What is going on at the pumps? Gas prices 101

In my April column I wrote about the major factors affecting the price of gasoline and touched on the reasons why I did not expect the price to come down any time soon. In fact since then, the price of a litre of gasoline at the pump has skyrocketed. While the article provided a general overview of how the price of crude oil affects gasoline prices, many more questions remain unanswered. Questions such as: “Why do prices vary from day to day?”, “Why do prices vary from place to place?”, and “Are gasoline prices fixed or floating?” have been raised in the past and continue to be in the minds of many people. In this article I will attempt to provide some answers.

Keeping in mind the complexity and difficulty of finding objective evidence to prove or disprove what the industry is saying about these issues, I was able to find a fairly reasonable explanation by the Petroleum Communication Foundation. The Foundation is a not-for-profit organization created in 1975 to inform Canadians about the petroleum industry. It employs a multi-stakeholder review process in the creation of fact-based, educational publications and programs to ensure they are balanced. The Foundation does not advocate, lobby or speak for any sector of the industry. Here is a summary of their findings.

The majority of motorists see little or no difference between brands of gasoline. If competing gasoline stations are about equal in service, convenience and cleanliness, many motorists will switch stations for two-tenths of a cent per litre. The key reason that prices fluctuate (rapidly and very nearly in unison) is that many consumers are determined to buy gasoline at the lowest price.

With some exceptions, larger cities tend to see consistently lower gasoline prices because retailers there tend to sell larger volumes of gasoline, which allows them to compete at lower margins per litre and still cover their operating costs. Across provincial borders, prices vary in part because of different provincial tax rates on gasoline.

A portion of the regional variation in prices is also due to the cost of transporting fuel to these markets.

All taxes except GST, HST and PST are levied in cents per litre and don’t change with the price of the product (fixed). GST, HST and PST are percentage taxes applied to all other fuel-price components, including other taxes, and are therefore a tax on tax.

When the price changes it is not the retailer making the decision, but someone in a head office somewhere.

With very few independent gas stations left, the only control the consumer has is to cut back on consumption, (car pool, buy a more fuel efficient vehicle, take the bus, etc.) and seek the lowest possible price. For the more daring ones, investing in energy stocks in the TSX would have meant a 50 percent increase in their investment in less than one year. The rest (as I explained in April’s article) is in the hands of government and industry, which have only been paying lip service to any task force on high gasoline prices.