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Why gasoline prices go up and down

Why am I paying so much for gas?

You are paying more for gasoline for several reasons:

• The demand for gas is growing. There are more people and businesses needing gasoline and other fuels, which is causing the price to increase.
• There’s an increase in demand during warmer weather. Typically demand increases by 25% during the summer driving season.
• The amount of gasoline being refined from crude oil is temporarily limited by routine maintenance at refineries.

Unless gasoline production increases, or consumers and businesses use less, prices will stay at these higher levels.

Why not just make more gasoline so prices will go down?

Gasoline is in made in refineries which transform crude oil into useable fuels like gasoline and diesel fuel. There are factors that can impact the amount of gasoline being refined, including:

• Current production at most North American refineries is at or near maximum capacity
• Temporary closures while refineries install new equipment or conduct maintenance
• Temporary shutdown of pipelines for maintenance or when older fuel types must be flushed out before new fuels can be introduced

Another contributing factor is that no new refineries have been built in Canada in the last 25 years. There are several reasons for this:

• The high cost of construction, which is currently estimated at more than $2 billion for a new refining facility
• The relatively low profit margin in the refining industry
• Environmental regulations which limit where refineries can be built  

Ultimately, any reductions in the production of gasoline work their way to the pump and push prices upwards for consumers.

What goes into the price I pay for gas?

The price you pay for gas has four parts:

1. The cost to locate and get crude oil out of the ground,
2. The cost to change crude oil into gasoline (refining margin),
3. The cost the gas station collects (retail margin), and
4. Taxes to provincial, federal, and sometimes municipal, governments.

On average crude oil accounts for roughly 47.1% of the cost of a litre of gasoline; taxes make up about 35.5%. Refiners collect approximately 12% on average, while retailers make 5.4% on average to cover their costs for every litre sold. (These percentages are based on the 2005 average retail gasoline price of 92.3 cents per litre.)

The refining and retailing margins also cover the costs for transporting the crude oil and gasoline to refineries and gas stations, and marketing.

Why do the prices of gasoline and other fuels seem to change so often?

Anything that affects how much crude oil or gasoline is available globally affects the prices we pay at the pump – and the effect is immediate. World events such as wars or severe weather disasters (such as Hurricane Katrina in 2005), and local events such as a refinery breakdown, can disrupt the flow of crude oil and fuel products to Canadians. The oil markets are extremely sensitive to these events and react quickly by raising or lowering prices if the available supply goes up or down.

Crude Oil and Gasoline Prices: A Timeline

Locally, frequent price changes typically happen when competing gas stations lower prices to attract customers.

Need more information? See How World Oil Markets Work.

Why do gasoline prices vary from region to region?

Gas prices vary from one region to another for several reasons:

• Provinces tax gasoline differently. Some municipal governments also tax gasoline. Those taxes, as well as federal ones are all included in the price you see at the pump. (see more information on gasoline taxes in Canada)
• Gas stations located in remote areas usually pay higher transportation costs to bring the gasoline from the refinery to the pump.
• Gas stations located in smaller communities sell less gasoline than those in larger centres and therefore need to sell their products at a higher price to cover their fixed costs. These stations also may not benefit from volume discounts offered by wholesalers.
• Some communities or neighbourhoods have more gas stations than others which results in more competition among stations. This generally helps keep prices lower than in areas with only one or two gas stations.
• Adding a car wash or convenience store to a gas station generates more income for the owner who can then afford to sell gas at a lower price.
  

Need more information? See Why Gasoline Prices Vary Across Canada

Why do gas stations seem to have the same prices?

Unlike a lot of products you buy, gasoline prices are advertised on big signs along roadways and at intersections to attract customers. When a station in an area lowers its price, other stations typically match the price to avoid losing you as a customer.  

During these price wars, gas stations may end up selling gasoline at a loss. This is not a sustainable practice and eventually the discounting stops. Gas stations will then put up their prices again, usually returning to earlier levels and the pricing cycle starts over again.

This seems to happen all at once, but actually price changes take some time to spread to other areas.

 

Why do gasoline prices rise before a long weekend?

Gas prices go up and down every week in response to how much gas consumers want to buy and the amount available at gas stations.

A review of actual prices charged across Canada indicates that gasoline prices do not rise or fall before a long weekend any more than they do before any other weekend. Prices do rise during the peak summer driving season when the demand for gas traditionally goes up by 25%.

What makes gas and diesel prices go up and down?

Gasoline and diesel prices are affected by several factors, often simultaneously, which may make them rise or fall:

• Changes in world crude oil prices
• Availability of oil and gasoline to meet demand
• Local competition among retailers
• Seasonal demand, i.e. the annual spike during the summer driving season
  
  

Who sets the price for gasoline I pay at the pump?

It depends on who owns the gasoline in the station's tanks.

In a majority of cases, when the station owner buys gasoline directly from a refinery, that person decides the pump price. This decision will take into account, among other things, how much it cost the owner to buy the fuel from the refinery.

For stations where the owner is an employee of a major oil company or a chain of independent stations, the price is usually set by the company’s head office.

Where can I get more information on gasoline prices?

There are a number of public web sites that offer information about gasoline prices.  View the list under Related Links.

Who profits from higher gasoline prices?

Between 2000 and 2005, the average Canadian gasoline price rose by almost $0.22 per litre. The biggest share of that increase (approximately $0.16 per litre) was due to an increase in the price of crude oil, the raw material used to make gasoline. Companies that locate and extract the oil are those that receive this additional revenue.

Also, when the price of gasoline goes up, governments collect more tax revenue. Between 2000 and 2005, that increase was about $0.03 per litre. Finally, for the same period, refiners and retailers also received an additional $0.03 per litre.