Competition Bureau concludes examination into complaints about high gasoline prices

Backgrounder

March 30, 2005

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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 (See attached chart).

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

What is the Bureau doing about allegations that the major companies used predatory pricing to harm independent retailers?

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.

How did the Bureau conduct its examination?

The Bureau analysed information from experts and participants from all sectors of the petroleum industry to determine whether there had been a breach of the Act. It also 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 spring and summer 2004 was likely due to anti-competitive conduct or to other factors.

The Bureau contacted all of the integrated refiners/marketers across Canada and asked them to cooperate with the examination. It then sent information requests to the major companies, held meetings with all of them, and met with a number of the regionally based refiner/marketers.

Other industry participants, including mass-merchandising retailers and gasoline importers provided information to the Bureau in response to information requests and in interviews with Bureau officers. In addition, the Bureau incorporated a great deal of public information on energy prices in its analysis.

The Bureau also commissioned an economic expert, Dr. Frank Roseman, a retired member of the Competition Tribunal with significant experience in competition issues in the petroleum sector, to participate in the examination and write a report for the Commissioner. Dr. Roseman's report, The Effects of Recent Volatility in International Petroleum Markets on Canadian Wholesale and Retail Gasoline Prices, is available on the Bureau's Web site.

Finally, the Bureau collected data on retail gasoline, wholesale gasoline and crude oil prices. These data covered the period of January 1996 to November 2004 and were used to analyse pricing behaviour in the Canadian petroleum market. The Bureau's report, Gasoline Empirical Analysis is available on the Bureau's Web site.

For more information on the Competition Bureau's role and activities concerning gasoline and other petroleum products, please visit the gasoline portal on the Bureau's Web site. The portal contains frequently asked questions, information on Bureau activities, a consumer pamphlet and basic facts on the Bureau's role with respect to gasoline price complaints.