We are excited to announce the new location for the geoLOGIC blog!
Please visit us at www.geologic.com/blog.
We are excited to announce the new location for the geoLOGIC blog!
Please visit us at www.geologic.com/blog.
(Or “Talk To Me About Gas Retail Pricing—Like I’m in Grade Four”)
Last year back in April-May, when I visited family and friends in Hamilton, Ontario, regular gas was being retailed at the $1.37 to $1.45 per litre range. You could literally hear groans from motorists each morning as they saw the daily updated pricing posted at refuelling stations. During my three-week stay the upward trend was a sustained phenomenon.
Some close friends — upon learning I worked for the oil and gas industry (sort of, that is) and being based in Alberta — bombarded me with questions about gasoline pricing in Canada. (As if I had something to do with the increases, or that I would know enough to help them understand what was happening).
Truth was (and still is) the explanations I’ve heard from TV talk shows at that time have not greatly eased the clutter in my mind about the subject. I am still far from having a firm grasp of the relevant pricing mechanism.
Most popular questions/observations I received were as follows:
1.“We are a major oil-producing country, aren’t we? How come our gas prices are so high?”
2.“Can you explain why gas is cheaper South of the border (U.S.A)?”
3.“Is it true a major portion of the price is taxes?”
4.“Can government not intervene and make gas prices more affordable especially for low-income families?”
I tried to give them a lay person’s answer to some of the questions but, being as befuddled as they were, I didn’t think I made much headway. The most I achieved, I think, was to make many of them understand I was as much in the dark as they were about the issue.
In the aftermath of this encounter with largely disgruntled inquisitors (disgruntled with the system, that is) I tried searching for answers and explanations. What follows is the result so far of reviewing information at certain key internet sites, particularly the excellent pages devoted to the subject at the Natural Resources Canada website, and at the Department of Finance Canada website.
Item #1: Petroleum Products Rack Pricing and The Law of Supply and Demand
Let’s begin with the rack pricing system which, as in everything else — particularly in a free-market economy or, the very least, in a mixed-economy — is based on the operation of the Law of Supply and Demand.
The rack price of petroleum products is of key importance to refiners because it determines viability of refinery operations. It is the product selling price available to the refiner at the loading rack (hence, “rack price”). And as any sensible product seller would do assuming product mobility — as is the case, for instance, of US and Canada — a refiner (either Canadian or US) would go for the best price available in a given choice of markets.
Thus, to use the illustration at the Natural Resources Canada website – “…if the rack price for gasoline was lower in Toronto than it was in Buffalo, refiners in Toronto would choose to ship their product to Buffalo to sell at the higher price, as long as the cost of transporting it to Buffalo was less than the price difference. …” .
[Translation: In a free-market economy (or a mixed economy with sufficiently strong market forces at work and not one run entirely or mainly by command or dictatorial fiats) refiners will always seek to maximize their revenue and profit by choosing the market with the best selling price. Profitability is the key determinant of such business decisions – not patriotism, not benevolence, or anything else one may consider a higher value or a loftier ideal than so-called “filthy lucre”.]
But eventually, as more product is shipped to Buffalo due to the attractiveness of the rack price in that market the supply will soon build up and the price will soon drop until it is no longer advantageous for the Toronto refiner to ship his product over to Buffalo. Soon the two markets will be in balance.
Item # 2: Effects of North American Petroleum Products Market Integration and Global Market Conditions
It is not just the local supply-demand equation that comes into play when pricing petroleum products. Domestic refiners are “price takers” — meaning (and using Canadian local refiners as an example) the price of imported petroleum products is used by local Canadian refiners as basis for their own competitive pricing even if Canada were not importing any such products at all.
[Translation: Local or domestic pricing is affected by import pricing regardless of whether we (in this example, we, Canadians) are doing any actual importation of such products or not. The Natural Resources Canada website refers to this practice as exercising “pricing discipline”. Hence, even when a local refiner’s cost structure is very competitive and the supply-demand equation may indicate a lower domestic price is sustainable (or attainable), actual pricing will still be close to the higher import price available in the integrated market.]
Again, the so-called “profit maximization function” will lead a refiner to seek opportunities to exact a higher price to maximize revenues. To repeat the dictum — for-profit-ventures, such as refining operations, are not driven by patriotism or benevolence: profitability is the moving force behind such a key business decision as product pricing.
Item #3: Effects of Substitute or Alternative Products
It may be difficult to understand but it is reality: petroleum products pricing is affected not just by the demand-supply situation for a given petroleum product but by the equation and pricing as applied to alternative or substitute products. Take for example propane which is described in as follows:
“Propane is a three-carbon alkane with the molecular formula C3H8, normally a gas, but compressible to a transportable liquid. A by-product of natural gas processing and petroleum refining, it is commonly used as a fuel for engines, oxy-gas torches, barbecues, portable stoves, and residential central heating.
Thus, for instance, automotive fuels (gasoline and diesel) directly compete with propane as far as its use as a vehicle fuel is concerned. The overall supply and demand equation for petroleum automotive fuels and resulting price regime are thus affected by the demand-supply-price behaviour of propane.
Item #4: The Very Nature of the Petroleum Product and How It is Used Affect the Price Consumer Pays for It
This point is still pretty much along the theme of demand-supply equations. The way consumers use (or consume) the product has a direct bearing on the demand-supply situation and, therefore, its price. One may even correctly say a given product may have competing “uses”; and the whole set of such competing or alternative uses necessarily affects the price consumers are willing to pay. A good example will illustrate this point more clearly and none can probably do it better than diesel fuel.
People who track economic activity – to determine whether it is waning or is on the rise – usually observe diesel demand and consumption patterns as a proxy indicator of economic activity. A healthy, growing economy will have a strong demand for diesel fuel because goods and services need to be moved and distributed increasingly in such a robust economy. This translates to an increase in truck traffic which largely relies on diesel fuel to run the engines of such huge tractor-trailers and other freight trucks.
Add to this the fact that most agricultural machinery and equipment likewise use diesel fuel. Then also diesel fuel can be easily converted to furnace oil for heating purposes. So versatile is diesel fuel that it is used as a fuel of choice in transportation, agricultural, industrial, and residential applications. The whole slew of such competing uses (translation: demand) is a big factor to diesel fuel pricing.
Item #5: The Tax Regime Applicable to a Given Market Affects the Price Consumers Pay for Petroleum Products
You must have heard the old cliché about the two things certain in this life: taxes and death. And in Canada automotive fuels are certainly subject to federal excise tax, GST and, depending on the province concerned, provincial tax.
The sum total of such taxes amounts to approximately $0.32 for a representative $1.00 per litre price of automotive fuels.
Item #6: Retailer’s Operating Costs Plus Any Retail Marketing/Promotion Strategy Affect the Price Consumers Pay
Retail operations entail costs that must be recovered and, to stay in business, such operations must give the operators a sufficient profit margin. Such considerations all affect the actual retail price offered to customers. Also, in certain instances, a retailer may opt to implement a promotion campaign to attract a bigger market share; price competition may be the best option. By offering a lower price they may drive more traffic to a particular retailer.
How these different key items affect pricing is summarized in the following graph from Department of Finance Canada using gasoline at an illustrative price of $1 per litre:
Approximate Price Components of Gasoline at CAN $1 per Litre (in cents)
I hope this post sheds some light on the subject of automotive fuel pricing in Canada. I will continue with this topic to touch on some other factors that affect the price customers have to actually deal with. Among the most controversial ones are the effects of a) speculative demand, and b) US $ fluctuation.
I must admit, though, this post hardly meets the challenge of explaining gas pricing in terms easily understood by a Grade Four student. I give up! But go to the Canadian government websites mentioned above. Also, at next post on the subject I will include non-government sites that I stumbled upon recently. They have a better way of reducing the complexity of information on this largely misunderstood topic.
I can remember the first Williston Basin conference I went to in 2008 in Minot, North Dakota. Horizontal technology was just hitting its stride and the main concern about producing Bakken oil was lack of infrastructure to deliver it to market. No one was talking about government regulation or royalties around the resource because everyone was excited to start producing. Now that there is heavy horizontal production coming from this area the same concerns linger; however the eternal question of how to compensate the people for the extraction of their resources has of course become a concern.
In Alberta, and the Western Canadian Sedimentary Basin in general, we have long been producing oil and gas and our methods and rates for royalty calculation are under constant scrutiny. It’s no surprise then that North Dakota, Montana and other new oil and gas hot spots are facing the same issues.
In Comparing Unconventional Oil Tax Policy Across US States Headwater Economics, a non-profit out of the US, does some analysis with use of VISAGE and the gDC US data to better understand and compare royalty rates between some of the states.
“Applying data and assistance from VISAGE and geoLOGIC Data Center, Headwaters Economics has analyzed how North Dakota, Colorado, Montana, and Wyoming approach the collection and distribution of energy revenue in the context of the unconventional oil boom. The goal of the research is to provide decision makers in each state with good information upon which to make better decisions.
The following figure shows the type curve for an average Bakken horizontal oil well which produced 157,222 barrels of oil over the first 36 months of production”
I checked and Alberta royalties are 5% for the first year of production on horizontal oil wells;
How do the other provinces stack up? Do these rates make Alberta competitive or not? Is it more or less expensive for us to get our oil to market; should royalty rates compensate for that? How can we use these same tools to make better decisions going?
Let me know what you think!
(See below for update)
I have an older smartphone that is about due for replacement. It’s a Samsung Omnia, a Windows Mobile 6.1 phone that I have had for almost 3 years. Before that I had always had a “standard” cell phone and I also carried around a Pocket PC for notes and such. I’ve gone through 4 different Pocket PCs over the years, starting with a Compaq Aero 1500 running Windows CE 3.0 through to a Toshiba e830 running Windows Mobile 2003SE, and over that time I have built up a library of software that I’ve transferred from device to device all the way up to the Omnia, simply because the software was useful (in at least one case I would go so far as to call it “critical”) for me in my work.
I like the Omnia, but there are some limitations due to the form factor (it’s a little smaller than is always practical for a touch screen), the OS (WM6.1 is 3 years old and has some quirks), and the age of the hardware (the battery is nearing the end of life). And now I have a dilemma.
We’re a “microsoft shop” and I have been using Microsoft-powered handhelds for a decade, so you could say that I have some loyalty to the OS. But Windows Phone 7 (and beyond) doesn’t support the software that I have grown to rely on. Which means that I don’t have a compelling reason to look at only the Windows Phone. In fact, an equivalent piece of software for the one critical application that I use on the Omnia is available in the Android marketplace and is not available in the Windows Marketplace, so I now have a reason to consider Android. And there is even a migration path. The app on the Omnia can share the data files with an application that I have on my desktop computer, and the Android app will also share data with the desktop software, so I can actually migrate the data from one device to the other with just a little bit of fiddling about.
So, what does this teach us?
These are (hard) lessons that we learned a long time ago. What it means for us is that we always know that we’re not the only game in town. It means that even though we roll out over 300 fixes and enhancements every 4 months, we try to do it without disrupting existing workflows. It means that, if the solution can be created by extending an existing module or function, that we try to implement that new solution without breaking what already works. It means that if the solution requires a change to the underlying data model, that we provide an automatic method to upgrade your existing version of the data to the new model. It means that we anticipate the problems that the solution may create, and plan the mitigation before we release the solution. We’re not always successful in this, but we have a better record today than we have had in the past. And we’ll be better tomorrow than we are today.
We don’t take our clients, or our success for granted. We work every day to provide the best solutions for our clients. And it means that even if we’re not always successful in this, our goal is to be better tomorrow than we are today. And we’ll always work to ensure that you do have a way to move your data into the new version with as little fuss as possible.
Updated Dec 12, 2011
Well, I made my decision yesterday. Here is my new phone:
…. Or Some Notions, Perceptions, and Misinformation (NPMs) vs. Facts About the Alberta Oil Sands
Mention “Alberta oil sands” and you would probably evoke in most hearers’ or readers’ minds a negative image, maybe even a sinister one.
We may attribute this phenomenon to the proliferation of highly critical media coverage of the oil sands. Such media chatter has definitely approached very-high-intensity decibels even as North America (primarily) is engaged in the raging debate about Keystone XL Pipeline project.
About the use of the term “oil sands” — I just did a seven-page random sampling of Google pages on the subject of “Alberta oil sands” followed by a cursory contents review of entries on those pages. I classified the entry contents into:
The results of this, my obviously non-scientific, exercise are nevertheless very interesting and illustrative as noted in the following summary:
One interesting trend I noticed is that entries employing the term “tar sands” tend to have a negative position or critical content against the Alberta oil sands. On the other hand, the positive-content-entries and most of the neutral-content-ones consistently use the name “oil sands” (two words) or its variant, “oilsands” (one word).
One may surmise persons and entities critical of the oil sands deliberately use the name “tar sands” as a politicized pejorative term (i.e., one that is likely to create a derogatory image). Conversely Alberta oil sands supporters are likely to be perceived as intentionally using the term “oil sands” as an equally politicized term — a politicized meliorative term (i.e., tending to create a pleasant or ‘admirable’ image).
What’s in a name?
As a person with no political agenda and/or being simply concerned with accuracy, how would one determine which name to use – “oil sands” or “tar sands”?
Consider the following learned statements of opinion:
“The hydrocarbon mixtures found in northern Alberta have historically been referred to as tar, pitch or asphalt.
” However, ‘oil sands’ (two words) is now used most often to describe the naturally occurring bitumen deposits. This helps distinguish it from the other terms like tar sands, which are associated with distilled or man-made products, such as the mixtures used to pave roads.
“Oil sands is an accurate term because bitumen, a heavy petroleum product, is mixed with the sand. It makes sense to describe the resource as oil sands because oil is what is finally derived from the bitumen.”
“Technically the product from the bituminous sands deposits is neither tar nor oil. Tar actually comes from trees (Look it up! I too did not know this) and oil comes from petroleum reservoirs.
“In fact the technically correct term is bituminous sands. It’s just not as easy to say as tar sands or oil sands.”
Source: David Finch,Calgary-based Oil Patch historian and author. http://davidfinch.blogspot.com/
“Oil sands are a natural mixture of sand, water, clay and bitumen. ….Bitumen is oil that is too heavy or thick to flow or be pumped without being diluted or heated. Some bitumen is found within 200 feet from the surface but the majority is deeper underground.”
Source: Canadian Association of Petroleum Producers – http://www.capp.ca/getdoc.aspx?DocId=191939&DT=NTV
It appears there is a strong scientific case to use the name “oil sands”. However, regardless of one’s preferred term for this proven oil reserve second in size only to Saudi Arabia’s (or third after Saudi Arabia, then Venezuela — depending on which ranking system you use), there exist other NPMs around the Alberta oil sands. I would like to address them here and in succeeding blogs as follows — if only for the sake of accuracy and fairness:
Let me here take up the very first and the closely related fourth statements of NPMs, as shown above. Succeeding posts on the subject will progressively tackle the rest.
“Dirty, Dirtier, Dirtiest Oil”
A key NPM that is becoming a staple in the increasingly vociferous Keystone XL pipeline debate is that Alberta’s oil sands is the “dirtiest source of fuel available”, to borrow the words of Democratic Congressman Henry A. Waxman (30th District of California). He opines that building the pipeline would “…….heighten US’ dependence on this most unclean fuel source.”
First, let’s accept for the sake of argument certain tenets of conventional wisdom, viz.:
A corollary of the above set of generally accepted statements of conventional wisdom is as follows:
Also, based on materials I have reviewed so far, it would seem energy sources are adjudged clean or unclean on the basis of the following major criteria:
Let’s have some perspectives here concerning GHG emissions. As the chart, below, clearly indicates oil sands GHG emissions amount to 6.5% of total emissions coming from all Canadian sectors combined. (Please see CAPP – Upstream Dialogue ).
An ordinal distribution of the different sectors, by percent GHG emissions is an eye-opener, to wit –
Out of the eight Canadian sectors monitored oil sands ranked second lowest emitter of GHG; the main culprit is “Transport” accounted for chiefly by passenger cars.
(Just an aside, and rather humorously , the book “Ethical Oil” by Ezra Levant, cites official statistics showing total oil sands GHG emissions being out-grossed by total GHG emissions from “enteric fermentation” — also-known-as flatulent gases being emitted by Canada’s livestock industry!)
And to continue with the discussion — it is interesting to note from the graph, above, that oil sands total GHG emissions in 2009 (latest complete annual data) “ … is equivalent [only]to 3.5% of 2009 emissions from the U.S. coal fired power generation sector.”
The misconception or misinformation (call it what you like) that oil sands is “the dirtiest source of fuel available” — in terms of carbon footprint — which the good Congressman Waxman has publicly held onto was echoed by another high-profile American figure, U.S. Ambassador David Jacobson. National Post reported the American diplomat as having “… suggested repeatedly that Canada needs to ‘to do more’ to reduce the carbon footprint from the oilsands [sic], most recently in a Calgary speech July 19[, 2010].”
One thing for sure — the strides made by Alberta oil sands over the years to reduce carbon footprint are among the most remarkable continuing achievements of the industry. The dizzying pace of technological advancements is a reality in the Alberta oil sands. Right at this moment new ways to reduce the footprint are either being tested, developed, evaluated, or are being emplaced. Sadly, however, such positive developments hardly get the same high-profile media treatment as the problems and challenges (and there a number of them, of course) in the oil sands.
I would assume these notable gentlemen have adopted the said publicly stated positions out of ignorance or as a result of having themselves been recipients of incorrect information.
Either way it seems ironic that the latest energy outlook report from US Energy Information Administration shows from 2008 to the present the US has relied, on average, on coal-generated power for about 20% of its energy needs. In fact in terms of ranking, energy from coal which is at least 28 times dirtier than energy from oil sands ranks as the number three source of power consumption by the US. Which has led National Post contributing author W.A. Dymond to remark: “…in point of fact, this would appear to be a case of ‘Old King coal calling the oil sands black’ (or blacker).”[bold-faced and italicized fonts supplied].
Please see, also, table below which I excerpted from US EIA report, and enhanced by two columns I supplied to show calculated average share in energy production and consumption, by source.
Even more ironically, based on more recent and very reliable reports, the US may have to even intensify its reliance on coal-generated power. The same report, which I will touch on in a more specific manner at a subsequent post, has also quoted reliable sources that Germany, a leading light in Europe and the Western world in the drive towards a desired global shift to green energy, will also increase reliance on coal-generated energy.
What gives? Are you kidding — more coal-fired energy production and consumption? Well, that’s Realpolitik for you, mixed with a healthy dose of Realekonomiks (if there is such a word, BTW).
Tough decisions, I suppose, propelled among others by nuclear scare emanating from the unfortunate Fukushima nuclear reactor incident. But choosing between coal and oil sands, on the basis of which one is clearly less dirty (or more clean), which one would you rather have?
Let me pick up this particular thread of discussion at next post. In the meantime I would be happy to get any comments and reactions from you on the topic.
Thanks, and I hope for now you will at least remember to use “oil sands” (two words) as the correct term – conceptually and even grammatically.
From the very beginning, in 1983, geoLOGIC has been a leader in innovation in the industry, introducing many features and datasets that others have followed along copying.
From the release of geoSCOUT Version 1.0 in 1993 to geoSCOUT Version 3.1 at the end of 1999 we introduced over 70 major features or modules. Between 2000 and June 2006 we released 17 versions of geoSCOUT with over 230 major features or modules. From the release of Version 7.0 in July 2007 until today, we have released another 97 major features or modules including the complete revision of the Map Window in Version 7. With Version 7.11, which was released this past Friday, there are another 17 major features and a complete module re-write.
Of course, geoSCOUT has been a completely Windows-based program from the very beginning, so this is something we’ve had since 1993.
|In fact, since 2009, geoSCOUT has been tested to meet all of the technical requirements to be Compatible with Windows ® 7 for both 32 and 64-bit versions of the operating system.|
In addition, geoLOGIC is a Microsoft Gold Certified Partner and has achieved a Microsoft Competency in ISV/Software Solutions.
Of course, we have not been standing still over the past 15+ years, and I do thank our competitors for their efforts in trying to catch up – it forces us to continue developing innovative solutions to the problems that industry brings to us.
Clearly, in this industry there are leaders and there are followers. As the record shows, geoLOGIC truly is the innovative leader.