What's fueling the rising cost of gasoline?

A Canadian gasoline refining and distribution system that is in good working order appears very unlikely to be able to stave off high pump prices this summer.

In mid-May, the federal Competition Bureau announced a gasoline price probe as Canadian average prices reached 84 cents per litre for regular unleaded fuel and the highly-taxed Montreal and Vancouver markets pushed close to the one-dollar mark.

Facing angry consumers, the Canadian Petroleum Products Institute (CPPI) called for the federal government to re-establish an independent Petroleum Monitoring Agency that would provide the public with unbiased answers to their questions on gasoline pricing. CPPI said that while Canadian prices remain very competitive with those of other industrialized nations, refiners in Canada can't hold out against global and North American market forces.

Rising world oil demand pushed crude prices in mid-May to 14-year record highs above $40 US per barrel ($55.90 Cdn), while kinks in the U.S. gasoline supply chain imposed additional upward pressure throughout the North American market.

Statistics provided by the United States Energy Information Administration show, for instance, that the People's Republic of China has doubled oil consumption in the last 10 years. At 835,866 cubic metres (5.26 million barrels) of oil consumption per day, it has surpassed Japan as the world's second largest consumer of petroleum products and total consumption is expected to double again by 2025.

In the fourth quarter of 2003, for the first time, world average daily oil consumption rose above 12.7 million cubic metres (80 million barrels) per day, from 11.9 million cubic metres (75 million barrels) per day in 1999.

Experts said a range of issues in the U.S. drove New York wholesale gasoline prices to record levels in mid-May.

They said regular seasonal build-up of gasoline inventories ahead of the summer driving season was slowed by the need to reconfigure refineries to meet new federal low-sulphur gasoline regulations. Those regulations, in combination with various state laws affecting gasoline quality, made it difficult to import large quantities of gasoline into the U.S. market from overseas.

The U.S. Department of Energy reported that refineries in that country were running at 96 per cent of capacity and motor gasoline imports had increased 47,830 cubic metres (301,000 barrels) per day in a week to reach 146,038 cubic metres (919,000 barrels) per day by May 7.

Still, demand for gasoline in the U.S. was averaging 3.2 per cent above levels a year earlier and gasoline inventories actually fell by 238,365 cubic metres (1.5 million barrels) in early May to a level 1.3 million cubic metres (8.1 million barrels) below the five-year average of about 34.2 million cubic metres (215 million barrels).

Against this backdrop, the U.S. national average gasoline price hit an all-time high of $1.94 per U.S. gallon May 10, exactly 45 cents per gallon higher than a year earlier.

The Organization of Petroleum Exporting Countries (OPEC) said there was plenty of oil available on world markets and no clear reason for the run-up in crude prices. OPEC blamed the situation on “geopolitical tensions” —instability in the Middle East—inadequate refining capacity in the United States, conflicting state gasoline regulations in that country and heavy levels of crude oil price speculation by investment funds and arbitrageurs worldwide. Contributing to speculation were terrorist attacks on foreign oil workers in Saudi Arabia, as well as civil strife in Nigeria and ongoing labor unrest in Venezuela.

The OPEC statement said the organization would do everything within its power to help stabilize prices and that member states were already producing about 4.1 million cubic metres (25.5 million barrels) per day, some 317,800 cubic metres (two million barrels) a day more than their official volume target. OPEC has declared an official target price range of $22-$28 US per barrel but is widely seen to be content with higher prices, so long as world economies are not pushed into retrenchment.

Before federal, provincial and local taxes, Canadian average gasoline prices were running at about 54 cents per litre on May 11, about two cents (Cdn) per litre below the U.S. pre-tax price. After taxes, the average Canadian price was 84 cents per litre, while the U.S. average worked out to 69.9 cents (Cdn) per litre.

CPPI said Canada cannot successfully maintain wholesale (pre-tax) gasoline prices separate from those in the U.S. and around the world. If Canadian wholesale prices are low in any major urban market, tanker trucks will pick up large volumes of gasoline for resale into the American market. These purchases will tend to bid up the price in Canada until cross-border equilibrium is restored. Conversely, if the price is lower in the U.S., tanker trucks will transport gasoline into Canada, again creating a levelling affect on prices.

The high costs of crude and gasoline are driving refiners on both sides of the border to keep inventories low to avoid being saddled with overpriced oil in the event of any sudden price turnaround and this is further contributing to tight supplies of finished gasoline, CPPI said.

The Competition Bureau probe is the latest of more than 20 federal and provincial investigations in recent years. But previous examinations have consistently found that Canadian consumers are the beneficiaries of intense competition in gasoline retailing.

Two landmark studies by the Conference Board of Canada and Statistics Canada reinforced that conclusion. In The Final Fifteen Feet of Hose, The Gasoline Industry in the Year 2000, the Conference Board said that in times of relatively stable crude prices, “the volatile nature of gasoline prices is a direct result of the competitive nature of the business.” In its own exhaustive 40-year study of Canadian gasoline prices, Statistics Canada said in 1996 that pre-tax fuel prices tended to track at or very slightly below the overall cost of living, while tax increases on gasoline were much higher than other living costs. The study said the two most influential factors in raising the price of gasoline in Canada were OPEC crude prices and taxes set by federal and provincial governments.

In Canada, gasoline taxes vary by province but the national average was 32.1 cents per litre in mid-May — some 38.2 per cent of the 84-cent-per-litre pump price. This compared with an average crude oil cost of 32.8 cents per litre or 39 per cent of the pump price. In the U.S., taxes averaged 15.3 cents (Cdn) per litre or 21.9 per cent of the total price of 69.9 cents (Cdn) per litre.

As the Northern Hemisphere headed into its summer driving season, there appeared to be few if any signs of near-term relief for motorists seeking a break on fuel prices.

For more information, follow this link to Gasoline Q & A

© Canadian Centre for Energy Information 2004

N.B. Statistical information may vary, depending on the source and date of publication. Sources for this article include the Canadian Petroleum Products Institute, M. J. Ervin & Associates, www.opec.org and the U.S. Department of Energy Information Administration.