AIMS report on gas price regulation questionable
The Truro Daily News recently printed an editorial commenting on a study by the Atlantic Institute for Market Studies (AIMS) (“Protection or burden?” Aug. 25/17). The editorial noted that the study “estimates motorists paid in excess of an extra $36 million in Nova Scotia” as a result of regulation, with others in Atlantic Canada paying tens of millions in additional costs because of regulation in their provinces.
It concluded that the “information put forward by AIMS is compelling” and suggested that governments were artificially raising the price of gasoline to collect more taxes.
In fact, these claims by AIMS are bogus. Let’s see why.
The new AIMS study, “What’s Still Missing From Your Wallet?” updates their 2009 study “What’s Missing From Your Wallet? How Gas Prices Regulation Robs from Consumers.” That 2009 study reported that regulation had cost Nova Scotian consumers $18 million since it began in July 2006. The new study claims an additional cost of $18 million for 2009-2017, for a total of $36 million.
What AIMS is attempting to calculate is how much consumers paid wholesalers and retailers before and after regulation for a litre of gas. If this “marketing margin” rises after regulation, AIMS claims that regulation caused it. Knowing the total number of litres of gas purchased gives an estimate of the increased costs to consumers.
However, comparisons of dollar values over time have to be adjusted for inflation, but their 2009 report didn’t do this.
I corrected this mistake in a paper published later in 2009 by the Canadian Centre for Policy Alternatives (“Debunking the Myth That Gas Price Regulation Robs From Consumers”). I found that the postregulation increase in the marketing margin was only about a third of what AIMS claimed.
I re-examined this in a 2012 report to the Nova Scotia government (“Petroleum Product Prices and Price Regulation in Nova Scotia: A Consumer’s Perspective”). I found that after regulation, marketing margins initially went up but then began declining steadily. This is not surprising because regulation sets what maximum and minimum margins can be and they do not keep up with inflation.
By 2012 average post-regulation marketing margins were less than they had been before regulation. By AIMS’ reasoning, Nova Scotians were saving money because of regulation.
So AIMS’ 2009 result of an $18 million cost to consumers was wrong. Remarkably, AIMS persists in using it, an indicator of the integrity of their report.
Their current study attempts to address my earlier criticism by adjusting for inflation, but uses irrelevant American inflation rates in its calculation. Once again, all of their numbers are wrong.
According to their new study, the $18 million cost to Nova Scotian consumers since 2009 comes from two numbers. The first is their (erroneous) estimate of the average inflation-adjusted increase in the marketing margin since regulation began in 2006: 1.864 cents per litre. The second is the volume of gas consumed in Nova Scotia since their 2009 study, which they state is 9,754,327 litres.
A further indication of the quality of their work can be seen in their arithmetic. But first, here’s a test of your arithmetical skills!
Suppose you go into a gas station to buy 50 litres of gas and you find that the price has gone up by one cent per litre. How much extra will you pay?
Yes, 50 cents. But according to AIMS’ arithmetic it’s $50!
In calculating the total cost to consumers since 2009, they multiply 1.864 cents per litre by 9,754,327 litres — and get an answer not in cents but in dollars: $18,182,066! Oops.
In fact, it is safe to say that regulation has not increased prices. Nor has it produced prices significantly lower compared to what they otherwise would have been. That was never its objective.
Regulation increases the predictability of price changes, adding stability to day-to-day prices. It also makes the setting of prices more transparent, assuring buyers that prices are based on reasonable costs of production that allow wholesalers and retailers to remain in business.
The reports by AIMS on gas prices regulation are misleading the public about its effects. Discussion about public policy should be based on fact not fiction.