Gas should be much cheaper with fall in oil prices, BMO says

It's not your imagination — gasoline prices in Canada should be a lot lower based on the price of oil, one of the biggest banks in the country says.

Gasoline should be about 80 cents a litre if historical correlations between crude and gas held true

Puzzling gas prices

6 years ago
Duration 2:20
Thomas Daigle reports on the disconnect between the oil price and the price at the pump

It's not your imagination — gasoline prices in Canada should be a lot lower than they are right now.

That's according to Benjamin Reitzes, an economist at Bank of Montreal, who said the price Canadians pay at the pump should be a lot lower than it currently is based on the plunging price of a barrel of crude.

"With last week's plunge in oil fresh in my mind as I headed into the weekend, I couldn't help but notice how gasoline prices had ticked higher from the previous week," he wrote in a research note on Monday evening. 

Despite Canada having one of the world's largest reserves of crude oil in the world, much of the gasoline that Canadians put into their cars — especially in Central Canada and on the East Coast — is based on crude oil that's been imported, most likely Brent crude from Europe.

Many factors go into the price of gasoline, but crude prices are a significant factor. And with crude prices plunging to under $35 US a barrel yesterday — a new six-year low — that should be affecting pump prices.

Except, it's not. At least, not as much as it should be.

"Simply, consumers don't appear to be reaping the full benefit of lower oil prices," Reitzes said, noting that Canadians are still paying more than $1 per litre in many markets, despite Brent crude prices falling to levels they haven't been at since 2008, when gasoline bottomed out at 76.5 cents per litre in Canada.

The following chart shows what Reitzes is talking about.

The price of gas and the price of oil have diverged this year, as this chart from a recent BMO report suggests. (Bank of Montreal)

Throughout 2015, and especially recently, Canadian gasoline prices have diverged from crude. They are still correlated, but not as closely as they once were.

If historical trends were still true, gasoline should cost about 80 cents a litre with crude being where it currently is. Yet across the country, the national average gas price was 97.70 cents a litre last week, according to gasoline price website

"Talk of a Christmas bonus by way of cheaper gas prices may be disappointing due to weakness in the Canadian dollar and profit taking by speculators and refiners," GasBuddy's senior petroleum analyst Dan McTeague said. 

"As most saw crude tumble last week, drivers expected further relief at the pumps, but got a surprising increase instead."

Canadians often complain that their gasoline prices seem to go up a lot quicker than oil does, and seem to fall much slower too, but McTeague says there's at least one valid reason this time why Canadians are paying more than they otherwise might be. 

On Wednesday, the U.S. central bank is widely expected to raise its benchmark interest rate for the first time in nine years. That's going to increase demand for the U.S dollar.

If the greenback rises, the loonie will by definition fall, which means Canadians will have to pay even more loonies to buy products like gasoline which are made out of crude oil priced in greenbacks. Add in the cost of refining, the vast majority of which is done in the U.S., and you have a recipe for more expensive gasoline once it's shipped back to Canada.

"Strip away the taxes and regulation costs on gasoline," McTeague says, "and you're left with the currency differentials that can't be ignored."

If historic trends held true today, gasoline would be closer to 80 cents a litre, based on the price of oil, Bank of Montreal says. (File Photo)

There's also booming demand for gasoline, which is driving up prices for drivers. American drivers have responded to cheap oil by driving more, making it harder for refineries to keep up with demand, and allowing them to demand higher prices for their end product — even if crude oil itself is cheaper.

Add it all up and McTeague doesn't expect relief at the pumps any time soon.

"Drivers in Vancouver and Victoria should look to an average three-cent increase per litre, with Edmonton, Calgary, Regina, Saskatoon, Winnipeg and the B.C. Interior following with an average two-cent bump," by this weekend, McTeague predicts. 

"Toronto, Ottawa, London, Hamilton, most of Southern Ontario and Montreal set for a two-cent average hike, while the Maritimes and Newfoundland, which follow last week's market prices, should expect a three-cent increase for Thursday and Friday."


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