Consumers generally understand the connection between world prices for crude oil and the retail price of gasoline. To put it simply, when crude prices go up, retail prices generally go up, and when crude prices go down, retail prices generally go down.
What is less understood is how retail prices are impacted by wholesale gasoline commodity prices.
Gasoline is bought and sold on commodity markets, much like crude oil. Wholesale gasoline prices — the prices retailers pay — follow the ups and downs of the commodity markets very closely. Any change to the balance of supply and demand or geopolitical events may have an impact on the wholesale price.
Canadian wholesale gasoline prices are very closely linked to U.S. prices due to the open nature of trade between the two countries, as stipulated by the North American Free Trade Agreement (NAFTA). Because refined gasoline is a commodity, it is traded between Canada and the United States. Canadian refiners therefore must keep their wholesale prices competitive with the cost to import from U.S. refiners.
If, for example, wholesale prices were significantly lower in Canada than in the U.S., American retailers would very quickly begin to import fuel from Canada (potentially causing supply issues for Canadians). Similarly, if wholesale prices were significantly lower in the U.S., then Canadian retailers would start to import fuel from the U.S., hurting Canadian refiners.
In addition to crude oil and wholesale commodity prices, retail prices are also impacted by local market conditions including: market size, level of local competition, taxes, and retailing and distribution efficiencies. Additionally, currency exchange rates can affect wholesale prices. A decrease in the value of the Canadian dollar relative to the U.S. dollar, for example, can increase the price of wholesale gasoline in Canada (if everything else is equal) and vice-versa. Over time however, retail prices do tend to follow the underlying commodity costs.
To learn more about wholesale and retail prices, visit the PumpTalk Blog.