It’s a hot topic at coffee shops and gas stations these days. “Why are gas prices not falling as quickly as crude prices?” After all, oil per barrel costs have dropped from over $100 to under $30. But prices at the pump per litre have only fallen from $1.50 or so to about $0.90 today in most places. Here’s some key reasons why that’s happened, and why good news may be on the way.
1. High demand, bad timing
Crude and gasoline markets are different. The world is awash in crude but refineries are barely keeping up with stronger demand these low prices are bringing—especially in the U.S. “Demand there is estimated to have climbed 5% to 6% to record highs,” says Dan McTeague, senior petroleum analyst with TomorrowsGasPriceToday.com. “The increase in gasoline demand meant that the refining industry delayed its semi-annual maintenance period which meant that many mid-western and eastern refineries went into maintenance mode at the same time, meaning pump prices actually increased when crude was falling,” explains Roger McKnight, Chief Petroleum Analyst for En-Pro International Inc. Maintenance must be done at all refineries twice a year and when this is done, the supply of gasoline at the pump falls.
2. Fewer refineries
In the past, demand to refine crude wasn’t as high as it is today so many refineries simply shut down. “This is especially true in Canada where the thought was that we could always rely on the U.S. to refine crude for us if we’re short,” says McTeague. The result? Higher costs for the refining portion of crude, which is passed on to consumers at the pump.
3. Lousy exchange rate
The value of the loonie has fallen in comparison to the U.S. dollar. All crude and refined products are bought and sold in U.S. dollars, “which I have taken unto myself to rename as the Canadian Quail,” says McKnight. “So when we see crude dropping in U.S. funds, it doesn’t fall as much in the devalued Quail. So if we see West Texas Intermediate (WTI) at $33 per barrel U.S. then this means we pay $46 per barrel Canadian.”
4. Add the tax
HST, which varies from province to province, is added to prices at the pump. And even though prices are dropping, the HST still adds several cents to the final litre price.
The silver lining?
Right now at least, pump prices are falling more or less in tandem with crude because of low demand from world economies and larger crude inventories from oil producing countries. “So the oil companies have reduced refining margins and are now fighting to maintain market share on the street which is lower and lower gasoline prices,” says McKnight. So watch for even lower prices at the pump for almost everyone. The relief in prices has already started in some cities.