Gas Prices and Fuel Economy
Why has the price of gasoline gone up so much in the past year or two?
Retail prices have increased because the commodity prices that retailers pay for refined gasoline have increased significantly. The two main factors contributing to this increase are:
- Higher crude prices, which have reached record levels in recent months.
Crude oil accounts for nearly three-quarters of the pre-tax cost of a litre of gasoline and almost half of the final pump price. Crude oil prices are set in the international marketplace and reflect global supply and demand conditions. They are influenced by factors such as inventory levels and geopolitical events including wars, weather, strikes and general economic conditions.
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- Higher North American wholesale gasoline prices.
Wholesale prices for gasoline are also influenced by their own set of international supply and demand pressures. Because gasoline can be easily imported and exported, prices are greatly influenced by supply and demand factors in Europe, the U.S. and Canada. Canadians tend to benefit from this as wholesale prices in Canada must remain competitive with these international markets despite Canada having a smaller population spread over a larger area.
Why does the world price of crude oil or gasoline matter when we have our own crude oil and refineries here in Canada?
Canada operates in a global marketplace. A producer of a commodity or finished product in Canada would not choose to sell it at a lower price in Canada versus selling it at a higher price to a foreign buyer, or vice versa. For this reason prices for products made in Canada can neither be significantly higher nor lower than foreign made products.
Canada has little influence on the global price of crude oil, as domestic production is roughly 4% of total world production.
Why do retail gasoline prices vary so much between markets and even within the same city?
While retail prices follow changes in crude and wholesale commodity prices, both up and down, they are also heavily influenced by local conditions. Factors such as market size, the level of competition, taxes, and retailing and distribution efficiencies can lead to situations where prices vary considerably between communities or change dramatically within a short period of time.
Why do retail prices seem to move up and down together? Isn't that collusion?
Consumers are very price sensitive when it comes to buying gasoline. Studies have shown that consumers will go out of their way to save two-tenths-of-a-cent per litre (a dime for a 50 L fill-up). Because of this, a retailer may lower their price to gain a temporary price advantage to attract more customers. If other retailers allow their price to remain higher for a significant period of time they will lose sales.
For this reason retailers frequently observe the price signs of their competitors in the area to keep their prices competitive. As prices in the market decline to a point where a retailer feels profitability is unacceptable, that retailer may increase their price back to a profitable level. Other retailers may or may not choose to follow. This continuous cycle is often misinterpreted as collusion, when it is in fact an outcome of vigorous, healthy competition.
Who sets the price of gasoline at a station?
This varies depending on the mode of operation. Some Petro-Canada branded facilities are independently owned and operated, while others are company owned and operated by a lessee or agent.
- Prices for the independently owned and operated sites are set by the operator.
- Prices for the company owned and lessee or agent operated sites are set by Petro-Canada.
Although an independent retailer may be able to choose the price at their retail site(s), the need to remain competitive with the surrounding market means that ultimately the local market dictates the maximum price.
Why are newer gas stations bigger, with more pumps and large convenience stores?
The retail gasoline landscape has evolved toward fewer, larger, higher throughput facilities with a growing reliance on ancillary sales (convenience stores, car washes, fast food, etc.), capable of competing with the most efficient gasoline retailers. There may be no better example of how competition in a free market drives improvement toward lower costs, and ultimately lower prices for consumers, as it is intended to do.
Why is gasoline less expensive in the U.S.?
Taxes. Retail gasoline prices in Canada are still the second lowest in the industrialized world. Only the United States has lower average gasoline prices than Canada and the difference between our retail fuel prices and theirs is taxes — not marketing margins, not refining margins, not profits. View international gasoline prices for a visual representation of average prices across the industrialized world.
- Taxes are one of the largest components of the retail price of gasoline, accounting for about 32%, or 33 cents per litre of the average pump price in Canada in 2007.
- The combination of taxes and crude oil costs together represents approximately 80% of the price at the pump.
- The remaining 20% must cover all costs of refining, transporting, distributing, marketing and retailing, as well as provide for a reasonable return on investment for the retailer and the company.
- Petro-Canada's retail profit in 2007 was about 3% of the average pump price.
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Aren't oil companies making record profits with the higher pump prices we have seen?
Oil companies such as Petro-Canada with upstream operations that explore for and produce crude oil and natural gas have seen increased profits from the higher world prices for these commodities.
However, retail gasoline margins on a per litre basis have decreased over the past few years. In 2007, Petro-Canada's retail profit was about 3% of the average price of gasoline in Canada.
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Why do prices tend to go up just before a long weekend?
Prices for gasoline do tend to increase in the summer months when consumers travel more and the demand for gasoline increases. Consumers may pay closer attention to gasoline prices when they fill up before or during a long weekend trip, however industry data shows no such pre-long weekend price increase trend.
Some provinces have price regulation. Doesn't that ensure that prices stay lower and more stable?
Price regulation, which determines a price range or maximum prices set by the government for a fixed period, can result in more stable prices. In markets with this type of price regulation however, the removal of free and open competition seems to have resulted in higher average retail prices over time.
Another form of regulation is designed to protect smaller independent dealers from the trend toward larger, higher throughput sites with ancillary sources of revenue, capable of operating at lower per litre fuel margins. This type of regulation involves a minimum regulated price, and is certainly contrary to the interests of consumers. Studies in the U.S. have shown that this type of regulation not only costs consumers more, but it does not help the independent dealers as it was intended to do.
Although price volatility is understandably frustrating, vigorous competition in a free functioning market economy provides consumers with the best products, services and prices.
Where can I get more information on gasoline pricing and the petroleum industry?
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How can I improve my fuel economy or save on fuel?
Vehicle type, driving style, good vehicle maintenance and driving conditions have the greatest effect on fuel economy. Driving for best fuel economy involves:
- Smooth, steady acceleration rather than "jackrabbit" starts
- Maintaining moderate speeds
- Avoiding heavy loads
- Avoiding a luggage rack or towing a trailer unnecessarily
- Avoiding using air conditioning or heating unnecessarily
- Not idling the engine when it could be switched off (generally not longer than 10 seconds), and
- Avoiding short trips where the engine does not have the opportunity to fully warm up.
Maintenance factors include:
- A properly tuned engine
- Clean air filters
- Aligned and balanced wheels
- Tires with the correct air pressure
- Periodic changing of the fuel line filter (in older vehicles)
Driving conditions that can reduce fuel economy include:
- Cold temperatures
- Head winds
- Driving up hills
- Snow on the road
For more tips on fuel efficiency, visit http://www.pumptalk.ca/.
Will higher octane improve a vehicle's fuel economy?
Generally, higher octane will not improve fuel economy. In fact, the difference in composition or heating value of different grades of gasoline plays a small role in fuel economy. Good fuel economy is a result of vehicle design and weight, good vehicle maintenance and driving style.
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