The following story by Mr. Neil Hartnell, Business Editor, ran in The Tribune, Business, on Monday January 21, 2008.
It is well worth the read as it quotes your not so humble blogger.
The only point that was left out was the fact that price controls also restrict business practices in the cases where larger mark ups might be necessary on slower moving items and lower mark ups on faster moving items.
Hope you enjoy the article.
GOVERNMENT-mandated price controls may be working against the Bahamian consumer by keeping energy prices artificially high, especially when it comes to the petroleum industry, a car dealership executive told The Tribune yesterday.
Rick Lowe, the director/operations manager at Nassau Motor Company, said the Government-mandated mark-ups imposed on wholesalers and dealers discouraged the three major oil companies and the gas stations retailers from competing against each other on price.
Because prices were controlled, the oil companies - Esso, Shell and Shell (Sun Oil or FOCOL) - and the dealers had no incentive to lower prices below the mandated mark-ups, thus keeping vehicle gasoline prices higher than they might otherwise be.
“There’s no real competition in the gasoline industry,” Mr Lowe told The Tribune. “The price controls cause more of a hardship than anything else........
“Government thinks they’re mandating something to protect the consumer, when in fact they’re not. I entirely agree that mandated price controls do not encourage competition.”
When it comes to the per gallon price of gasoline in the Bahamas, a significant chunk of that is accounted for by government taxes and the wholesale/retail mandated mark-ups.
With the price of crude oil trading on the Brent and Nymex indexes at around $88 per barrel yesterday, and one barrel equivalent to 42 gallons of oil, the rough spot price of a gallon of crude oil is just below $2.10.
Once oil and petroleum products are landed in the Bahamas, at every stage they are price controlled by the Government. It imposes $1.06 per gallon in import duties on unleaded gasoline to boost the Treasury, while the wholesale and retail mark-ups are respectively $0.33 and $0.44 per gallon.
Adding those two mark-ups to the $1.06 import duty produces $1.83, the fixed cost of a gallon of gasoline once it is landed in the Bahamas. And adding that number to the price of crude oil produces the total of $3.93, accounting for the lion’s share of per gallon gas prices, which are currently hovering around $4.70
This indicates that Government-mandated mark-ups and taxes are heavy contributors to the cost of a gallon of gas, along with the greatest variable - crude oil prices.
And the $3.93 figure does not even include the 7 per cent stamp duty that the Government levies on the cost of imported fuel freight (CIF), a sum that would take this over $4 per gallon.
Mr Lowe pointed out that in his industry, government-mandated mark-ups imposed a 25 per cent increase on CIF ceiling for cars, and 75 per cent ceiling for vehicle parts.
As a result, “none of us mark-up to 15 per cent; we all mark-up to 25 per cent”. Mr Lowe pointed out that when the late US president, Ronald Reagan, removed gasoline price controls in the US during the 1980s, “prices fell because people realised the game was over and they couldn’t hide it any longer”.
While the removal of the wholesale and retail mark-ups in the gasoline industry would not spark a dramatic fall in the gas prices faced by Bahamian consumers, Mr Lowe said it would encourage competition and help to gradually lower prices over time.
“I don’t think they’re going to bring it down appreciably, but it’s better for everyone without mandated price controls,” Mr Lowe said. “Where they think price controls protect people, they don’t.
“I do not see a huge increase in price. What you’re going to see down the road is that one gas station will realise that if they lower their price a bit, they will attract more business. Then Harry will do that, and John will follow, too.”
Mr Lowe added: “Price control needs to go. Price control across the board needs to be dropped. I think the consumer should be the one who determines the competitive price and who to do business with. Let’s keep government out of it as much as we can.”
A whole range of foods, including staples such as eggs, bread, milk, cheese, butter, cooking oil and baby food are price controlled in the Bahamas, all featuring wholesale and retail mark-ups of 13 per cent and 23 per cent respectively.
In a nutshell, price controls are a useless policy that are used for political, not sound economic policy.
