That familiar pain you feel at the pump has returned with a vengeance this year, after an all-too-brief reprieve from the gasoline price highs seen in the summer of 2008. And that pain is really hitting the bottom line for consumers.
Inflation, or the cost of living for Canadians, jumped 3.7 per cent in May, the highest rise in eight years. And that was fuelled in part by a rise in gas prices. Statistics Canada said Wednesday prices at the pump jumped 29.5 per cent from a year ago.
While current gas prices are at 121 cents a litre, down from a high of around 134 cents in May, according to GasBuddy.com, the volatility has left many drivers asking what justifies the rising price of fuel and whether the industry has them over a barrel.
"I think it's very clear that for most Canadians, including this Canadian, that how they come about their pricing is not very transparent, it’s opaque," former federal Industry Minister Tony Clement said in May as he promised to summon refinery and gasoline retail industry representatives to Ottawa for a ceremonial grilling.
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5 Reasons Why You Pay At The Pump
While there is plenty of outcry over high gasoline prices, it’s not always clear how that price is set. Accusations of collusion and market manipulation abound. It’s a market that is at once global and local. Here are the main factors that drive gas prices at the pump, step by step, from recovery of the raw material to delivery to your car’s engine.
Step 1: Crude Oil Prices
It starts with crude oil. Although Canada may produce more oil than it consumes, the country is at the mercy of global markets for the commodity. Increased Middle East instability, sparked by popular uprisings, has lead to concerns about supply. Better-than-expected economic growth, especially in developing nations such as China and India, has also increased demand.
While crude prices have been rising through 2011, they have not yet reached the lofty heights seen in the summer of 2008, when a barrel of West Texas Intermediate traded for over $145 (U.S.). Indeed, the closing price this spring was never higher than $115 per barrel, 20 per cent below the historic peak. For Canadians, the drop is even more pronounced, because our dollar has risen in value by about 10 per cent over that time frame, increasing our buying power in U.S. dollar terms.
Step 2: Refining Oil into Gas
The next link in the supply chain is refining. In order to turn thick, black crude oil into useful products such as gasoline, diesel, heating oil and jet fuel, it must be sent through a mind-boggling array of pipes and tanks, heaters and condensers to sort the components of the substance from lightest to heaviest. This is a complex and costly process, and is paid for by what is known as the “crack spread,” or refining margin. This represents the difference between prices fetched for the products produced, and the cost of crude oil inputs.
This is where some of the rise in price is explained. In 2008, crack spreads had fallen to historic lows as shocked drivers cut back on their fuel budgets, putting the squeeze on refineries across North America. This occurred as the cost of crude oil inputs rose faster than the price for outputs, including gasoline.
Since that time, consumers have grown more acclimatized to the higher gasoline price environment, and consumption of fuel has remained strong in the face of rising prices. At the same time, there has also been a reduction in refining capacity in North America as several plants closed, including Shell Canada’s largest facility, located in Montreal. These factors have contributed to a rise in crack spreads.
Step 3: Transportation to Retailers
Once the oil has been refined into gasoline, it must be transported to retail outlets across the country. This is accomplished through a network of 23 terminals - from St. John’s to Nanaimo, B.C. -- forming the backbone of the distribution network.
It is at this point where most branded fuel companies add their secret sauce of fuel additives intended to improve the performance and clean-burning properties of the fuel. From these terminals, tanker trucks fan out to supply the nearly 13,000 retail outlets across the country.
Step 4: Retail Mark-Up
The retail mark-up averaged 7.6 cents per litre in April. This national average masks wide variation, from lows of 4.6 cents in Calgary up to highs of 25.8 cents in Whitehorse, according to Kent Marketing Services, an industry consulting group.
The spectacle of gas prices changing in lock-step overnight arouses the suspicion of many consumers, leading to charges of collusion. In reality, this reflects the intense local competition between outlets, where setting the price a few tenths of a cent too high can lead to a station being deserted by its customers. As a result, prices are mainly driven by the wholesale price at the regional terminal, with dealers competing on their retail mark-up. (Since 1990, six major investigations in response to allegations of collusion in the gasoline industry have concluded that market forces, such as supply and demand, and rising crude oil prices have been responsible for price spikes – not conspiracies to limit competition in the Canadian gasoline market.)
This is not to say that evidence of price-fixing has never been found in Canada. In 2008, the national Competition Bureau laid charges against several gasoline marketers for a scheme in four Quebec communities, involving dozens of stations, after a wire-tap investigation.
Step 5: Taxes at the Pump
Finally, taxes. The federal, provincial and sometimes even municipal governments each levy excise taxes at a fixed rate per litre, ranging from 19 cents in Calgary to an eye-popping 37.9 cents in Vancouver.
Federal GST – a visible tax, unlike the indirect excise tax – is added to this price, as well as provincial sales taxes in some provinces, most notably Ontario, where the introduction of the harmonized sales tax in July, 2010 added 8 per cent to the price of fuel. The slew of taxes levied on fuel sales contributed an average of 38.8 cents to the price of a litre of gasoline in April 2011, compared to 34 cents per litre in July 2008.
Summary: What Can You Do?
As Canadians get ready to head into the summer driving season, we should be prepared for more wince-inducing fill-ups. This article has shown how gas prices are influenced by factors out of the reach of ordinary consumers.
While there is not much you can do about the price, you can try to reduce your consumption, making every drop count. Easing up on the throttle, ensuring your tires are properly inflated, and making each trip worthwhile are just some of the things you can do to stretch each litre. Your wallet will thank you.