If Canada has so much oil, why is our gasoline so expensive?

Nov 15, 2017

By Tristin Hopper

At the moment this story goes online, gasoline in Tsawwassen, B.C. is $1.45 a litre. Drive a mere two kilometres south into Point Roberts, WA, however, and gas can be had for the equivalent of CAD$1 per litre.

What gives? Canada has more oil than everyone except Venezuela and Saudi Arabia and we remain the single largest foreign supplier of U.S. oil. So why are we paying a nearly 50 per cent premium on a product that by all rights should be flowing from our kitchen faucets?

All your questions are answered below. Special thanks to Jason Parent, a consultant with Kent Group Ltd. who was particularly patient with our questions on the downstream petroleum market.

Our status as a major oil producer is surprisingly irrelevant to what we pay for oil products
Think of oil like a big, juicy bluefin tuna. If a Nova Scotia fisherman pulls up a 400 kg tuna, he’s not going to sell it to the diner down the street if he knows he can sell it to Japan for $600,000. Similarly, the minute Alberta pumps out of a barrel of oil, it’s going to be sold to whoever’s willing to pay the highest price. As a result, even if your next door neighbour is the Hebron oil platform, if you want to buy oil you’ve got to be prepared to pony up roughly the same price that a New Yorker would pay. The technical term for this is that we Canadians are “price takers”; if we want oil, we have to pay the same as the “price makers” in the much larger U.S. market. If you don’t like this system, you can always do like Pierre Trudeau and impose an artificially low national price for oil. But a word of warning; it didn’t go so well last time.

Gas is a whole different product than crude oil
In late 2014, crude oil was about $80 a barrel and the average Canadian gasoline price was about $1.20 a litre. Nowadays, gas prices are about the same, but crude oil is only $55 a barrel. That doesn’t seem right, does it? It does if you consider that in an average litre of Canadian gasoline right now, only 48 cents of the final cost is due to the cost of the crude oil used to make it. Refiners, gas station owners and the government all need to take their cut of a litre of gasoline, and the relative sizes of those cuts all contribute to the final price at the pump. It’s like beer. It’s basically free to make a drink from grain, hops and yeast, but the picture gets much more complicated when you have to factor in distribution, taxes, bartender salaries and all those Hockey Night in Canada commercials. Right now, for instance, our recent blip of high gas prices is being driven almost exclusively by high refining costs.

Our taxes are way, way (way) higher
The number one reason for high Canadian gas prices, by a long shot, is taxes. Road tax, carbon tax, federal excise tax, GST, HST and, in some cases, a municipal transit tax. Metro Vancouver, for one, keeps its SkyTrains running with a 17 cent per litre municipal gasoline tax. According to the Washington, D.C.-based Tax Foundation, the highest gas taxes in the United States are in Pennsylvania, where the total government take on a litre of gasoline is equivalent to $0.26 CDN. Compare that to Montreal where drivers are paying$0.32 per litre in federal excise tax, provincial fuel tax and local transit tax. And that’s before the 15 per cent sales tax.

Building more Canadian refineries generally won’t make things better
Canada exports more refined products than it imports. In July, we took in 1.5 million cubic metres of gasoline, diesel and other petroleum products. Meanwhile, we exported 2.6 million cubic metres of the stuff. Geographic considerations aside, it’s technically true for Canada to gas up every Cessna, Honda and John Deere in this country using our own refineries. According to Parent, the market is so crowded that there’s no real “business case” for Canada to up its refinery game. Besides, even if a new refiner did open its doors (it’s about to happen in Alberta, in fact), that refiner is still going to be selling at whatever prices the Americans are willing to pay.

Ditto with more Canadian pipelines
Pipelines can do a lot of things, but they’re not so great at bringing down gas prices. Even if we could get cheap Alberta oil flowing into every refinery across Canada, there’s nothing forcing those refineries to pass on those savings to the consumer. Below is a lovely graph prepared for us by Andrew Leach, an economist at the Alberta School of Business. It shows the prices for two varieties of crude oil, West Texas Intermediate and Brent. It also shows “crack spreads,” the extremely unfortunate name for the price difference between crude oil and the products made from it. What’s amazing is that when the price of West Texas Intermediate went down in 2010, the only result was that the crack spread went up. The refiners, not the customers, were benefiting from the cheaper crude. “Refineries don’t pass on cheap crude costs if they don’t have to do so,” said Leach. Dan McTeague with GasBuddy.com, however, disagrees. If Canada could only get its cheap Alberta oil to the highly competitive Eastern Seaboard, he says refiners would immediately use their price advantage start undercutting each other. “Don’t think for a moment that won’t make a difference at the pumps,” he said.

When the dollar is low, we pay more for fuel
In the NHL, the persistent problem for Canadian teams is that they have to pay their players in U.S. dollars. Thus, when the Canadian dollar is weak, the payroll costs of a team like the Ottawa Senators can skyrocket by as much as 40 per cent. Similarly, when our dollar is weak, we need to pay a premium to compete with American prices. The exchange rate, incidentally, is the one guaranteed area in which pipelines would have a beneficial effect on prices. If Canada were to suddenly embark on a pipeline-building spree, it would boost oil production, which would then boost the value of the dollar and usher in another period of cheaper gas and NHL players.

That cheap gas station across the border might have lower profit margins
Let’s return to the Point Roberts example in the introduction. Despite having only 1,300 people, this Washington State enclave has an incredible four gas stations. Obviously, these stations are supported in part by enterprising Canadians popping over for a cheap fill-up. And given that the Canadian clientele are obviously very interested in saving money, it’s a particularly cutthroat market when compared to Tsawwassen. Still, gas stations everywhere are generally kept very honest by competition, a fact reflected by wildly varying gas station prices. “The fact that prices swing or fluctuate is generally an indication that competition is working,” reads a note by Canada’s Competitive Bureau. Compare gas stations to the not-so competitive market for Kraft Dinner. Even when the local No Frills is selling KD for a dollar a box, Save On Foods will feel pretty safe about continuing to sell their Kraft Dinner for a comparatively outrageous $1.89.

Despite everything, there’s often still a price gap
Even when stripping away the taxes and the exchange rate, there’s still a pretty persistent gap between the Canadian wholesale gas price and the wholesale gas across the border. Jason Parent noted that there are structural reasons for this. A good example is differences in Canadian and U.S. gasoline regulation. Sometimes, Washington State tank farms are full of a special gasoline blend unique to the U.S. market, forcing Vancouver to spend extra buck to find a more conventional gasoline elsewhere. But Dan McTeague of GasBuddy.com is pretty sure that more unseemly forces are at work in maintaining the U.S.-Canadian price gap. He chalks it up to a “distinct lack of competition” among Canadian refiners, allowing artifically high wholesale prices to persist unchecked.

Source: http://nationalpost.com/news/canada/if-canada-has-so-much-oil-why-is-our-gasoline-so-expensive