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Interview with Jane Savage: Part 1 – Fuel Prices at the Pump, Collusion and the Price of Diesel
Jane Savage is the President and CEO of CIPMA, the Canadian Independent Petroleum Marketers Association. This industry trade association represents sellers who, together, account for 15% of liquid petroleum fuel volume sold in Canada.
Jane is a professional engineer, holds an MBA and has 29 years of experience in the downstream oil industry-22 with “big oil”-which has traditionally been dominated by men. Over the coming weeks I will bring you excerpts of a phone interview conducted with Jane on January 28, 2009.
Andrew: Jane, great to have you on the phone today. You understand this conversation will be used as content on the Volkswagen blog, right?
Jane: Yes, and thank you for inviting me into the conversation. I understand this is an open Internet audience.
A: And you do not have any prior knowledge of the subject matter here today…
J: That’s correct. However, it might be important to point out that I do know you. We met last year at the Canadian Fuel Marketers Conference in Ottawa and attended a Senators game together. So, yes, in the spirit of transparency this is a “cold” interview for me. I don’t know what you will ask, but trust you won’t force me into a corner on some issue. This is a progressive blog, right?
A: Good, we are clear then!
A: So let’s get right to it.
The cost of fuel
A: Fuel at the pump in July was approaching $1.50/L. Today it is in the mid $0.80 range. What happened?
J: One word. Speculation.
A: That sounds like the easy answer. The big oil companies made record profits during this period. What really happened?
J: I’m serious. It was speculation. Think about it. This was all about speculative interests…that is, investors who were interested in making money in crude oil futures. This was not someone making money from the buying and selling of oil. The same was true of food commodities at the same time. There was a massive influx of money.
A: What drove all of this speculative “interest” in crude?
J: Andrew, when we were at the petroleum conference last April in Ottawa, what did we hear? China demand. India demand. Peak oil. Climate change. Carbon. Green house gases. Go back a year or more to the leading media stories. We were inundated with these messages. The investment community reacted.
A: When will we see $150 oil again?
J: Well, I am loath to forecast oil prices-it’s a mug’s game, but for you, Andrew, I will step out on a limb and assess it will be a long time.
A: In the oil industry…what is a “long time,” Jane?
J; Oh, I think 5 to 10 years. Look, this is a supply and demand equation. No one will argue that hydrocarbons (crude oil) are a limited resource. There is a finite supply. So with the current economic situation, a recession, which will likely play out for five years, we will not see oil pricing levels in the mid-one hundred and fifty for maybe 10 years. All bets are off of course if our pension funds get stupid again and bet the farm on something as volatile as commodity prices.
Collusion
A: The consumers are cynical. They look at the oil industry as one big monopoly where pricing is fixed. A game of collusion. How do you respond to those accusations?
J: I hear it all the time. Wonderful cocktail party dialogue…But here is the bottom line. What appears to be a lack of competition at the retail level is in fact intense competition. Shift your thinking for a moment, Andrew. Imagine that you are the proprietor of a liquid fuel station-what consumers refer to as the gas station or, for your TDI readers, the clean diesel station. Across the street from you there is a competitor. Now, as a driver, where will you go? Every day pricing is set to maintain the business volume of pumped fuel in an effort to drive traffic and therefore “off sales” (convenience store items) for operational margin. There is very little margin at retail on fuel. It is too easy to just drive across the street.
Diesel price
A: Let’s talk about the cost of diesel. Why are we seeing diesel sold at a premium to gasoline? This is new. Will we see this as the norm?
J: Diesel fuel retail pricing will move closer or on par with gasoline within the year. Whoops, there I go again doing what I say I don’t do.
A: Well, I would expect this as it is my understanding that diesel is less expensive than gasoline to refine. That would indicate a lower price at the pump, right?
J: Well, that is a half truth. The devil is in the detail. The capital expenditure at the refinery construction stage used to be less expensive (used to be, because ultra low sulphur diesel has added to refining capital costs). So that is where the pricing advantage ends. The amortization periods on this capital would of course impact costing but this is a refinery-specific calculation. Once a barrel of crude is dumped into the refinery process, the costs are similar for gasoline, diesel, kerosene, jet fuel…and depend on refinery configuration.
A: But what about supply and demand? With a recession I would expect a reduction in diesel demand and therefore a corresponding price adjustment.
J: Well, that is true and primarily why I feel the diesel gasoline price gap will narrow. Within the petroleum industry we look to diesel fuel as an indicator of economic condition or health. The economy and diesel fuel are closely linked. Diesel and the gross domestic product (GDP, the value of all goods and services produced in the country) work closely together. Recession will show up in diesel but less so in natural gas, propane, heating oil and even gasoline, etc.
A: Why GDP and diesel fuel?
J: Look at the highways. Freight, for the most part, is moving by truck. Demand for goods that move by truck is down.
More with Jane in future posts where we will continue this conversation and talk about biofuel, biodiesel, clean diesel, the Canadian RFS, ULSD, more on the price spread on diesel, fuel pricing regulations and the gas station of 2030.
To read the second part of the interview, please click here.
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