As the price of gas rises, here’s what drives the price of the pump

Canadians are facing record high gasoline prices, making driving more unaffordable and contributing to the rising cost of daily goods and services.

In the last year, gas prices have risen by more than 50 percent, pushing the price of a liter to more than $ 2 in many parts of the country. At the same time, inflation – which stands at 6.8 per cent nationally – continues to exceed wage growth.

But when it comes to the staggering cost of gasoline, what lies behind the price consumers pay?

Here is a brief explanation of how to understand the prices of the pump.

What is the biggest contributor to high gas prices?

The price of gas can be divided into four components: the price of crude oil, the cost of refining it for gasoline, the order from the gas station owner and of course taxes.

The primary driving force behind high gas and diesel prices is the price of crude oil, of which one barrel now costs 75 percent more than it did in May 2021.

“It’s the overwhelmingly dominant reason why prices are higher now compared to a few months ago,” said Trevor Tombe, a professor of economics at the University of Calgary.

The supply of crude oil became more limited after Russia was put under sanctions for its invasion of Ukraine. Russia’s removal from the global market is a major producer of crude oil and has pushed up prices by $ 20 per tonne. barrel since the invasion began on 24 February.

And with rising demand for gasoline, as it usually does in the summer, prices are rising even higher.

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What about taxes?

There are several taxes on gasoline, both at the federal and provincial levels.

The federal carbon tax adds 11 cents to the price of every gallon of gas, a number that gets criticized as fuel becomes more expensive.

“It … breeds a lot of political anger from people because it’s a different treasure,” said David Detomasi, an associate professor of international business at Queen’s University.

But the notion that the carbon tax is what lies behind high gas prices is a misconception, he said.

“Although, you know, 11 cents per liter is a meaningful level overall, they are not driving the recent increases that we are seeing,” he said. “It’s really about global oil prices, and it’s really driven by things that are far beyond the control of the Government of Canada.”

However, the federal carbon tax is set to increase: it will increase by 2.2 cents per liter each year until 2030.

Do gas stations make a lot of money?

When filling up your vehicle, you may be under the illusion that gas stations make a lot of money.

But retailers keep very little of what you pay at the pump. In fact, they earn less on each refill today than they did a year ago. Retailers are currently adding an average of 6.9 cents to the price of a liter of gas, down from an average of 8.6 cents a year ago – so that means their profit margins have fallen by 20 percent.

“The companies that make the gasoline are doing pretty well. But the actual retailers and businesses, they are not getting rich from this,” Detomasi said.

Is more oil being produced to increase supply?

U.S. oil companies have increased their drilling activity by nearly 60 percent over the past year, according to a closely monitored weekly count of rigs in operation conducted by oil service firm Baker Hughes. In Canada, drilling activity rose 134 percent in April from a year ago, according to Alberta The Ministry of Finance’s board and finance.

However, the Organization of the Petroleum Exporting Countries is responsible for 30% of global oil production. Following declining production during the pandemic, the cartel of 13 oil-exporting countries has been slow to rise – despite calls from the West as they try to find an alternative to Russian oil.

In addition, Detomasi said oil exploration budgets have been significantly cut in recent years, which has contributed to a tighter supply of global oil. He attributes the declining investment to the price of crude oil, which fell dramatically after 2014, as well as to the social and political movement to limit the use of fossil fuels.

“The political risk and cost of expanding new investigation for a company is high,” he said.

Alberta’s oil production has increased compared to a year ago, but global production has been slow to rise again after the pandemic hit in 2020. (Larry MacDougal / Canadian Press)

However, Tombe said the primary deterrent to exploration has been lower oil prices – the price of a barrel of oil fell from more than $ 100 in 2014 to just under $ 30 in 2016.

“The main reason for the decline in production and exploration and development of new oil and gas resources is that oil prices until very recently have been very, very low,” the economist said.

How are the oil companies doing?

Oil companies are seeing their profits rise along with gas prices.

Shell’s profit in the last quarter tripled over the same period last year, bringing in $ 9.1 billion. Saudi Aramco, Saudi Arabia’s primarily state-owned oil company, has seen its profits rise by 82 percent, bringing in nearly $ 40 billion.

But Tombe said high profits are a function of high prices, a phenomenon that is not surprising or out of the ordinary.

“High oil prices are positive for oil and gas producers – absolutely,” he said. “But it’s not the profit that is causing the high prices, it’s the other direction.”

Will gas prices fall soon?

Gas prices are historically volatile and difficult to predict, the economist said.

They also tend to be cyclical, meaning they rise during economic booms and fall during recessions. At the beginning of the pandemic, for example, gas prices fell dramatically to a low of 78 cents per tonne. liters, which led to oil producers slowing down production.

In the short term, prices can also change dramatically from one day to the next. On Friday, gasoline prices fell dramatically in some parts of the country. Tombe said these fluctuations may be due to changes in competition, and given that crude oil prices have not fallen, margins have likely changed for producers.

Are you planning a summer road trip? Gas prices are likely to remain high as demand for summer travel rises and supply remains low, experts suggest. (Alex Lupul / CBC)

Laura Lau, chief investment officer at Brompton Funds, said high demand for gasoline as people travel more, coupled with low supply, means gas prices are likely to remain relatively high in the short term.

“Longer term in terms of price, stuff [will] normalize, “she said.

Markets expect the price of oil to fall slightly in the long run. Futures contracts, which track the price of oil at some point in the future, expect a barrel of oil to cost $ 89 in May 2023. As of Friday, the price of a barrel closed around $ 113.

A key factor that can significantly change gas prices is the war in Ukraine. If the situation stabilizes, Tombe said oil prices are likely to fall.

“You really can not predict what will happen,” he said.

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