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Crude oil price drops 'like a stone,' so why are gas prices so high?

Crude oil prices are low but the oil company savings aren't being passed on to customers. Burlington's Roger McKnight, a petroleum industry expert, explains why.

Oil prices down 52 per cent

Roger McKnight, Chief Petroleum Analyst for En-Pro International Inc., explains why crude oil prices are low but gas prices are high. 5:17

Crude oil prices are low but the oil company savings aren't being passed on to customers. Burlington's Roger McKnight, Chief Petroleum Analyst for En-Pro International Inc., explains why.

CBC's Conrad Collaco spoke with McKnight Friday morning. Here's an edited and abridged transcript of that interview. The full interview can be heard by clicking the link at the top of this page.

Roger McKnight, Chief Petroleum Analyst for En-Pro International Inc.

Q: What's behind the spike in prices this time?

RM: Prices have gone up about 27 cents. In Hamilton-Burlington its about 26 and a half. When I compare to last year this time our prices are only down 10 per cent. Crude oil prices are down 52 per cent. Something has gone off the rails. I can see why the consumer gets frustrated seeing crude prices falling like a stone while pump prices are falling like a feather.

There are a couple of reasons for it. One is the loonie which I have renamed the dying quail. When people see crude at $49 a barrel that's not actually true. That's U.S. funds. That's really $64 a barrel, Canadian. Fully integrated crude companies have two revenue streams.

The 'upstream' is exploration and production. That's finding the stuff and getting it out of the ground. The 'downstream' is refining it and getting it to the consumer.

Western Canada isn't getting $49 a barrel. It's getting $35. That's getting close to their production costs, let alone their operating costs. What they are losing there in profit they are making up in prices at the pump. The oil companies have increased their refining margins by 74 per cent in Hamilton and Burlington.

Q. You live in Burlington. What can you tell us about price changes in the Hamilton-Burlington area?

Prices are going down a cent tomorrow. In Burlington, it's going down to $1.17. That's for the major companies. Independents will be a bit lower than that but they still have to buy off the majors. Prices are going down tomorrow. How far they will go down over the summer is debatable.

We already have an over-supply of crude, globally, to the tune of 2.5 million barrels a day. Speculators say the Iranian sanctions coming off will add another million barrels a day to a flooded market.

And Obama may lift the ban on the export of domestic crude which will put more on the market.

This will lower the price of crude and make the economies in the oil sands, shale oil and Hibernia even shakier. 

Q. Will the additional crude on the market result in lower prices down the road?

You'll probably see prices fall but not at the levels of the drop in crude because of what we just talked about. The only people who never complain and I never get a call from are the federal and provincial governments because when the prices are high they make more money with the HST and GST.

That is a percentage. My suggestion would be to put a cap on the price on which the GST or HST is applied. Say we charge HST and GST at $1.15 a litre but at $1.16 we won't. 

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