Gas Prices Are Up....I know.
High gas prices lead to...interesting studies.

Why do gas prices change when commodity prices change?

Us_dollarIn a comment on an earlier post, Diane Wilson asked me why the price at the pump changed quickly after a change in the commodity price for oil or gasoline?  After all, it isn't refined and distributed to the gas station the next day.  So what gives?  I've answered this question a few times over the years, but apparently with limited success.  So let me try a different approach.

It hit me when I was getting ready for a recent trip with my family and went to the bank to get some U.S. currency.  At first, I was happy with how many greenbacks I could buy with my good ol' Canadian loonies.  But then I looked at the bills.  Some were printed years ago and were quite worn.     One US dollar bill was printed in 2002, when it took $1.38 in Canadian funds to buy one American buck.  Yet, there I was, buying that bill and many others at par.  Was this a masterful money-saving heist on my part which I would laugh about as I roared out of the bank parking lot in my aging minivan?   Sadly, no.  I was merely paying a price for the U.S. money that had been set by the currency markets just hours before I stepped up to the counter.   That price was the result of a number of market factors that had nothing to do with me and the teller, but we both accepted it. 

Take it one step further - if I came back from my trip with some leftover cash (dream on), and a year from now a friend who was heading to the US but didn't have time to go to the bank asked to buy some US funds off of me, I'd probably sell it to him at the current market price.   That could mean more or less for me, but we would likely both agree it was fair.

So how does this relate to gas prices? 

Well, gasoline and crude oil are commodities, which means they are bought and sold at prices determined by the commodity markets.  Like the dollar, the daily price can be impacted by a complex array of local and international factors.    Bottom line: the ' wholesale price' for gasoline changes daily.

So why does that change the price at the pump?  Well, first of all, Petro-Canada purchases a fair amount of gasoline to round out supply requirements and has done so for years.  We are therefore buying in the wholesale market, where the border is open and prices are set by the daily swings of the market.

For the gasoline we produce and sell, we work with the same wholesale price that can change from day to day.  Why?  Because if we didn't have a number of gas stations, we would sell it to those who do.  And we would do so at the accepted daily wholesale price (see commodity markets).  We therefore follow that approach at our gas stations. 

As the retail price, like most other products, is a reflection of the wholesale price plus a bit of a margin for the end retailer, it's naturally going to go up and down based on what's happening on the markets.  We all know when this works to our disadvantage, but it can have the same effect when commodity prices for gasoline and crude oil sag.   Pump prices drop and there is little anyone who refines or sells gasoline can do about it.  Just like when it goes up.

The worth of the change in your pocket has nothing to do with the cost of the raw materials and the fine craftsmanship at the mint.  It's the markets that tell us how much it's worth on a daily basis.   Crude oil and gasoline prices pretty much operate the same way.    We readily accept that when buying a few bucks to head south or purchasing something online, but when it comes to filling up our tank, it's got to be something else.  Something unseemly.  It's just not the case.  The cost of the the raw materials, etc are not the factors to watch.  Check the markets on a daily basis and you'll find the answers.

Now does anyone want to give me $1.38 Canadian for my 2002 US dollar?  $1.35?  $1.25?

Photo Credit: SqueakyMarmot


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Stacey Upson

So, with oil dropping to under $100 today (for now anyways)? When oil went from $99 to $110, gas jumped 3 cents. Now that oil has gone down, is gas going to go down just a fast? I tend to think not. However, if it goes down within the next two days, I will gladly post on here again that I was wrong.

Jack Lance

Can you explain to me then, when tracking the data on the wholesale market, price increases at the pump have been adjusted within 24-36 hours, while price decreases in the cost of crude, have not been anywhere near as fast to respond. In fact, sometimes, it does not decrease at all! I am sure now, you will fall onto the argument of supply and demand. That whole .06 % increase over last year for demand. Don't forget to divide that by 12 for your monthly increase fact.

I support the oil industry, in most cases, however, there are times the oil and gas retailer are taking Canadians for a ride.

Further, when I convert the CAD to USD, the currency that oil is sold in, Canadians have not received their fair share? The retail price, adjusted, is about 2- 3c higher than what it should be with an adjusted dollar!


Great post. With prices on the raise we need to look at different fuel sources or better fuel eff.


Jon Hamilton


Thanks for your post. Sorry for not replying sooner. It's been a busy Easter weekend. I'll run the numbers this week to check what happened. Of course, the price at the pump is influenced by a number of other factors, so it's not always exact, but it's suprisingly close. The Canadian dollar dropped with oil this week, which reduces the purchasing power of Canadian oil companies as the markets are in US dollars. That puts upwards pressure on the price too and may have negated some of the impact of the drop in crude prices.



Jon Hamilton


Thanks for your comment. I'll run the numbers this week to see what was at play. There is rarely a simple answer, but I'll report back. You're right on demand for gasoline in North America as it's a mature market. The demand pressure is coming more from the countries like China and India. My last post also dealt with how the impact of the fundamentals - like supply and demand - is becoming more difficult to track.

As for the dollar benefit, the Federal Government has studied the benefit to consumers. The details can be found here:





I don't think you will get many people disputing that the gas prices need to reflect the replacement cost of the stock - hence the link to current prices

It's as others have stated - the prevailing persistent impression that prices seem to jump up much quicker on whatever news is used to justify the increase - and take longer to drift down.

You have control over your corporate store pricing
but not over your franchisees - but that still does not explain why petro profits hit record highs in seeming lockstep with crude.

Nor does it really address another question as to why we should expect gasoline companies to keep lower prices for consumers. Its a "competitive oligopoly" - so if we believe in market forces - we aren't paying an undue market premium - right Jon.

But this is gasoline and nothing seems as it is.

Earlier there was a post regarding the Quebec proposal (and Australian program) requiring retailers to post their price increases a day in advance - why would Petro's object to that? If that's the will of the people - let them eat cake.

There has also been the chart that showed the historic trend line of major world events and the corresponding increase in price -
that chart - shows a significant disconnect between cause/effect comparing then to now.

Those are the things people (myself included) want/need to understand. If there are factors/forces beyond your control - like OPEC taking a price premium, displacement of demand into China/India - fine - lets quantify that and move on.

but its the incessant arm chair quarterbacks who proclaim one day the cause to be this and the next day contradict themselves that drives everyone into the deep end.

If speculators are artificially driving up the cost of crude - then lets have the market control that - by requiring larger contracts, longer dated contracts....

Solutions, leadership, partnership that's what is required.

that why I keep urging you/oil companies to take a proactive stance in helping us poor peons better understand and better manage our expenditures on fuel/energy - being part of the solution.

To your credit Jon

you are the pointed end of the stick - that your inductry bretherin have not chosen to follow and expose themselves to these tough questions
So KUDOS to you and PetroCanada - for creating this channel of discussion and yes at times rage.


Joe Feyereisen

I disagree with everyone's discussion on oil prices affecting gas prices. Why do the governments allow gas to be treated differently than other commodity staples? The market trades on future prices, and just because something may cost less or more in the past, it shouldn't have an immediate effect on consumer retail pricing. If we think a freeze will hit the orange market, orange futures go up, but the price at the grocery store doesn't change until their next shipment arrives.

If it is indeed based on market prices, then markets are closed on weekends, nights, and holidays. So why do prices at the stations change during those times?

The business of gasoline should be based on the same economic business principles of inventory purchasing. Separate the business of futures and the business of distribution.

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