First of all, the answer is yes. Gas prices have been dropping across the country the last few weeks as crude oil prices have dropped, but not as much as most people would like based on the calls I’m getting. Commodities, like crude oil, are priced in US dollars. Therefore when the Canadian dollar drops, so too does our purchasing power. Just like it does when you head to the US outlet malls across the border. Let me explain.
It’s July 2008 and your teenage son bounds in to tell you the running shoes he needs/wants are only $100 at the outlet mall located just across the border. These particular shoes are only available in the United States and, according to your son, are a great deal. He knows this because his best friend just came back from a weekend trip with his family to the US and they purchased the running shoes. To further entice you, he reminds you that the Canadian dollar is pretty much at par with the US dollar, so it’s an even better deal. You agree to go together when you have some time.
It’s now October 2008 and your teenage son once again bounds in to tell you the US outlet store is now selling the running shoes for 15% off. What a deal! So you decide to head south that weekend. Trouble is, when you head to the bank, you find out that the Canadian dollar isn’t worth what it was in July. In fact, with most of the drop in the dollar occurring in the last few weeks, one US dollar now costs you 15% more in Canadian funds. If only you had gone sooner. You head across the border and pay $85 US for the $100 shoes which seems like a great deal to your son. But once you factor in the exchange rate, they actually cost you $97.75 Cdn for a grand savings total of a Toonie and a quarter with a moose on it.
So when is this going to tie back to gas prices? Well, we don’t cross the border to buy crude oil at The Refinery Barn or Crate & Barrel, but it’s not that far-fetched. The price for commodities like crude oil – regardless of where they come from - are set by the US commodity markets in US funds. So when the Canadian dollar falters, it weakens the purchasing power of Canadian refiners. That means that while the price of crude oil has been dropping, the cost to purchase it has also increased. For those looking only at the price of crude oil, the drop in the pump price will therefore be a disappointment.
Now before the comments come in accusing the oil & gas sector of taking advantage of the drop in the Canadian dollar, read my post from a year ago. At the time, the surging Canadian dollar was sheltering Canadians from some of the gas price spikes being caused by the dramatic rise in crude prices. As changes to the commodity price can be quickly reflected in the pump price, the improvements in the Canadian dollar were also felt quickly. In a study on the subject, Natural Resources Canada stated "...due to competition in the North American gasoline market, Canadian gasoline consumers, and not the refiners, have benefited from the lower wholesale gasoline prices resulting from the stronger Canadian dollar."
So while the rising loonie sheltered Canadians from rising crude prices for the last year and a half, the recently sagging loonie has slowed the drop in prices that one might have have expected if they just looked at the price of crude.
Photo Credit: Chealion