The price of oil has dropped 20 per cent in 3 weeks but gas prices at the pump haven't budged.
The price of crude oil has fallen 19 per cent in the past two weeks but prices at the gas pump in Ontario have barely budged. Why?
It depends who you ask.
Everyone agrees the two don’t always rise and fall in tandem, at least not in the short term.
But that’s where the agreement ends.
Gas price watcher Dan McTeague says Canada’s highly concentrated, poorly regulated oil industry is able to “tack on” what he calls “extra mystery cents” to the wholesale price of gasoline paid by gas retailers.
“While you’d think Canadian refiners would observe market forces, they don’t have to,” said the Liberal MPP for Pickering-Scarborough East. “That’s why I’m getting a lot of letters from the public. How is crude going down and the price at the pumps not falling as much as they should?”
Industry consultant Michael Ervin says gas prices normally rise as much as 10 to 15 cents a litre at the start of the summer driving season, partly because demand rises but also because summer fuel is more expensive to make.
But the global economy is weaker, producers have added more ethanol to gasoline, and consumers are switching to more fuel-efficient cars, he noted.
“What we’re seeing here is not as much of a seasonal rise because gasoline is relatively plentiful. So, the good news is consumers today are enjoying a pump price that is 10 or 15 cents a litre less than we would have historically suggested,” said Ervin, vice-president of M.J. Ervin and Associations/Kent Marketing Services, in Calgary.
In a 16-day period this month, the price per barrel for crude oil plunged 19 per cent, yet the price for gasoline at the pumps in Toronto slipped just 5 per cent, according to Spencer Knipping, an oil industry analyst with the Ontario Ministry of Energy.
The price of gasoline in Toronto held steady from March until the beginning of May. The average retail price for a litre of gasoline in Toronto was 97.24 cents Wednesday.
Here’s what happened.
The price of crude oil lost ground as investors worried that the debt crisis in Greece could spread other countries and cast a pall over the long-awaited global recovery. That would put a crimp in demand.
That sent the price of crude oil down to $69.87 U.S. a barrel, from a high of $86.19 US over the previous two week period, according to Knipping’s figures.
The wholesale price of gasoline, which trades on the North American market, also fell though it fell 16 per cent in New York but only 5.8 per cent in Toronto, according to Knipping.
The value of the Canadian dollar plays a role. As it falls, the cost of crude rises. But the Canadian dollar fell just 2.5 per cent during that period, Knipping said.
Knipping said he couldn’t explain why the Toronto wholesale gasoline market has been “more sluggish” in its response to changes in crude oil.
The petroleum industry says it’s highly competitive.
“Generally, if you look over time, the wholesale price of gasoline adjusted for currencies, between Canada and the U.S. track virtually identically,” said Peter Boag, president of the Canadian Petroleum Products Institute. If the spread remains too high it becomes an incentive to export, he explained.
Summer gasoline is more expensive to make, Boag also said, which is why refiner’s gross margins rise at this time of year. Gas produces more fumes in warm weather. “Volatile organic compounds are bad for the environment,” Boag said. “In the summer vapor pressure is reduced to lessen harmful emissions.”
The price of crude oil is just one of the factors that make up the price of gas at the pumps, The other two are the price of wholesale gasoline and competition in the local retail market.
“The three markets can go in opposite directions,” said Spencer Knipping, an oil industry analyst with the Ontario Ministry of Energy. “It’s not unusual and there’s nothing wrong with it.
“You can have movements in crude oil prices, which are determined by world market forces, and the price of gasoline not budging. Or the wholesale gasoline market, which is determined by the North American market, may not be budging.”
Or you can have short-term price wars in local markets, he said.
But while there may be short-term blips, generally speaking “over time, crude oil market prices get passed through to the pump,” Knipping said.
Patricia Mohr, vice president of economics and commodity market expert at Scotiabank, had estimated that crude oil prices would be in the mid-$80 a barrel range for this year and next.
She is now reviewing that forecast because of the persistent debt worries in the euro zone.
“It appears that growth, which was not going to be particularly strong across the euro zone, is going to be marked down again. Global oil demand is still going to rise this year but not as strong as it otherwise would have,” Mohr said.
With files from Madhavi Acharya-Tom Yew