As Canadian drivers prepare for what analysts say will be a month of record-breaking gas prices, we take a look at what exactly goes into determining the price of a litre of gas at the pump.
Prices were up in several parts of the country Wednesday, but not as high as some predicted.
In Toronto, they reached a high of 140.1 cents a litre for regular gas, an eight per cent increase over this time last year even with crude oil prices being lower than a year ago.
In Montreal, prices declined somewhat but were still the highest in the country at 147.9 cents a litre, according to the sites GasBuddy.com and Tomorrow's Gas Price Today, which track local pump prices.
Prices across the country vary widely because of different provincial and territorial tax regimes, but analyst Roger McKnight of Oshawa, Ont.-based En-Pro International Inc. has predicted that prices in southern Ontario could hit record highs between 143 and 147 cents a litre by the end of April.
Prior to this week, Canadian gas prices peaked in July 2008, based on a weekly average. Natural Resources Canada had the average price at 140.1 cents/litre the week of July 15, 2008, and M. J. Ervin and Associates had it at 141.3 cents/litre the week before that.
It's usual for gas prices to rise in the spring as refineries shut down to convert from producing diesel to gasoline as the summer driving and vacation months approach, but this year, prices have been affected by several other factors, too:
- Shutdowns at four refineries in Pennsylvania and five in Europe have restricted North American supplies.
- Tensions over a possible conflict between the West and Iran have affected supplies and oil futures markets. The U.S. has restricted Tehran's financial transactions with U.S. banks, and the EU has placed an embargo on the import of Iranian crude oil and petroleum products as of July 1. Some insurance companies have stopped insuring tankers transporting oil from Iran, which has reduced the number of supertankers going there.
- Reductions in exports from conflict-ridden Syria, Yemen and South Sudan have disrupted global supply.
The price at the pump for a litre of gasoline is determined by the price of crude oil, the cost of refining that crude, marketing and distribution costs, taxes and, of course, profits all along the way — for everyone from those who extract the oil to those who pump the end product into your automobile.
Components of the pump price
M.J. Ervin and Associates of London, Ont., consultants to the petroleum industry, have been tracking the price movements of oil for over 20 years. Using their data for February 2012, here's the breakdown for the average cost of a litre of gasoline in Canada:
|Price Component||% of pump price (Feb. 2012)||Amount (Feb. 2012)||% of price (Feb. 2002)||Amount (Feb. 2002)||% of price (Feb. 1992)||Amount (Feb. 1992)|
|Crude costs||53||66.7 cents||34||20.4 cents||25||13.2 cents|
|Refiner's operating margin||12||14.7 cents||11||6.3 cents||16||8.37 cents|
|Marketing operating margin||5||6.8 cents||6||3.4 cents||10||5.33 cents|
|Taxes||31||38.9 cents||49||29.3 cents||49||25.7 cents|
|Pump price||101*||127 cents||100||59.4 cents||100||52.6 cents|
Source: M. J. Ervin and Associates. *Percentages are rounded so might not add up to 100.
The exact proportion of the components of the pump price vary across the country. According to M.J. Ervin, crude costs were 59.7 cents/litre for the cities west of the Ontario-Quebec border and 76.5 cents for cities east of that border. Ervin uses the price for Brent crude for the east and the Edmonton Par crude price for the west, as they approximate the types of crude being refined in those respective regions. Ervin says those prices give an estimate of the refinery acquisition costs.
The refiner's operating margin, which is the difference between what the refiner pays for the crude and the wholesale price, varies from 6.6 cents/litre in Halifax and St. John's to 20.7 cents in Vancouver.
The marketing operating margin, which includes the costs of distribution and retail, in the major cities in the country's provinces ranges from 3.9 cents/litre in Calgary to 9.8 cents in St John's but is much higher in the north, with Yellowknife the highest at 36.7 cents/litre.
Calgary also has the lowest tax portion of the pump price, at 24.1 cents per litre. Montreal and Vancouver, which add a transit tax to the federal and provincial taxes, have the highest tax components, at 48.2 cents/litre and 45.4 cents/litre, respectively. Victoria also has a transit tax but is not one of the sample cities on the Ervin chart.
The federal excise tax is 10 cents/litre, and provincial flat taxes range from 6.2 cents in the Yukon to 20.1 cents in B.C. Percentage taxes (GST/HST and sales tax in Quebec) are also added.
Crude proportion higher, tax component lower
The proportion of each of the components has changed over time. Crude costs, which are about four times higher than they were 20 years ago, now make up 53 per cent of the pump price. In February 1992, they accounted for 25 per cent of the pump price, which was 52.6 cents/litre at the time.
Fluctuations of the price of crude oil are the most important determinant of long-term fluctuations in the price of gasoline.
In February 1992, taxes represented 49 per cent of the pump price while in February 2012, the share was down to 31 per cent. The increase in the average tax on a litre of gasoline in Canada is 13.2 cents over the past 20 years.
The two margin components accounted for 26 per cent of the pump price in February 1992 and 17 per cent in February 2012, rising from 14 cents/litre in 1992 to 22 cents this February.
Despite these fluctuations and the general upward trend of prices in recent years and the predictable griping they bring from consumers, some studies have shown that increases in prices at the pump don't actually affect personal spending habits that much.
The New York Times recently reported on one study, by economists Lutz Kilian at the University of Michigan and Paul Edelstein of the consulting firm IHS Global Insight, that found that periods when energy prices were high did not coincide with a significant decline in spending on recreational activities such as movies, gambling, spectator sports and sightseeing — the areas that were most likely to be cut back to offset higher fuel costs.
Those findings seem to indicate that prices at the pump will have to get a lot higher before consumers start driving less.