sources of energy in the same way as there are alternate sources of paper instead of trees. Whenever we run out of oil, we will NOT have a choice but to develop alternate energy.

The stupid and unfortunate thing is that BEFORE oil becomes scarce we still have the capability to conduct the same research! Nothing is stopping us now.

I just can't believe that it's a Conservative government that is putting this through.

Ooooh... again the deceptive Right/Left or Liberal/Conservative distinction!

A long time ago, Sir John A. MacDonald was accusing Sir Wilfrid Laurier of Americanism because the Liberals of the day promoted free-trade with our southern partners....

It all has to do with money. Follow the money and you will see the truth!

[Toro]

What an incredibly stupid policy.

If the government wants to lower the price of gas, lower taxes.

[BHS]

High gas prices are the best thing that can happen to us, because it spurs research and makes affordable alternative sources of energy. It's the only thing that will pull us from the teat of big oil and make us plan for the inevitable day when we have to start reducing our consumption because production is down. Better they should go up gradually, as they have been, than very suddenly.

Off the teat of Haliburton, and onto the teat of General Electric. Big improvement.

[lost&outofcontrol]

The stupid and unfortunate thing is that BEFORE oil becomes scarce we still have the capability to conduct the same research! Nothing is stopping us now.

We won't be running out of oil for the next few hundred years. As the price increases, previously unprofitable deposits become profitable.

[jbg]

The stupid and unfortunate thing is that BEFORE oil becomes scarce we still have the capability to conduct the same research! Nothing is stopping us now.

We won't be running out of oil for the next few hundred years. As the price increases, previously unprofitable deposits become profitable.

I agree. There's even a school of thought that at least some oil reservoirs go much deeper than believed and are essentially self-replenishing.

[Charles Anthony]

We won't be running out of oil for the next few hundred years.

Where are these neverending reserves? Why is the price going up?

As the price increases, previously unprofitable deposits become profitable.

Profitable? Just because a "price" of a product or service goes up, it does not automatically equate to increased profits -- particularly when the cost of production goes up at the same time.

People are complaining of prices being too high now, what will make them be able to afford the even-higher-prices of the future????

I agree. There's even a school of thought that at least some oil reservoirs go much deeper than believed and are essentially self-replenishing.

The price is going up and we are resorting to more expensive (more difficult to extract) sources of oil. Cheap oil must be getting more scarce.

[Riverwind]

I agree. There's even a school of thought that at least some oil reservoirs go much deeper than believed and are essentially self-replenishing.

That would be the 'ostrich school of thought'. It would not matter if a few reserves had an infinite supply the problem is it is only possible to get it out of the ground so fast. This means that demand from emerging economies like China and India will create shortages even if the reserves theoretically exist (which they don't).

[geoffrey]

We won't be running out of oil for the next few hundred years.

Where are these neverending reserves? Why is the price going up?

The reserves numbers and estimates you see are based on current prices and to some extent future financial modelling of the viability of extraction. There is considerably more oil in the world then we will use within the next few centuries, as long as the price remains high to support it. Proven reserves=economically extractable.

As the price increases, previously unprofitable deposits become profitable.

Profitable? Just because a "price" of a product or service goes up, it does not automatically equate to increased profits -- particularly when the cost of production goes up at the same time.

People are complaining of prices being too high now, what will make them be able to afford the even-higher-prices of the future????

Gas isn't that high now, compare it to 1960's prices, include inflation and gas isn't that much more expensive, in some areas it's less. People just like complaining when it goes up a bit. The difference now is that the gas is a little cheaper and the taxes are more.

I agree. There's even a school of thought that at least some oil reservoirs go much deeper than believed and are essentially self-replenishing.

The price is going up and we are resorting to more expensive (more difficult to extract) sources of oil. Cheap oil must be getting more scarce.

Somewhat true. Saudi Arabia is more depleted then we would be lead to believe. That being said, Alberta has significantly more oil than previous predicted, Canada isn't far from leading the world in proven reserves... if Saudi Arabia wasn't misleading we would be first. There is plenty of oil, but like you said, it's different.

The theory you might be refering to: abiogenic petroleum origin

It's actually somewhat likely that small amounts are created abiogenically, but not enough to fuel our demand. It applies more readily to natural gas than crude anyways. None the less, it's actually more plausible than many give credit to. I wouldn't rely on it though.

[lost&outofcontrol]

We won't be running out of oil for the next few hundred years.

Where are these neverending reserves? Why is the price going up?

As the price increases, previously unprofitable deposits become profitable.

Profitable? Just because a "price" of a product or service goes up, it does not automatically equate to increased profits -- particularly when the cost of production goes up at the same time.

People are complaining of prices being too high now, what will make them be able to afford the even-higher-prices of the future????

I never said we can afford to pay for gas if the price keeps increasing, I'll quote myself so you’ll have a second chance at reading what I posted.

As the price increases, previously unprofitable deposits become profitable.

When the price of a barrel is at $12, it's unprofitable to extract oil in Alberta but as the price increases, well you get the picture. I do not agree with our current market system but even I understand the basics of it.

[Charles Anthony]

To add to everybody's understanding of the basic economics:

When the price of a barrel is at $12, it's unprofitable to extract oil in Alberta but as the price increases,

we are hoping that the neverending supply of current deposits in Alberta stay the same with respect to ability to extract. Once that changes, our comception of profitability will change.

We do not know if the technology exists to make even-more-difficult-to-extract-oil of the future affordable.

[jbg]

When the price of a barrel is at $12, it's unprofitable to extract oil in Alberta but as the price increases, well you get the picture. I do not agree with our current market system but even I understand the basics of it.

The term Proven Reserves is defined by OPEC as follows:

an estimated quantity of all hydrocarbons statistically defined as crude oil or natural gas, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Reservoirs are considered proven if economic producibility is supported by either actual production or conclusive formation testing. The area of an oil reservoir considered proven includes those portions delineated by drilling and defined by gas-oil or oil-water contacts, if any, and the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proven limit of the reservoir.

Crude oil: estimates include oil that can be produced economically through application of improved recovery techniques following successful completion of pilot testing. Estimates do not include:

oil that may become available from known reservoirs but is reported separately as "indicated additional reserves";

• oil, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics or economic factors;
  
• oil that may occur in untested prospects; and
  
• oil that may be recovered from oil shales, coal, gilsonite and other such sources.
  

Thus, the price is highly relevant to determining what the reserves are.

[Charles Anthony]

Let me simplify.

Increased price DOES NOT automatically translate into increased profit -- regardless of the product or service or market structure.

I never said we can afford to pay for gas if the price keeps increasing,

Then, from where will the profits come????

Profit is the difference between total revenue and total cost. Yes, price enters into the calculation of total revenue but the calculation does not stop there. Price also has an inverse relationship between quantity sold. In other words, if you plan to raise prices you should also plan to reduce the total number of sales.

Charge all you want. If people can not afford your price, you are not guaranteed all of the sales that you want. Thus, the misconception:

As the price increases, previously unprofitable deposits become profitable.

If this basic economic principle is still too difficult to understand (or too easy to misrepresent), here is an illustration:

Imagine all of the oil producers being under the impression that rising prices translate directly into rising profits. Under this premise, they raise the price of oil to $1,000 a barrel. The only people in the world who can afford it are Bill Gates and The Queen and they each only need one barrel of oil a day. What was once a multi-billion dollar industry has now been reduced to a $1,000,000 industry in annual revenue. Sounds profitable????

A lot of raging socialists do not realize that capitalists (or more accurately, suppliers) do not have all of the power. However, that is a topic for a different thread....

Now for the supply side of the equation.

Once all of the current reserves (forget about the accounting defintion of reserves, I am talking about the real physical quantity that we are able to extract with current technology) are depleted (and I do not care how long that takes) how do we know that we will be able to extract even more oil?

If we develop a new technology to extract oil at that point, how do we know that consumers will be able to afford the higher cost?

The answer is simple: we do not know unless we start looking at researching for that technology NOW not later. Thus, my original statement:

The stupid and unfortunate thing is that BEFORE oil becomes scarce we still have the capability to conduct the same research! Nothing is stopping us now.

[cybercoma]

Uh...yeah but if it costs $60 per barrel to extract and the market price of oil is $12 per barrel.....there ain't much reason to extract it. Now if the market price is $70 and more.......

[Charles Anthony]

Uh...what part of Price Increases => Quantity Decreases did you not understand?????????????????????

[geoffrey]

Uh...what part of Price Increases => Quantity Decreases did you not understand?????????????????????

That's a rather elementary view of the economics at hand. Inelasticity of demand plays a big factor in the oil prices we pay, and why your little theory doesn't exactly apply in real terms. In the long run, your correct. But as Maynard Keynes said, "In the long run, we are all dead."

Chances are we won't see a most elastic demand for oil in any of our lifetimes, everything we use from fuel, to plastic to vaseline is all oil. It's the building block of our current civilization.

[Charles Anthony]

That's a rather elementary view of the economics at hand.

Correct. It is quite elementary and when you try to defy it either you (or your government) eventually goes bankrupt.

Inelasticity of demand plays a big factor in the oil prices we pay, and why your little theory doesn't exactly apply in real terms. In the long run, your correct. But as Maynard Keynes said, "In the long run, we are all dead."

Sounds like a fiscally responsible standard, does it not? Forgive me but in the long run, we are not all dead; Keynes is dead.

Unfortunately, the spiral of debt financing seems to have lived forever. His statement was an asinine rebuttal to people who suggested that excessive government spending may have ill effects in the long run. Sorry, the children of the baby-boomers are now paying for the experiments of Keynesians in the long run.

Chances are we won't see a most elastic demand for oil in any of our lifetimes,

Actually, it is precisely the inelasticity that that makes the depletion of physical reserves the problem. Prices will rise dramatically beyond affordability. We can not continuously expect consumers to be able to afford higher and higher prices. Where are they going to get the extra money??? Thus, we have to start research now.

Uh...yeah but if it costs $60 per barrel to extract and the market price of oil is $12 per barrel.....there ain't much reason to extract it. Now if the market price is $70 and more.......

.....all of the consumers who could previously afford oil at $12 will magically have an extra $58 dollars to spare? to continue consuming at the same level???? Profit depends on the number of sales you make. Zero multiplied by $70 is........

CAVEAT: In all fairness, "we" do not have to start any research at all. The oil "capitalists" are already on it. I am sure they have already figured it out. They are just waiting for us to get there. Do you think they would leave the fate of their profits in anybody else's hands?? In the long run, it is highly irrational to think that the oil industry is planning to be dead with the rest of us.

However, they can be beaten at their own game. Developing alternate sources of energy will make the demand for oil less elastic.

[geoffrey]

Bring on the shortages. If gas prices elsewhere rise above the limit, NB will be without gas, simple as that. It's way more profitable to sell it elsewhere.

Demand for gas is inelastic, and thats why prices are high... demand never decreases. So with demand steady... prices steady in NB... and high prices elsewhere, they won't have gas.

Does anyone not remember the NEP or have not at least read about it? Price controls never work, ever.

I hate to say I told you so, but I told you so:

http://www.canada.com/topics/news/story.ht...ad4e4bd&k=61087

[Big Blue Machine]

What an incredibly stupid policy.

If the government wants to lower the price of gas, lower taxes.

To be frank, the government gets alot of revenue from gas taxes. Besides, cutting the gas tax by like 1% won't have any impact except lower revenue for the government.

[August1991]

That's a rather elementary view of the economics at hand. Inelasticity of demand plays a big factor in the oil prices we pay, and why your little theory doesn't exactly apply in real terms. In the long run, your correct. But as Maynard Keynes said, "In the long run, we are all dead."

Chances are we won't see a most elastic demand for oil in any of our lifetimes, everything we use from fuel, to plastic to vaseline is all oil. It's the building block of our current civilization.

Geoffrey, you are referring to demand reponses in the very short run, months even. The 1970s showed that demand responses measured in years are quite elastic. As an example, we are still seeing economic growth despite oil prices whereas in 1973, such prices were enough to provoke a recession.

Econometric studies of energy demand tend to show a low elasticity. But the ‘long run’ in such studies is typically only five years. The important responses to changes in energy prices are slower than this, suggesting that if the long run is measured over decades, energy demand will prove to be elastic.

Link

Someone standing in a showroom today decided to opt for the car rather than the SUV because of the price of gasoline. That is how price elasticities work.

----

Incidentally, the short run inelastic demand (which explains both high gasoline prices and their volatility) also proves that their is no cartel in the gasoline market - no cartel would sell in the inelastic portion of the demand curve.

[cybercoma]

Well, there's a bunch of gas stations in NB refusing to sell gasoline as long as it's regulated. They're claiming they will lose money. This is a humourous turn of events.

[August1991]

Well, there's a bunch of gas stations in NB refusing to sell gasoline as long as it's regulated. They're claiming they will lose money. This is a humourous turn of events.

Humourous? Geoffrey rightly predicted the result.

The next step will be for the government to pass a law to forbid hording and to require gas stations to sell available gasoline. To preserve customer loyalty, some stations may resort to rationing (five litres per customer).

New Brunswick may well become a textbook example.