As the cost of gas climbs, here's what's fuelling the price at the pump
Gas prices have climbed by more than 50% over the last year, feeding into high inflation
Canadians are facing record-high gas prices, which is making driving more unaffordable and feeding into the climbing cost of everyday goods and services.
In the last year, gas prices have jumped by more than 50 per cent, pushing the cost of a litre to more than $2 in many parts of the country. At the same time, inflation — which is sitting at 6.8 per cent nationally — continues to outpace wage growth.
But when it comes to the staggering cost of gasoline, what exactly is behind the price consumers are paying?
Here's a brief explainer on how to understand prices at the pump.
What's the main contributor to high gas prices?
The price of gas can be broken down to four components: the price of crude oil, the cost to refine it into gasoline, the markup from the gas station owner and, of course, taxes.
The primary driver of high gas and diesel prices is the price of crude oil, a barrel of which now costs 75 per cent more than it did in May 2021.
"That is the overwhelmingly dominant reason why prices are higher now compared to a couple of months ago," said Trevor Tombe, a professor of economics at the University of Calgary.
The supply of crude oil became more constrained after Russia was placed under sanctions for its invasion of Ukraine. A major producer of crude oil, Russia's removal from the global market has pushed prices up by $20 US a barrel since the invasion began Feb. 24.
And with demand for gasoline increasing as it usually does in summer, prices are climbing even higher.
WATCH | What's fuelling record-high gas prices in Canada?
What about taxes?
There are several taxes levied on gasoline, both at the federal and provincial levels.
The federal carbon tax adds 11 cents to the cost of each litre of gas, a figure that's drawn criticism as fuel becomes more expensive.
"It … engenders a lot of political anger from people, because it's another tax," said David Detomasi, an associate professor of international business at Queen's University.
But the notion that the carbon tax is what's behind high gas prices is a misconception, said Tombe.
"While, you know, 11 cents a litre is a meaningful level overall, they don't drive the recent increases that we're seeing," he said. "It's really about global oil prices, and that's really driven by things far beyond the government of Canada's control."
The federal carbon tax is, however, set to increase: it rose by 2.2 cents per litre this year and will continue to rise until it reaches $170 per tonne by 2030.
Are gas stations making a lot of money?
When you fill up your vehicle, you might be under the illusion that gas stations are making lots of money.
But retailers keep very little of what you pay at the pump. In fact, they're making less profit on every fill up today than they were a year ago. Retailers currently add, on average, 6.9 cents to the price of a litre of gas, down from an average of 8.6 cents a year ago — so that means their profit margins are down by 20 per cent.
"The companies making the gasoline are doing pretty well. But the actual retailers and outlets, they're not getting rich off this," Detomasi said.
Is more oil being produced to increase supply?
American oil companies have increased their drilling activity by nearly 60 per cent over the last year, according to a closely watched weekly count of rigs in operation conducted by oil services firm Baker Hughes. In Canada, drilling activity in April was up 134 per cent compared to a year ago, according to Alberta's Ministry of Treasury Board and Finance.
However, the Organization of the Petroleum Exporting Countries, is responsible for 30 per cent of global oil production. After decreasing production during the pandemic, the cartel of 13 oil-exporting countries has been slow to ramp up — despite urging from the West as it tries to find an alternative to Russian oil.
Additionally, Detomasi said oil exploration budgets have been significantly cut in recent years, contributing to a tighter supply of global oil. He attributes that decreased 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 the expense of expanding new exploration for a company is high," he said.
However, Tombe said the main deterrent to exploration has been lower oil prices — the price of a barrel of oil dropped from more than $100 US in 2014 to just below $30 US in 2016.
"The biggest reason for the drop in production and exploration and development of new oil and gas resources is because up until just quite recently, oil prices have been very, very low," the economist said.
How are oil companies faring?
Oil companies are seeing their profits spike alongside gas prices.
Shell's profits last quarter tripled in comparison to the same period last year, raking in $9.1 billion. Saudi Aramco, Saudi Arabia's primarily state-owned oil company, has seen its profits rise by 82 per cent, netting nearly $40 billion.
But Tombe said high profits are a function of high prices, a phenomenon that isn't surprising or out of the ordinary.
"High oil prices are a positive for producers of oil and gas — absolutely," he said. "But it is not the profit that's causing the high prices; it's the other direction."
Will gas prices fall anytime soon?
Gas prices are historically volatile and difficult to predict, the economist said.
They also tend to be cyclical in nature, meaning they rise during economic booms and fall during downturns. At the start of the pandemic, for example, gas prices fell dramatically to a low of 78 cents a litre, leading oil producers to slow production.
In the short-term, prices can also change dramatically from one day to the next. On Friday, gasoline prices dropped dramatically in some parts of the country. Tombe said these fluctuations can happen due to changes in competition and, given that crude oil prices haven't dropped, margins have likely changed for producers.
Laura Lau, chief investment officer of Brompton Funds, said high demand for gasoline, as people travel more, paired with low supply means that gas prices will likely remain relatively high in the short-term.
"Longer run in terms of price, things [will] normalize," she said.
Markets are expecting the price of oil to come down a little in the long run. Futures contracts, which track the price of oil at a specific point in the future, are expecting a barrel of oil to cost $89 US in May of 2023. As of Friday, the price of a barrel closed around $113 US.
One key factor that could significantly alter gas prices is the war in Ukraine. If the situation stabilizes, Tombe said oil prices will likely fall.
"You really can't predict what will happen," he said.
ABOUT THE AUTHOR
.png)