Rising gas prices now an election issue?

It appears the party leaders are fielding more questions regarding rising gas prices (with the exception of Mr. Harper of course, who only receives scripted questions). People are mad about rising costs, without any readily apparent reason other than because of oil speculators (similar to what happened prior to the recession). Canadian voters are asking politicians what they will do to fix it.

Politicians, being what they are, say they will have inquiries to get to the bottom of this to see if there is collusion, appoint an ombudsman to hear public complaints, and various other touchy-feely band-aid promises. The reality is there was a commission a few years ago to determine collusion, none was found. And none of these answers actually fix the problem.

Gas prices, like pretty much everything else, are typically driven by supply and demand. But huge investment firms and hedge funds like Goldman Sachs, J.P. Morgan and the like (not that I have investigated whether these particular firms actually engage in this) invest in crude oil futures quite vigorously, which drives up the crude oil spot price. The fact that Canada is a net oil exporter would make you think that Canadians wouldn't feel the pain at the pumps. Another factor that has been cited is that refining capacity in Canada has dropped over the years, which means Canada has to import its gas.

Now, back to the problem of high gas prices as it relates to election promises. The biggest mistake made with respect to this issue is when Petro-Canada, which was a crown corporation, was sold to private investors. This meant that the Canadian government had no proxy in the free market to ensure sufficient competition in the marketplace. Since buying Petro-Canada back would be an expensive proposition (in the tens of billions of dollars), beyond the fact that it could be political suicide for any party that puts it in its platform during an election (because of the cost), I believe the government does have an opportunity to play an active part. The government should direct the Canada Pension Plan, which already has billions of dollars in the open market, to buy a majority of shares (51% or more) of Petro-Canada.

With the CPP having a controlling interest in Petro-Canada, they can install their slate of candidates on the Board of Directors, as well as recommending their picks for senior management. In doing so, they can pursue the following strategy:

1. Ensuring Petro-Canada has a complete supply chain under their control, i.e. from well head to the pumps. That means not only drilling and having gas stations, but having a significant transportation and refining capacity.



2. Because it is a for-profit organization, having a policy of cost plus reasonable profit pricing strategy ensures shareholders (including the CPP) are taken care of.



3. Buying up more shares over time to ensure the CPP maintains its majority stake.

By following this strategy, the government now uses the CPP as its proxy to maintain controls on gas prices within a free market economy, through the use of competition. Other oil companies will be forced to match gas prices at Petro-Canada pumps, thus reducing the possibility of gouging and influence of oil speculators. No need to form commissions, which find no evidence of collusion (and wastes a few million dollars doing so), or hire ombudsmen, or otherwise increase the size and cost of government.

What can the average Canadian voter who is worried about the gas price do now? Remember this: gas prices are affected by supply and demand, use less gas, demand goes down. Demand goes down, supply increases. Supply increases, prices come down. How do you do this?

Boycotting a particular gas company and buying your gas elsewhere doesn't fix the problem, because you're shifting the same demand to fewer gas chains. This reduces competition, which makes matters worse. You need to reduce your consumption! How can you do this? Here are a few ideas:

1. Instead of buying a gas guzzling SUV, buy something that's easier on gas. Of course if you only have one vehicle, you want to buy one that suits your needs. But you don't necessarily need a huge vehicle to accommodate the occasional time you load up with materials from Home Depot. You can always rent a van or trailer. You want a vehicle that meets more than 75% of your needs. Not necessarily 100%.



2. When buying a vehicle, look for vehicles with fewer cylinders. The more cylinders, plus the higher the engine displacement, the more fuel you go through. Compare that to hybrids. Typically, hybrids are more expensive to purchase so going with a smaller engine will be less costly and have a competitive fuel economy.



3. If you decide you need two vehicles and you absolutely need an SUV or minivan, your second vehicle should be one that has the best fuel economy that you can get in the class you need. Typically it just needs to get you to work, so you don't need a large interior, therefore a sub-compact will do. Keep the SUV in the driveway when you don't need the capacity.



4. If you're fortunate enough that you don't need the regular use of a car, rent one when you actually need one. Using the services of companies such as Zipcar, where available, make this very convenient. But where Zipcar is not available, the prudent use of traditional rental car companies (they're everywhere) may do the trick.



5. Buy foods that are produced locally, as much as possible. This encourages local producers which reduces transportation requirements, thus the need for gas and diesel used in transportation systems. When it comes to fresh produce, you need to take advantage of seasonable supply of the various offerings. Try to stay away from foods shipped in from other countries, especially from overseas.

Canadians are looking to the government to fix the problem. Maybe they want to hear that the government will reduce their taxes at the pump. This is a big mistake, because it will quickly get absorbed by the gas companies and Canadians will be back to square one, and governments will have less revenue to deliver programs that Canadians want. Government has a role to play, but not the way politicians are dancing around it. The CPP is the best immediate option to deliver what Canadians want: Reasonable gas prices.