What determines gas prices in Canada?

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What determines gas prices in Canada?

Rounding it up

  • Gasoline is an inelastic product, meaning Canadians will generally purchase it, regardless of the price.

  • All vehicles get different gas mileage, so no two cost the same to fill up.

  • Gasoline prices are impacted by the cost of producing and shipping it, taxes, weather, and competition.

  • The move to electric vehicles will have a drastic impact on the cost of filling up.

6 min read

Dan Bucherer
#Gas prices#electric vehicles#crude oil#economics

Electric cars being ubiquitous might be just down the road but, for now, gasoline-powered autos are still the kings of the highway. Gasoline is, perhaps more than anything other than food, something that Canadian families need every single day. Driving to school, getting to the doctor, commuting to work...all of these things, generally, require gasoline. The price of gas is also one of those things of which consumers are acutely aware. Have you ever filled your tank on a Wednesday only to find that the price has dropped precipitously overnight? Of course you have.

Understanding what determines gas prices can help you plan out when you fill up your tank or at the very least, understand why you’re paying more in the first place.

First, let’s talk economics

Gasoline prices are a major portion of any global economy. The price of fuel drastically affects how much it costs you to get to work and how much you pay for food at the grocery store. It affects the leverage that governments have over others and, sometimes, is a major factor in whether nations go to war. We know gasoline is important and this is why it’s the perfect example of an inelastic good. Inelastic goods are those where the demand for them is not necessarily affected by their price. It’ll hurt for sure, but Canadians will almost always continue to fill their gas tanks, regardless of the costs. The money to fill up will have to come from other areas of the monthly budget. Inelastic goods tend to be essential items, including gas, prescription drugs, food, and electricity.

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Elastic goods, by contrast, are those that are affected by prices. Take avocados, for example. If the price of avocados suddenly skyrocketed, there will be a drastic decrease in the number of people purchasing them.

Understanding this principle will help to explain what determines the price of gasoline. To put it plainly, consumer sentiment isn’t it. Gasoline producers know that the public will generally pay almost anything for gas. There are several laws in place to keep gasoline producers from cranking up prices and prevent price gouging, but the fact is the same.

So what does affect gasoline prices?

Now that we know a bit about the economics behind gasoline, let’s take a closer look at what causes you to pay more or less at the pump. Gasoline prices are impacted by a lot of different factors, from production costs to natural disasters to war.

Crude Oil and Processing

First, in order to produce gasoline, you need to be able to find and get oil out of the ground. There aren’t very many easy ways to do this and none of them are cheap. Oil exploration involves using complex equipment to find oil seams, specialized tools to reach it, and plenty of heavy machinery to pump it up to the surface.

If you manage to get oil out of the ground, it takes quite a bit of work and a huge amount of equipment to transform the oil into the stuff you pump into your car. Despite what you may think, those two substances are worlds apart. Deep black crude oil is rife with impurities, filled with dirt and water, and is nearly unusable.

After it’s removed from the ground it’s piped or trucked to a refining plan where the different usable pieces of the oil are separated and refined. A barrel of oil can turn into thousands of different products, from plastics to kerosene, jet fuel to medical balms. In fact, on average, just a quarter of a barrel of oil actually becomes gasoline that you put in your car. Another 32% or so becomes diesel that generally goes in trucks or larger equipment. The remainder goes into a variety of different products. The gasoline that is refined is then transported using trucks and delivered to your local pumping station. All of these steps cost money and those costs are factored into the overall price per gallon.

All of the work that goes into producing gasoline influences the price but that’s not the only factor.

Taxes

Yes, the Canadian government takes its share of gasoline sales. In fact, according to the Canadian Competition Bureau, which ensures a fair, transparent marketplace for all Canadians, government taxes make up 35% of the overall purchase price of gasoline, second only to the production. Both the federal and provincial governments have tax structures in place and each province gets to set its own, resulting in some variability. These taxes pay for all sorts of things like roads, schools and social welfare programs. Gas taxes aren’t popular. They are something that consumers see every time they fill up. However, they are an important part of paying for the services we’ve come to rely on.

Time of Year

Canadians tend to drive more in the summer, when they travel, than they do in the winter. When the weather is warm, you want to get out and enjoy it. This increase in demand tends to lower the supply of gasoline, meaning the price tends to be a bit higher. When the summer driving season is over, prices tend to head downward.

Straight Competition

Have you ever been driving by two gasoline stations and noticed that they have the same price? Or, interestingly, have you noticed the price of gasoline change based upon the time of day? Both of these phenomena are simply ways that pump stations owners are trying to get you to spend your dollar with them. In the first instance, many gas stations will hover around the same price to remain competitive with one another. In the second, gas stations that are on the side of the road with lots of morning traffic will charge more in the early hours of the day. A gas station on the opposite side of the street may charge less, until the traffic flips and folks head home for the day.

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Weather

Despite being an oil-producing nation, Canada accounts for just 5% of the global supply and yet still falls in the top five of countries producing the most oil behind Saudi Arabia, Russia, and the US. All the oil used in Canada, then, either has to come by ship, train, or truck, all modes of transportation that can be greatly affected by the weather. Much of the oil refinery work for North American oil is done on the southern coast of the US in Texas, Louisiana, and Mississippi, three places that tend to get slammed by hurricanes every now and again. When infrastructure is damaged, oil and gas prices can skyrocket.

So...a lot goes into determining gas prices

Yep! And that’s one of the many reasons governments around the developed world are beginning to push their citizens away from fossil fuels and toward electric alternatives. Being less reliant on foreign oil is a line that politicians have uttered for decades but for the first time, this is actually possible. The environmental impact aside, Canadians saving money by “filling up” at their home or at work from a wall socket versus a pump station will be the best way to reduce the cost of keeping your car moving.


Dan Bucherer

Dan is a runner and writer living in the Washington, D.C. area, where he currently works for a financial services trade association as the Communications Director.

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