Gasoline prices in Canada

For gasoline consumers in Canada, the pattern of gasoline prices in 2007 was consistent with previous years: lower prices in the winter, rising prices in the spring, higher prices during the summer driving season, and lower prices in the fall. However, in 2007, the spring rise in prices began earlier and the fall decline was not as pronounced as in other years.

Gasoline prices in 2007. Across North America, gasoline price increases from February through May were mainly due to tight supply, which in turn resulted from extended refinery shutdowns during which gasoline production was severely reduced. Some shutdowns - to perform routine preventative maintenance or to meet changing standards in gasoline - were planned.

Others, however, were unanticipated, and because North American refineries are operating at almost maximum capacity, there is little capability for other refineries to increase output when one encounters problems. This was the case when a fire disrupted production at the Nanticoke, Ontario refinery in February 2007. Although the refinery was back to full capacity by mid-March, because of the gasoline shortage, consumers in southern Ontario paid as much as 5.8 cents more per litre.

Compounding this were unusually large inventory drawdowns prior to the summer driving season. Normally, gasoline inventories are built up in spring to accommodate the increased demand from June through September. When this did not occur in 2007, gasoline prices incurred additional upward pressure.

Although prices declined slightly after the summer, increases during the latter part of the year were largely the result of rising crude prices and a fire at the Scotford, Alberta bitumen upgrader in November 2007.

Another big difference in gasoline prices in 2007 was that retail gasoline prices were, on average, 4.2 per cent higher than in 2006. In fact, retail gasoline prices have risen steadily over the past few years, about 39 per cent since 2003. Fortunately, the rise in the value of the Canadian dollar against the U.S. dollar has shielded Canadian consumers somewhat from more dramatic price increases.

Components of gasoline prices. This rise in gasoline prices over the last few years has generally paralleled the price of crude oil. When the price of crude oil rises, the price of gasoline usually rises in tandem. But, crude oil prices don't tell the whole story. The price of gasoline is more volatile than the price of the crude oil from which it is refined because there are more components to gasoline pricing, any one of which could have a significant impact.

There are three markets that impact the price consumers pay for gasoline at the pump. The worldwide market for crude oil from which gasoline is refined; the North American wholesale market for gasoline and the local retail market.

Wholesale prices represent the cost of crude oil plus refining margins, which include the refiner's operating costs and profit. Retail prices represent the wholesale price plus marketing margins, which include marketing costs and profit, and federal, provincial and, in some jurisdictions, municipal taxes.

The graph on the right shows the difference between crude oil prices (lower curve), wholesale prices (middle curve), and retail gasoline prices (upper curve). Retail prices more closely track wholesale prices than they do crude prices, indicating more volatility between wholesale prices and crude prices.

As well as crude oil prices and refining and marketing margins, taxes are also an important part of gasoline pricing. Crude oil and taxes are the most costly of the three main segments. The most volatile is an aspect of refining called the crack spread. The crack spread is the margin a refinery earns by cracking or refining a barrel of oil. Even when the price of crude oil is falling, if gasoline inventories are also falling, the crack spread will rise, and with it, the price of gasoline.

The chart on the right shows the averages in Canada for 2006, but pricing for gasoline is more localized than for almost any other manufactured product. There is tough competition among retailers, manifested by occasional local price wars. Canadian consumers are very price sensitive when it comes to buying gasoline and they will purchase from the lowest-priced retailer even if the difference is only a few cents per litre. This competition explains why, before promotional incentives and other marketing tools are factored in, the service stations in a given area charge the same amount for a litre of gasoline.

Refining and distribution costs change by area, and crude oil prices change daily. But the main source of variability in gasoline prices from province to province is taxes.

Taxes within Canada include a federal excise tax, provincial taxes, GST, PST and, in Montreal and Vancouver, transit taxes. The chart on the right shows how these taxes vary in different jurisdictions across the country. If the federal excise tax is excluded, drivers in St. Johns pay 225 per cent more to their provincial government than drivers in Whitehorse (29.8 cents compared to 13.2 cents in 2005).

The federal excise tax is the same everywhere in Canada, and provincial taxes are calculated in the same manner. Only GST is calculated as a percentage of the gasoline price. As prices rise, GST rises as well, compounding the impact.

In October 2007, Quebec began imposing a carbon tax on gasoline. The province will collect slightly less than one cent per litre from petroleum companies, thereby raising about $200 million per year to pay for energy-saving initiatives such as improvements to public transit.

Within a province prices vary primarily because of market size, throughput efficiencies and local price competition.