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1. Determining Energy Prices

1.1 What are the components of the retail pump price of gasoline?

The retail price of gasoline can be broken into four key components: crude oil costs, wholesale margin, retail margin and taxes. Crude oil and taxes account for nearly 85% of the cost of a litre of gasoline. The remaining 15% represents the refining and retail margins. These margins must cover the costs associated with refining the crude oil, transporting products throughout the distribution system and marketing the product, as well as provide the refiner and retailer with a reasonable rate of return on their capital.
 

1.2 How is the price of gasoline determined?

Gasoline prices are determined by the interaction of a number of different factors. Crude oil is the largest component of gasoline prices. As crude oil prices change, so do gasoline prices. However, crude oil and gasoline are different commodities that are subject to different market forces. In the short term, other market conditions can be more important than crude oil costs in determining gasoline prices.
 
One of the primary drivers for gasoline pricing is the average throughput, or sales per outlet in a particular market. This explains why prices may differ from area to area or outlet to outlet. An outlet with lower sales volumes may have to charge a higher price to generate sufficient revenue to cover the outlet's fixed operating costs. Cities with low average throughputs, such as Saint John, New Brunswick, have much larger retail margins than those that have a large average throughput, such as Toronto.
 
Other prevailing conditions in a marketplace include the availability and proximity of supply, the efficiency of wholesale marketers, the number and variety of competing retailers, the different costs of operation, consumer demand and preferences for services and even driving patterns. These are all important factors in establishing the price at the pump.
 

1.3 How is the price of crude oil determined?

Crude oil prices are determined in world markets according to the supply/demand balance and pricing dynamics of the world oil market. When supply exceeds demand, prices tend to fall. When demand is growing faster than supply, prices will increase. Interruptions to supply or even the threat of supply problems (such as political events or hurricanes) can also put upward pressure on prices. Crude oil prices are similar all around the world and are differentiated only by transportation costs and differences in the quality of the crude oil.
 

1.4 Why does the price of crude oil affect the price of petroleum products?

Crude oil is the raw material from which petroleum products are refined. Therefore, changes in the cost of crude oil will affect the price at which the refiners sell their products to marketers and distributors and, in turn, this increase or decrease in price will be passed on to retail consumers.
 

1.5 Why do the costs of petroleum products seem to change so often?

World events such as wars or weather disasters, and domestic events such as problems at refineries and pipelines can all disrupt the flow of crude oil and petroleum products.
 
Domestically, market conditions, inventory levels, competition and government taxes also determine the retail price of petroleum products.
 

1.6 Why do gasoline prices vary from place to place?

Like any retailers, gas station owners are subject to various factors when running a business-market structure, competition and costs. Therefore, if you live in a small, isolated community in Canada's North, it is likely you will pay more for gasoline simply because of the costs associated with transporting the product, and the fact that there will be fewer stations competing against one another and fewer customers to meet the costs of maintaining the business.
 

1.7 Does the gas station owner determine the price of the gasoline?

It depends on who owns the gasoline in the station's tanks. If the station owner bought the gasoline from the refinery at the wholesale level, that station owner owns it and is free to determine the price. If the station owner is operating as a commission agent of the major oil companies or independent chains of stations, then the price is usually set by the oil company's or the chain's head office.