Why are Gas Prices So Darn High?
March 22, 2022
My weather app used to be the first thing I opened on my phone in the morning. These days, it’s GasBuddy. Over the last month, like the rest of the world, I’ve watched the price per litre rise quickly. And like the rest of the world (including my family who keep texting me about prices – give it a rest, Uncle Jim), I’ve wondered why.
Let’s break it down.
As you know, gasoline is refined from crude oil. And the price for crude oil, the price that refineries pay, is set on a global market. Not local, but global. That means that events and factors across the world, not just here at home, affect the price of crude, which in turn affects the price of gasoline.
I live in BC and most of our gasoline is refined nearby in Burnaby (BC), Edmonton (AB) or Washington state. It’s difficult to internalize that events halfway around the world impact the price of gas at my local station.
Supply and Demand
What events and factors have an impact? Any threat to the supply of crude makes the price go up – that’s the economic principle of supply and demand. Russia is one of the largest oil and gas producers in the world, so when the supply of crude that they provide to the world is put into question, as has happened with their invasion of Ukraine, the global market responds.
However, even before the conflict, another major factor was already putting pressure on the market: global demand for gasoline was on the rise. Across the world, we’re emerging from two years of pandemic restrictions. People are returning to workplaces, going out more, starting to travel again – en masse. But, during the pandemic when demand was significantly lower, several oil and gas companies across the world slowed down their production (including capping wells and laying off employees) to try to stay in business. Our global supply of oil was already low.
This combination of an accelerated demand increase plus an already low supply, which may become even lower, has created a perfect storm for an unprecedented rise in crude prices.
Not Just Crude Prices
In addition to the cost of crude oil, which makes up about half of the price of retail gasoline, there are three other costs that determine the price of gas:
- Refining costs
- Distribution and marketing costs
- Taxes by federal, provincial and municipal governments (including a planned increase in the federal carbon tax on April 1st ).
Inflation is at a 30-year high in Canada, surpassing 5%. This impacts the costs of goods and services. Higher inflation rates increase the cost of refining, distribution and marketing fuel; transportation is more expensive as are operating costs at both wholesale and retail locations.
What about taxes? The federal government in Canada taxes gasoline at 10 cents per litre. Each province has its own combination of sales tax, fuel tax and carbon levies which impact the price of fuel. And three municipalities – Montreal, Vancouver and Victoria – also apply taxes to gasoline. This is why per litre prices vary so much depending on where you live.
Alberta, beginning April 1st, is going to pause their 13 cents per litre provincial fuel tax. British Columbia has indicated that they will not be pausing their tax, saying that it wouldn’t impact the cost of crude which is the main driver of fuel price increases. Prince Edward Island has announced a $20 million dollar relief package to help cushion the increased cost of living, including fuel prices. Other provinces have not yet made any official announcements.
How Long Will It Last?
How long will gas prices remain at their current level is the question on everyone’s mind. And, like most things that affect the price of crude – it’s all about supply and demand. As long as Russia continues its invasion of Ukraine, and the global boycott on the purchasing of Russian crude continues, prices will likely remain high. We’re heading into the summer driving season, a period of typically high demand – which can keep gas prices high.
However, if refineries in the Middle East or North America are able to increase their crude supply – that could ease prices – but would likely take time as these facilities ramp up production which, as I mentioned earlier, had been reduced because of the lack of demand during the pandemic.
Saving Money on Gas
There are some small things we can do to help out with the cost at the pump:
- Use a credit card that offers savings at the pump (RBC cards an be linked with your Petro-Points number to save 3 cents per litre).
- Keep your car well-maintained
- Make sure your driving practices are fuel-efficient
Some Final Thoughts
As you can imagine, we get a lot of questions about fuel prices. Hopefully this post has helped clarify the complexity of the global fuel market and what goes into pricing fuel.
We’ve also been asked recently about the source of the crude that Suncor, the proud owner of Petro-Canada, processes into fuel. Suncor does not process Russian crude oil at any of its refineries. And the fuel you purchase at Petro-Canada is not made from Russian oil.
Do you have other fuel-related questions? Leave them in the comments below and we’ll try to get them answered.