Last week gasoline prices soared in southern B.C., with the price at the pump in Vancouver hitting over $1.55 per litre. This was not due to a restriction of supply, although Alberta Premier Rachel Notley jumped on the opportunity to once again misrepresent reality in order to draw erroneous conclusions supporting the need for Kinder Morgan’s Trans Mountain expansion.

“There are a lot of ways in which the province of B.C. can assure an adequate supply of gasoline in order to combat the ridiculous prices that they pay,” Notley said in Calgary last week.

If B.C. wanted to keep gasoline prices low, she said, it should stop opposing the Kinder Morgan oil pipeline expansion as it would increase “the ability of Alberta to ship more product to the West.”

Notley assumes B.C. needs more crude oil to supply the Parkland refinery in Burnaby and more refined petroleum product to supply the retail outlets that Parkland’s refinery does not. She also assumes that building Trans Mountain’s expansion means Alberta’s oil producers and refiners will ship more product to B.C. Neither assumption is correct.

Let’s review the facts.

High gas prices are not due to a shortage of supply.

Gas prices are not high because of a lack of supply. There is plenty of supply to serve the B.C. market.

High gas prices are the result of a decades old strategy in Alberta to charge what the market will bear, not charge based on the costs of production and delivery (including a reasonable return on investment) as would be the case in a well-functioning market. This unfair or predatory pricing is sometimes referred to as price gouging. This reality exists to varying degrees all across Canada, although it is more prevalent in Lower Mainland and Vancouver Island markets.

Every time the pain at the pumps from this inappropriate pricing practice becomes obvious, it appears industry apologists are standing at the ready to trot out phoney “reasons” for the increase in gas prices.

The facts show B.C. exports more gasoline than it imports. Port of Vancouver statistics reveal that during 2017, exports to the U.S. exceeded imports by almost 70 per cent, giving rise to net gasoline exports of 6,000 barrels a day. There is no supply shortage in B.C. — chronic or otherwise.

Kinder Morgan’s new pipeline will not increase the shipment of product to B.C.

Trans Mountain’s expansion is intended to ship 540,000 barrels a day of diluted bitumen — heavy oil — to the Westridge dock for offshore export. None of this crude is destined for B.C.

The Parkland refinery already receives all the light crude oil it can refine from the existing pipeline so there is no shortage there. Further, the refinery is not configured to use heavy oil like diluted bitumen from the oilsands. This is why a heavy oil pipeline through B.C. is of no benefit to B.C.

As far as refined product is concerned, Kinder Morgan’s business case for the Trans Mountain pipeline is explicitly based on no increase in crude oil or refined product supply to B.C.

Kinder Morgan told the National Energy Board (NEB) that “refined product shipments will not increase as a result of [the Trans Mountain Expansion Project].”

Unfair pricing at the pump will not change no matter what happens with the Trans Mountain expansion because it is not due to a scarcity of supply. Addressing the failure of the market to fairly determine gasoline prices requires policy direction from government and meaningful regulation.

If the Trans Mountain pipeline expansion is built, B.C.’s gas prices will increase. https://t.co/htqlwYcGeC

— DeSmog Canada (@DeSmogCanada) March 28, 2018

If the Trans Mountain expansion is built, B.C.’s gas prices will increase.

We know regional gas prices will rise if Trans Mountain’s expansion proceeds because the NEB approved an increase in toll rates on the existing pipeline that guarantees it. The board gave Kinder Morgan permission to more than double the cost of delivering a barrel of gasoline or diesel to B.C. motorists on the existing pipeline in order to help pay for the new one.

Higher transportation costs on the existing line will ratchet up pump prices. Producers and refiners consider increased transportation costs a cost of doing business and they get passed onto end-users.

Trans Mountain’s expansion — a heavy oil pipeline Notley maintains is for the benefit of offshore markets in Asia — is not commercially viable unless B.C. consumers and businesses subsidize it through higher gas prices here at home.

Big Oil needs B.C.’s market demand more than B.C. needs Alberta’s refined product.

Notley has threatened B.C. with an ultimatum — stop resisting the expansion or face serious supply restriction. But her threat to “turn off the taps” is idle.

Kinder Morgan and Alberta’s oil producers and refiners will not allow this kind of behaviour. It would send shock waves through the international business community and will fundamentally cost Alberta’s oil sector more than it will cost B.C.

B.C. is an important market for Alberta’s refiners and light oil producers.

If supply from Trans Mountain is shut off, the Parkland refinery can turn to offshore crude while other retail distribution systems can seek imported refined product — likely at lower prices if existing supply agreements are rendered invalid through Alberta legislated restrictions. A marine terminal to deliver jet fuel to the Vancouver International Airport is in the process of being constructed with the expressed purpose of being able to access jet fuel supply at lower cost from numerous markets.

Turning off the taps in B.C. would flood the Prairies and end up costing Alberta’s refinery sector.

Since the Trans Mountain pipeline delivers gas from Edmonton refineries to B.C., if supply were to be curtailed, downward pressure on retail prices in Prairie markets would mount because of a corresponding over-supply there.

That would mean every barrel supplied in Alberta would take some hit — not just the barrels diverted from B.C.

In order to limit supply in one market without a corresponding loss, there needs to be demand in another. The demand is not there.

Which companies are poised to take the hit in Alberta? Suncor, Imperial and Shell.

Suncor is poised for a double whammy. Suncor is the major shipper of refined gasoline and diesel product to B.C. along Trans Mountain for sale in Petro-Canada stations, but also under agreement with other retail outlets.

There is little likelihood Suncor will break contracts and destroy long-term business relationships with others in B.C. undermining not only its short-term, but long-term profitability in order to support Notley’s political posturing.

Kinder Morgan has too much to lose if shipments along its pipeline are curtailed — including the ability to finance its project.

Notley has not connected the dots between Kinder Morgan Canada Limited’s (KML) revenue stream and the company’s ability to proceed with the Trans Mountain expansion, either.

Current toll rates charged on the existing pipeline provide a significant portion of the company’s cash flow. It is not trivial.

Interrupting Kinder Morgan Canada’s revenue stream by limiting supply impedes the company’s ability to pay dividends to its shareholders. This not only hurts Canadian investors, it particularly hurts Kinder Morgan’s ’s Texas-based parent Kinder Morgan Inc. (KMI) in Houston.

Kinder Morgan senior still owns 70 per cent of the Canadian company. KMI needs dividends from the Canadian operations to support its ongoing financial challenges. An interruption of Trans Mountain’s existing revenue stream would get in the way of KMI’s cash flow needs .

Interruption of Trans Mountain’s existing revenue stream, by limiting pipeline shipments, would also impede Kinder Morgan Canada’s ability to pay dividends on its $550 million in outstanding preferred shares.

As well, Kinder Morgan Canada still needs to raise more than $2 billion in equity capital to help finance its expansion. Try going to financial markets to raise risk capital while revenues are impaired because of a legislated election ploy.

Finally, if reduced cash flow from “turning off the taps” — even just a little bit — causes a credit rating downgrade for the Canadian operations, Canada’s big banks could pull their $5.5 billion construction loan facility. Without the credit facility keeping the expansion afloat, the Trans Mountain expansion sinks.

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.

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This is a guest post by Derek Wong, sustainability consultant and founder of the blog Carbon49.com.

Did you know our government spends money subsidizing fossil fuel energy to keep prices artificially low?

A new International Monetary Fund (IMF) study uncovers just how much these subsidies amount to and urges governments to stop these market distortion practices. So just what kind of numbers are we talking here?

Using the IMF’s numbers – the Canadian portion from the full report (pdf) – I calculated the real price we pay for fossil fuel energy and the results are astonishing. With additional data provided to me by the IMF office in Washington, I discovered energy subsidies are higher than I expected. In fact, far higher.

Interestingly, the release of the study was widely covered by mainstream media around the world in the New York Times, Washington Post, Financial Times, and in a particularly good analysis from the Wall Street Journal.

But it was strangely left untouched by Canadian media.

What the general public is mostly unaware of is the fact that our energy prices are subsidized prices. When we pay $50 at the gas pump, the gas we got is actually worth more than $50. When we pay $100 for our hydro bill, the energy we used is actually worth more than $100. Why is that? It’s because the government financially subsidizes the energy we use. Although this practice has been taking place for years, most people in the general public don’t realize the energy prices we consumers pay are below market levels.

You might think: Isn’t that great? The government is paying for part of my gas!

But let’s trace it backward. Where does the government get their money to subsidize your gas? That’s from government revenues. Where does the government get their revenues? Mostly from taxes.

The federal government of Canada gets more than 80 percent of their revenue from two sources: income tax and consumption tax (source: StatsCan). Who pay the government those incomes taxes and consumption taxes? That’s the taxpayers. You get the picture … it’s you. 

The gas you get from the pump is paid partly by you at the gas station. The other part of the cost is also paid by you, but indirectly through withheld pay and the GST you pay at the register.

And this is the part I’ve always wondered: What’s the real price of the energy we use?

Are the energy subsidies large or small? What’s the fully loaded energy price compared to the ‘sticker price?’ This is a very complicated calculation as multiple levels of federal, provincial, and commercial players are involved. But thanks to the economists at the International Monetary Fund and their extensive study, we now have some good data.

According to the IMF study (and the additional data they provided to me) Canada incurred $26 billion on energy subsidies in 2011. The Canadian government’s revenues were $665 billion in that year. In other words, 4% of the government revenues were spent on energy subsidies. (Note that the IMF calculation uses U.S. dollar, but the Canadian dollar was at virtual parity with the U.S. dollar over the year of 2011, with $1 USD equaled $0.989 CAD).

Let’s put these numbers into more relatable context. How much energy subsidies were made for each person? According to StatsCan the Canadian population was 33,476,688 in 2011. That works out to be a whopping $787 of energy subsidies for each Canadian for the year. This is a far higher number than I expected. On average each Canadian paid $787, mostly through our income tax and GST, for our energy in 2011 and probably a similar amount year after year. Remember, this is on top of the payments we make at the gas pumps and through our hydro bills. For a family of four, this amounts to over three thousand dollars per year spent invisibly on energy.

With this in mind, are fossil fuels really that much cheaper than renewable energies?

The IMF cites many downsides to putting so much public money into subsidies and keeping energy prices—at least the ‘sticker prices’—artificially low, not least of which is giving the false impression to the general public that fossil fuels are much cheaper than renewable energy.

Subsidies distort resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries, reducing incentives for investment in renewable energy, and accelerating the depletion of natural resources.

According IMF First Deputy Managing Director David Lipton, removing these subsidies worldwide could lead to a 13 percent decline in CO2 emissions and generate positive spillover effects by reducing global energy demand.

It would also strengthen incentives for research and development in energy-saving and alternative technologies. That’s the reason the IMF is urging governments the world over to reform subsidies for products from coal to gasoline, arguing that this could translate into major gains both for economic growth and the environment.

So next time you hear someone say they prefer fossil fuel to renewable energy because they are cheaper, tell them they have been paying $787 a year on top of their bills for those fossil fuels without knowing it.

Special thanks to the International Monetary Fund for providing additional data for these calculations.

Image Credit: gas pump via wikipedia. Tar sands images by kris krug.

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.