Competition Bureau Concludes Examination Into Complaints About High Gasoline Prices
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No Evidence Of National Conspiracy By Gasoline Companies To Coordinate Price Increases
After a thorough examination, the
Competition Bureau has found that low inventories of gasoline in North America
and worldwide increases in the price of crude oil, the major cost component in
the price of gasoline, led to the rapid rise in retail gasoline prices in the
spring and summer of 2004.
“We found no evidence to suggest a national conspiracy by gasoline
companies to coordinate price increases,” said Sheridan Scott, Commissioner of
Competition. “Retail gasoline pricing behaviour in major centres across Canada
during this period was consistent with independent pricing actions taken by
businesses in response to normal market forces.”
The examination also found that before taxes, retail gasoline prices in
Canada continued to be lower than prices in most industrialised countries and
were slightly lower than prices in the United States in May 2004.
As part of its review, the Bureau analysed information from industry
experts and participants from all sectors of the petroleum industry. The
Bureau also retained an expert economist to assist with the examination. The
expert’s report, The Effects of Recent Volatility in International Petroleum
Markets on Canadian Wholesale and Retail Prices, is available on the Bureau’s
Web site.
In its examination, the Bureau studied refiner margins, crude oil and
retail price indexes and other industry data to determine if the rapid
increase in the price of retail gasoline in the spring and summer of 2004 was
likely due to anti-competitive conduct or to other factors. The Bureau’s
report, Gasoline Empirical Analysis, is also available on its Web site.
Since 1990, the Competition Bureau has conducted five major
investigations into allegations of collusion in the gasoline industry. It has
consistently found no evidence to suggest that periodic price increases
resulted from a conspiracy to limit competition in gasoline supply. After each
increase prices fell to normal levels.
However, the Bureau continues to investigate specific complaints about
potential contraventions of the Competition Act and will not hesitate to take
appropriate action where warranted.
The Competition Bureau is an independent law enforcement agency that
promotes and maintains fair competition so that all Canadians can benefit from
competitive prices, product choice and quality service. It oversees the
application of the Competition Act, the Consumer Packaging and Labelling Act,
the Textile Labelling Act and the Precious Metals Marking Act.
Competition Bureau Concludes Examination Into Complaints About High Gasoline Prices
Background
As a result of a significant number of complaints, on May 4, 2004, the
Competition Bureau began an examination of the Canadian petroleum market to
determine whether increases in retail gasoline prices in the spring and summer
of 2004 resulted from a breach of the Competition Act. In particular, the
examination focused on whether the price increases resulted from a conspiracy
among the integrated gasoline refiners/retailers to fix or coordinate prices,
or whether another explanation such as worldwide or North American supply and
demand changes caused the increases. The Bureau examined these issues under
the conspiracy provisions of the Act.
What did the Competition Bureau find?
The Competition Bureau found no evidence to suggest that the rapid rise
in retail gasoline prices in the spring and summer of 2004 resulted from a
national conspiracy to fix prices. Its general findings are summarized below.
– High crude oil prices and low gasoline inventories caused by a shortage
of refining capacity in North America were largely responsible for the
sharp increase in retail and wholesale gasoline prices;
– Retail gasoline pricing behaviour in major centres across Canada during
this period was consistent with independent pricing actions taken by
businesses in response to normal market forces;
– Before taxes, retail gasoline prices in Canada continued to be lower
than equivalent prices in most countries in the industrialised world
and were slightly lower than prices in the United States in May 2004.
Why were retail gasoline prices so high?
In 2004, high crude oil prices and low gasoline inventories caused by a
shortage of refining capacity in North America were largely responsible for
the sharp increase in retail and wholesale gasoline prices. Crude oil prices
increased dramatically by the Spring and reached record highs of over
$50 (U.S) a barrel in September 2004. Crude oil is the major cost component in
the price of gasoline, accounting for about 78 per cent of the price before
taxes.
The Bureau did not find any evidence of coordinated conduct among the
major companies in Canada to reduce refining capacity. Indeed most Canadian
oil refineries in 2004 produced at or beyond normal total capacity levels. A
number of oil refineries in Canada experienced prolonged breakdowns and other
unplanned maintenance problems which reduced production; however the major
companies routinely imported gasoline from Europe primarily to supply their
network of gasoline stations and other wholesale customers during planned
refinery maintenance shutdowns. These factors are not indicative of
coordinated actions to withhold production from the markets to increase
gasoline prices.
What about wholesale prices?
Collectively the major companies are responsible for the vast majority of
gasoline sales across Canada. Gasoline imports by companies not affiliated
with them represent a small percentage of Canadian wholesale supply. Canadian
wholesale prices, which are published and are quite visible to competitors and
customers, tend to be benchmarked according to prevailing prices in
neighbouring regions in the United States. This is due to the ability of
Canadian refiners to sell most of their output into large U.S. markets. In
fact, two refineries in the Atlantic provinces are primarily export-oriented.
Given the commodity characteristics of gasoline, commonly published
wholesale prices among competitors is a normal practice and insufficient to
raise suspicion of conspiracy. Moreover, published wholesale prices rarely
represent actual transaction prices, as volume discounts are usually applied
to most sales. Discount programs vary for wholesale customers, which reduces
the probability of a conspiracy.
Why do retail prices always appear to be similar?
Many motorists base their choice of gasoline on price alone — they
consider that gasoline brands differ in few, if any, other ways. Retailers usually post their prices on large street-side signs. Since
retailers know that the majority of consumers are very sensitive to price, gas
stations often strive to meet or beat their competitors’ posted rates. As a
result, competing retailers frequently charge similar or identical prices.
The fact that retailers may charge similar prices does not constitute an
offence under the Competition Act — there must be evidence that competitors
have made an illegal agreement to set those prices.
What causes price swings?
Street-level pricing is cyclical as competitors attempt to increase
market share by cutting prices or by restoring prices when operating margins
fall to unsustainable levels. As a result, retail prices within a region or
town can change significantly in response to competitive forces. It is common
for a gasoline station to change its prices more than 25 times per week.
Understandably this is a source of frustration for consumers who miss a price
reduction. Price swings of up to 10 per cent are not uncommon. In gasoline
retailing, the constant cycle of price changes in a market is actually a sign
that the market is competitive. In its recent examination, the Bureau found
that in virtually all the centres it studied, retail prices adjust in the same
manner following an increase or decrease in wholesale prices.
What kind of activities are illegal under the Competition Act?
It is illegal for retailers:
– to agree to fix prices or enter into other anti-competitive agreements;
– to try to influence another retailer’s prices by agreement, threat or
promise; or
– to persuade wholesalers to cut off gasoline supplies to discount
retailers, because of the discounters’ low prices.
It is illegal for wholesalers:
– to agree to fix prices or enter into other anti-competitive agreements;
– to try to influence a retailer’s prices by agreement, threat or
promise; or
– to refuse to supply a gasoline retailer just because that retailer
charges low prices.
All of these activities are illegal under the criminal provisions of the
Competition Act. To convict someone of such an offence, the evidence must be
convincing “beyond a reasonable doubt.” It must meet the standard criminal law
test.
Franchise retailers who sell gas on consignment often change their prices
on instructions from their head offices. This is not illegal under the
Competition Act.
The non-criminal provisions of the Competition Act may also come into
play to address abuses of market power that exclude competitors from a market.
Under the abuse of dominant position provisions of the Act, the Competition
Tribunal may issue an order to stop anti-competitive acts engaged in by one or
more dominant firms that prevent or lessen competition substantially.
Throughout 2004 the Bureau received many complaints from independent
gasoline retailers alleging that the major companies were engaged in
“predatory” pricing. The Bureau continues to examine these allegations and has
not yet reached a conclusion on the issue of predation.
@ March 31, 2005