Op-Ed

The price of gas at the pump, pt. 2  

“One of our primary objectives is to ensure that as Bahamian business owners, we are able to operate our business at a profit.” Bahamas Petroleum Retailers Association

For the past few weeks, we have discussed how we are all experiencing increases in the cost of virtually everything. No one is immune from inflation’s uninvited incursion into our daily lives.

We referred to inflation as a hidden tax that the government collects without passing supplementary legislation because customs duties and value-added taxes (VATs) are paid on the inflation-expanded prices we pay at the point of sale.

Last week, we discussed how significantly the price of fuel has increased at the pump and how the inflated price of this commodity has adversely affected so many lives. We specifically reviewed the cost of fuel and how the government regulates the price margins of fuel.

We further examined the challenges that the wholesaler faces considering the government’s regulations that have seen wholesalers’ price margins remain fixed for more than two decades.

This week, we will consider this — What existential challenges do petroleum retailers face in combating the costs to operate and what do they encounter regarding the price of fuel even before it reaches the pump?


The price of fuel

Recently published reports confirm that automotive fuel has reached an all-time high as demonstrated by the following pump prices for a gallon of gasoline:

RUBiS: $6.13

Esso: $6.48

Shell (FOCOL): $6.35

The price difference between the various brands is directly attributed to the timing of the import (purchase cost) and the resulting logistics cost experienced by each wholesaler/importer.

We observed that it is essential that the consumer understands that the government fixes petroleum wholesalers’ and retailers’ price margins.

The price that the consumer pays includes several components. In addition to the initial cost that wholesalers pay to land the fuel in The Bahamas, they must pay a fixed customs duty of $1.16 per gallon.

No matter how much the wholesaler pays for the fuel, how high or how low the price may be at any given time, for every gallon of gasoline, by government regulation, the wholesaler can only earn $0.33 per gallon for gas and $0.18 per gallon for diesel fuel.

The retailer, by comparison, is also under a mandate by the government and can only earn $0.54 per gallon for gasoline and $0.34 per gallon for diesel. The consumer also pays the applicable VAT, presently 10 percent.

Assuming the first cost of $4 per gallon of gasoline and diesel, the government earns the lion’s share of what the consumer pays at the pump, somewhere in the region of approximately $1.76 per gallon for gasoline and $1.73 for diesel. That government revenue includes customs duty and VAT.

The retailers’ $0.54 margin per gallon represents only eight percent of the retail gasoline price based on current price levels.

In contrast, 27 percent of the retail price is attributed to duties and taxes (including VAT), with the remaining 60 percent representing product acquisition and transportation costs in the international market.

Similar percentages for diesel are five percent, 28 percent, and 64 percent, respectively.

Implications for retailers

Last week, we covered the implications of this price structure for the wholesaler. This week, we will examine the implications for the retailer.

The government approves all fuel price changes, and those price margins for retailers have been fixed for more than 10 years. Therefore, the retailer earns no extra profits when fuel prices increase in the local or international markets.

At first glance, it may appear that the retailer earns more than the wholesaler, but that observation does not tell the entire story. The retailer incurs costs that the wholesaler does not equally bear.

Most gas stations are owned by the wholesaler, who then leases the premises to a licensed retailer.

The retailer then pays a monthly rent to the wholesaler for the use of the gas station that could range from $15,000 to $30,000.

In addition, the retailer pays a monthly franchise fee to the wholesaler that can range from $6,000 to $7,000. This fee is based on a percentage of store sales to customers.

In addition, the retailer is responsible for maintaining the equipment that it uses. The retailer also bears the added costs of labor, national insurance, general liability insurance, business license fee, training, repairs and maintenance, utilities, electricity, office and administrative expenses, and improvements to landscaping.

And now, in this age of technology, dominated by digital payments, retailers are obliged to offer customers the option to pay for fuel with a credit/debit card.

The associated bank fees on each of those transactions can range from 2.5 percent to 3.5 percent of the sale which the retailer has to absorb. So, as the rising price of fuel increases the credit card fee incurred by the retailer, at present, the retailer must also take this fee from his fixed $0.54 margin.

To augment its revenue, the retailer has expanded its products to include the sale of goods that one would typically find in food stores. This helps to generate additional revenue for retailers, without which they would normally incur a net loss from operations.

It is a fact that, as fuel prices increase, consumers tend to reduce their consumption. This reduced consumption has negatively impacted gross profits for retailers, as it has for wholesalers, because their fixed margins are regulated on sales volume and not sales revenue.

Furthermore, the retailers’ business license fee is assessed on turnover, not on gross profit. Therefore, higher fuel prices result in higher turnover which translates into higher license fees all payable from the same fixed margin.

It is not surprising that many gas stations in the country have gone out of business over the years. They just cannot keep up with the inflationary pressures they face in their businesses.

Fortunately, from a business perspective, this phenomenon is overshadowed by a steady economic recovery as COVID-19 restrictions are relaxed.

People are no longer working from home and kids are now attending face-to-face classes, just two components that have increased vehicle time on the road and, therefore, the need for increased gasoline consumption.

The combination of operating on the same 10-year-old fixed margins against the increased cost of doing business over the past decades is already a burden when considering the retailers’ responsibility for maintaining and managing modern infrastructure across the industry along with changing business practices in the digital economy.

In the face of stagnant price margins, the challenges associated with higher fuel prices do not help.

There is another concerning component connected to this industry, the pervasive practice of wholesalers, who also own retail stations. This reality contributes to a perception of avarice by wholesalers on two levels.

Firstly, it enables wholesalers to double-dip by earning increased profits of a combined $0.87 margin per gallon of fuel, as both the wholesaler and retailer ($0.33 and $0.54, respectively).

Secondly, it competitively pits wholesalers against retailers who franchise from the former.


The case for a repatriation tax

As we observed last week, FOCOL is the only fuel distributor publicly traded on The Bahamas International Stock Exchange (BISX).

Accordingly, FOCOL truly represents the democratization of the fuel industry in The Bahamas because thousands of Bahamians annually benefit from its fortunes as shareholders in that company.

Approximately 60 percent of FOCOL’s profits are paid in dividends to its Bahamian shareholders. FOCOL’s profits remain in The Bahamas.

The other two major fuel distributors, Exxon, and RUBiS, are privately held companies. The majority of the profits they earn in The Bahamas do not remain here but are repatriated to their companies’ headquarters in Canada and France, much like the foreign-owned commercial banks in this country.

A strong case can be made for the government to impose a significant repatriation tax on these foreign companies because they export their profits from The Bahamas. Such a tax must be well-studied and considered in order to be properly administered.

Our legislature must be astute in drafting the appropriate legislation to ensure that impacted companies find no loopholes that would enable them to avoid paying the fully due repatriation tax.

Our leaders must not be deluded that repatriation taxes will be harmful to our jurisdiction and may cause these companies to leave.

They will not go anywhere for two reasons. Firstly, they pay much higher taxes in their own countries and, secondly, they earn too much money here to pack up and leave.

Besides, if they decide to depart, the void that would be created by their departure will be immediately and instantaneously filled by other investors.

Finally, the government should use its moral suasion to encourage the two major oil wholesalers that have little to no Bahamian ownership to offer their shares to the public, taking a page from FOCOL’s playbook.

They should also be encouraged to consider selling the station facilities to their Bahamian operators.


Adjustments are required

Like any other investor, we must not forget that the Bahamian petroleum retailer is an investor in the economy and should earn a reasonable profit on his investment.

Repeated requests by the petroleum industry to increase its margins have fallen on the deaf ears of successive governments. Reasonable requests for increased margins by retailers, when prices return to normal levels, should be periodically reviewed and adjusted to ensure that this industry is allowed to flourish.

Failure to do so will result in the closure of gas stations.

Therefore, serious consideration should be given to a new regime in the margin setting process for the petroleum retailer/investor. For example, fuel margin could be established as a percentage based on the landed cost. That way, the retailers’ margin will increase and decrease with the market dynamics, as it does with all other commodities.


Conclusion

The Bahamas’ fuel industry is a classic example of the adage that “all that glitters is not gold”.

While it may appear to the average consumer, as they watch the rising gas prices at the pump, that the Bahamian automotive fuel industry is earning excessive profits, a rush to judgment requires a deeper dive into the industry to fully appreciate what goes into the price of gas at the pump.

As another company once admonished, “an informed consumer is our best customer”.

And as informed consumers, we must keep in mind the words of American writer and educator, Anna Lappé, “Every time you spend your money, you are casting a vote for the kind of world you want.”

In this case, a more equitable world for the 21st century Bahamian automotive fuel industry.

 
• Philip C. Galanis is the managing partner of HLB Bahamas, Advisors and Chartered Accountants. He served 15 years in Parliament. Please send your comments to
pgalanis@gmail.com.

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