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Updated: Fri, 11 Jul 2014 16:11:18 GMT | By CBC News, cbc.ca

Gas prices: Here's how they determine what you pay at the pump



Gas prices: Here's how they determine what you pay at the pump

Energy analysts and gas-price watchers say high gasoline prices across Canada aren't expected to drop significantly until the summer weather and sectarian conflict in oil-rich Iraq cool off.

In mid-June, prices across the country made records. Some gas stations in Toronto reached an unprecedented 142 cents a litre for regular gas, while Vancouver got as high as 152.7. In April, Montreal had an average price of 153 cents, giving it the dubious distinction of having the highest gas prices in Canada, according to the web site TomorrowsGasPriceToday.com.

According to GasBuddy.com, which tracks pump prices locally and across the country, the current average for Canada is 134.8 cents, which is more than four cents over the average price at this time last year (130.4).

Canadian gas prices peaked in July 2008, based on a weekly average. Natural Resources Canada had the average price at 140.1 cents the week of July 15, 2008, and M. J. Ervin and Associates had it at 141.3 cents the week before that.

Prices across the country vary widely because of different provincial and territorial tax regimes. CBC News takes a look at what exactly goes into determining the price of a litre of gas at the pump.

Geopolitical factors

It's usual for gas prices to rise in the spring as refineries shut down to convert from producing diesel to gasoline as the summer driving and vacation months approach.

This year, prices have been affected by several other factors, too:

- The gasoline market is becoming ever tighter with the closing of several refineries in North America. In 2013, Imperial Oil announced the closure of its facility in Dartmouth, N.S.

- As usual, Middle East conflict is having an effect on prices. This summer, sectarian violence between the jihadist group Islamic State in Iraq and Syria (ISIS) and the Iraqi government and changing control over some of the country's key oil fields and refineries has caused concern about supply. Iraq is the second-highest exporter of crude oil in the Organization of the Petroleum Exporting Countries (OPEC), which controls approximately 80 per cent of the world’s oil reserves.

- In recent years, reductions in exports from conflict-ridden Syria, Yemen and South Sudan have disrupted global supply.

The price at the pump for a litre of gasoline is determined by the price of crude oil, the cost of refining that crude, marketing and distribution costs, taxes and, of course, profits all along the way — for everyone from those who extract the oil to those who pump the end product into your automobile.

Components of the pump price

M.J. Ervin and Associates of London, Ont., consultants to the petroleum industry, have been tracking the price movements of oil for over 20 years. Using their data for June 2014, here's the breakdown for the average cost of a litre of gasoline in Canada in the last few years.

Source: Natural Resources Canada/M.J. Ervin and Associates. *Percentages are rounded so might not always add up to 100.

Natural Resources Canada combines the refining and marketing costs in one statistic, but MJ Ervin breaks it down.

The refiner's operating margin is the difference between what the refiner pays for the crude and the wholesale price. According to M.J. Ervin, that figure varied in June 2014 from7.7 cents/litre in Halifax to 36.7 cents in Vancouver.

The marketing operating margin, which includes the costs of distribution and retail, in the major cities in the country's provinces ranges from 8.6 cents/litre in Calgary to 10.1 cents in St John's, but is much higher in the north, with Yellowknife the highest at 21.8 cents.

Whitehorse has the lowest tax portion of the pump price, at22.9 cents per litre. Vancouver and Montreal, which add a transit tax to the federal and provincial taxes, have the highest tax components, at 49.4 cents and 51.2 cents, respectively. Victoria also has a transit tax, but is not one of the sample cities on the Ervin chart.

Crude proportion higher, tax component lower

The proportion of each of the components has changed over time. Crude costs, which are about four times higher than they were 20 years ago, now make up 53 per cent of the pump price. In February 1992, they accounted for 25 per cent of the pump price, which was 52.6 cents/litre at the time.

Fluctuations in the price of crude oil are the most important determinant of long-term fluctuations in the price of gasoline.

In February 1992, taxes represented 49 per cent of the pump price while in February 2012, the share was down to 31 per cent. The increase in the average tax on a litre of gasoline in Canada is 13.2 cents over the past 20 years.

The two margin components accounted for 26 per cent of the pump price in February 1992 and 17 per cent in February 2012, rising from 14 cents/litre in 1992 to 22 cents in February 2012.

Despite these fluctuations, the general upward trend of prices in recent years and the predictable griping from consumers, some studies have shown that increases in prices at the pump don't actually affect spending habits that much.

The New York Times reported on one study, by economists Lutz Kilian at the University of Michigan and Paul Edelstein of the consulting firm IHS Global Insight, that found that periods when energy prices were high did not coincide with a significant decline in spending on recreational activities such as movies, gambling, spectator sports and sightseeing — the areas that were most likely to be cut back to offset higher fuel costs.

Those findings seem to indicate that prices at the pump will have to get a lot higher before consumers start driving less.

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