Kevin Correia

I recently had a trip to Seattle and noticed that the price difference of gasoline first hand – 20 cents. We decided to fill up the car before entering the country and noticed that all of the customers at the gas station were Canadian. Here’s my analysis without trying to resort to the easy explanation of “price gouging”.

The oil industry is a commodity-based industry, so I think it would be a good idea to have some definition refreshers:

• A commodity is a good that is in demand but there is a little distinction from one supplier to another. The only thing that makes someone fill their tank at Esso gas station instead of a Petro-Canada is probably a rewards program, a lack of a job offer from Petro-Canada, or naivety.
• A spot price is a quoted price for a commodity at a specific location. The benchmark for crude oil in North America is West Texas Intermediate, while the gasoline benchmark is a cargo ship in the New York harbour. The cost of a commodity elsewhere is dependent on closest spot price, and the cost of transportation.

Contributing factors to gasoline prices:

CAD vs USD conversion

When the Canadian dollar increases relative to the American dollar, crude and gasoline become cheaper. In reality, the Canadian dollar often increase when crude oil increase in American dollar, so this isn’t a strong factor on a short-term basis.

Spot price of WTI Crude Oil

WTI is the benchmark of crude in North America, but Canadian refineries buy everything but WTI crude. For example, Suncor’s refinery in Edmonton processes bitumen from Fort McMurray, which is cheaper than WTI. Refineries in Ontario and Quebec purchase crude from the offshore oil platforms in the Grand Banks and the North Sea.

Spot price of gasoline at the New York Harbour

Every day cargo ships enter the New York harbour looking to sell gasoline to wholesalers. This gasoline can come from Europe, as there is a structural surplus of gasoline, or export driven refineries in the Caribs. The closing price of these transactions determines the spot market on the East Coast. There are also benchmarks in Los Angeles (another large market) and the Gulf Coast (refinery hub of the US).

Wholesale price in the local market

The wholesale price reflects the local conditions of the market, and is loosely based on the spot price of the closest major market. If there is a unplanned shutdown in a refinery in Sarnia, it will have a minimal effect on the New York market, but there would be an increase in the Ontario market. The wholesale margin accounts for the refinery operating cost, and marine / pipeline transportation.

Retail Margin

This is the rate that gas stations add to the wholesale price. It covers the transportation costs from the fuel terminal to the gas station, and profit for the retailer.

Taxes, Taxes, Taxes

Taxes are a large component of the price of gasoline at the pump. Taxes may be collected at the federal, provincial, and state level. Environmental taxes may also be charged like BC carbon tax.
Anyone who has been to Europe would be amazed by the price difference. For the most part taxes are the single greatest factor for what make gasoline more expensive between geographic regions, not the spot rate of gasoline.

Comparison of Canadian and American Gas Prices

When you look at the graphs below showing the price breakdown of gasoline at the pump, you can see that before tax the cost of wholesale gasoline is roughly equivalent to the American cost (this is the bars in dark and light purple). There is a slight increase, but I think it makes sense as the US is a bigger market than Canada. Commodity pricing is always based on the elephant in the room, and the US happens to be that elephant on our continent.

The distinguishing factor between the pump prices north and south of the border is taxes. I was surprised to learn that there are multiple taxes being charged at the pump aside from the usual sales taxes. A flat excise tax is charged at the pump at the provincial and federal level (roughly 24 cents per L). Vancouver and Montreal are unique examples that also have a local tax applied at the pump – which helps fund public transportation and infrastructure projects. British Columbia is the first province in Canada, and probably North America, to also include a carbon tax.

Conclusions

At the end of the day, 85% of the difference between Canadian and American gas prices are accounted by taxes (based on May 2010 prices). There are some regional differences, but that’s just how a commodity based industry works. It’s not just about the product. It’s about the product and it’s location.

References and Links

Tomrrow’s Gas Price Today

Oil companies update gasoline prices daily during the week to reflect the market conditions. Websites like Tomorrow Gas Price Today use the daily closing values of WTI, NYMEX RBOB, and CAD-USD foreign exchange to predict the price of gasoline at the pump.

Petro-Canada’s Retail Site

Petro-Canada’s website has some interesting graphics. Some of them are outdated, but still applicable.
What you pay at the pump
Gasoline Taxes Across Canada
International Gasoline Prices