Gas Prices

In May of 2005, I remember wondering how gas stations would display their price when it hits the century mark. A couple months later I was watching images of Hurricane Katrina on CNN. The damage to billion-dollar oil platforms in the Gulf was enough to push gas prices from 90 cents a litre to well over the century mark. At first, many gas station displays showed 00.0, but it wouldn't take long for gas stations to put in the capital and upgrade their signs to be capable of showing prices north of the 99.9 cents per litre mark. Apparently they realized these prices were the new norm.


Why are gasoline prices so high?
Crude oil prices.

The price of oil on NYMEX at the time of writing is $126 a barrel (May 9, 2008). That's about double the price a year earlier and will ultimately translate into an average gasoline price of about $1.32/L in Canada and $3.78/gallon in the U.S. (I expect prices at the pumps to be in this range entering the long weekend).

The chart below shows normalized crude oil prices compared to normalized gasoline prices in real Canadian dollars from January 1987 until May 2008.

large size

(you will need a Google account to access the source link)

As the chart shows, the price Canadians pay at the pumps has actually lagged quite a bit behind the crude oil price since 2004. The break is mostly thanks to the increased value of the Loonie compared to the Greenback (American gasoline consumers are not as fortunate in this regard).


What about price gouging right before long weekends in the spring?
This is probably due to speculative commodity traders. In anticipation of higher demand, they buy more oil and the price gets to consumers before the demand is actually there. An energy analyst I heard on CBC the other day said there is no evidence of any price gouging. I haven't seen any conclusive numbers myself that would either confirm or deny this claim.


Would boycotting gas stations help?
Yes and no. Reduced demand means improving the supply/demand balance and subsequently lower prices. But reducing demand doesn't seem to be the objective of the "boycott oil company X" initiatives I've seen on the Internet and in emails. This strategy will not work unless a significant number of people actually reduce demand and not just buy gas from somewhere else or wait until after the weekend to fill up. Toronto is the largest Canadian market and has the lowest gasoline prices in the country thanks to the so-called 'gas wars'. Torontonians pay even less on average than Calgarians who save about five cents per litre in lower provincial gas taxes. Smaller, more remote regions such as Halifax are amongst the highest in Canada. This is a pretty good indication that free-market competition forces are working as they should.


sourced from Natural Resources Canada



Can we petition government to put a cap on prices?
Sure we can. But I don't think this is a good idea. Part of the reason oil prices are so high is because of increasing demand from China, an emerging economic power that subsidizes its oil price to stimulate growth. China's economy can afford the higher price mostly because per capita consumption is only about 1/6^th of a barrel of oil per month. Here in North America, each of us use over 2 barrels per month. The approach makes sense for an emerging economy like China's but for the established economies of Canada and the United States it's an unsustainable Band-Aid approach.

In Canada, the taxes on gasoline at $1.25/L range from 25 cents to 40 cents depending on the province [detailed breakdown]. Most of these taxes are dedicated towards transportation infrastructure. Ultimately the question becomes who is going to pay to repair roads and bridges under a tax holiday or even a price cap. The most likely answer is taxpayers. Tax shifting can be good policy but I don't see why it would be in this instance.


Canada has a lot of oil and gas. Why are we selling so much of it across the boarder with such high prices?
We are essentially committed to free market prices under international free trade policies such as NAFTA. In 1980, the Trudeau government decided to regulate prices in with the National Energy Program. It was not very popular in the west and polarized the country. With tens of billions of dollars lost from the Alberta economy,^[*] I don't think we'll see a repeat of this policy anytime soon.


How high will crude oil prices go?
Stay tuned. I'll discuss this in my next post.