Pain at the pumps: Gas is back up near record highs but consumers wonder why

Drivers vexed but gas pump pain may have peaked

Gasoline prices actually less volatile than crude: you'd be paying $2.70 if they moved up in lockstep since early 2009 bottom

Gas prices won’t hit new record highs this summer and are instead likely to ease from current levels, according to a petroleum industry expert.

Calgary-based energy analyst Michael Ervin said the peak likely came and went when retail gas prices in Metro Vancouver briefly touched an average of $1.42 a litre May 11.

This year’s run-up in gas prices has fueled a new round of pump pain and anger from motorists demanding to know why gasoline is back at near-record levels when crude oil is far below its previous peak.

“This illustrates what we’ve been saying for a long time – crude prices are really a terrible indicator of pump prices in general,” Ervin said.

Crude oil makes up a little under half the overall cost of gasoline, which he noted is a commodity in its own right that fluctuates according to its own supply-and-demand dynamics.

It may seem like pump prices move in mysterious ways, but a look at the recent price history shows gasoline has actually been much less volatile than crude. (See also graph at bottom of story.)

Retail gas prices in Metro Vancouver came close to $1.50 a litre in the summer of 2008 just as crude oil prices peaked just below US $150 a barrel.

As the global financial meltdown and ensuing recession deepened, oil plunged all the way down to $32 a barrel. But gas prices here didn’t fall to 32 cents a litre – they stopped around the 78-cent mark in early 2009.

On the way back up from the bottom, crude has likewise moved up faster than gas.

From the trough to the recent $112 a barrel peak in April, crude oil has more than tripled.

If gas prices had really risen in lockstep with crude, we’d have been paying $2.70 a litre by May.

“Back in 2008, when crude prices were high we saw similar gasoline prices to what we see today,” Ervin noted.

“The reason gasoline prices weren’t higher then is because inventories of gasoline were very high and kept the retail price of gasoline down in relation to crude oil at that time.”

Ervin was referring to the “crack spread” – the difference between what refiners pay for crude and can charge for the gasoline they make, depending on market conditions.

In 2008, the crack spread was almost zero thanks to the glut of gas supply, but he said it’s considerably more now.

He doesn’t label the current profit margins excessive, but instead says drivers were getting a very good deal three years ago when gas prices weren’t rising as fast as crude.

“Consumers actually got about a 15-cent-a-litre break.”

Demand typically surges in the spring when more drivers take to the roads, resulting in refiners enjoying a wider crack spread until more refinery capacity can be cranked up, usually stabilizing pump prices by June.

Drivers would enjoy lower prices if more refineries existed in North America.

But no new ones have been built in more than 30 years. Local residents typically oppose them, permitting is challenging and they take a long time to build.

But Ervin said the main obstacle is refineries simply haven’t been lucrative enough compared to the potential profits from other industry investments.

Even with the constraint of the current stable of refineries, there’s a limit to how high prices can go in North America before they start to attract gasoline imports from Europe.

The other side of the equation is demand and it’s another reason companies aren’t clamouring to build new gas refineries.

“Just about all observers are pretty much certain demand for gasoline has peaked and we’ll never see the same high levels again,” Ervin said.

He cites the trend to more fuel-efficient cars, hybrids, plug-in electrics and the offsetting of gasoline use by ethanol and other fuel alternatives.

Clark Williams-Derry, an analyst with the Seattle-based Sightline Institute, agreed people are finding ways to burn less gas as they adapt to the new reality of higher prices.

“If you have two cars – a Hummer and a Ford Focus – you’ll drive the more economical one more,” he said.

It’s all translated into fewer miles logged on the roads and less gas being pumped, he said.

Former Ontario Liberal MP Dan McTeague, a gasoline watchdog who now runs the site tomorrowsgaspricestoday.com, said motorists are right to be outraged by current prices.

He said refiners’ margins have tripled in the past year, dismissing Ervin’s suggestions refining isn’t profitable enough.

“Cry me a river,” McTeague said. “These are all massively integrated oil companies. If they’re not making money at retail, they’re making money at the refinery. If they’re not making money at the refinery, they’re making money at the exploration level.”

Vancouver wholesale gas prices are about six cents higher than the equivalent cost in the U.S., he said.

“If you add real competition and vigorous oversight, you’d be paying prices substantially less than you pay today.”

McTeague agrees motorists should get over their obsession with tracking crude oil prices, which are largely irrelevant at the pump.

But he said government should focus on speculators who use derivatives, futures and now exchange-traded funds to profit from gas price movements, creating artificial demand.

“It’s not a free market,” McTeague said. “It sets the stage for not just volatility, but price manipulation.”

Industry Minister Tony Clement has promised to ask petroleum refiners, distributors and retailers to appear before a parliamentary committee to explain their pricing methods.

Federal New Democrats want an ombudsman named and say the competition bureau should examine the issue.

Taxes take huge bite at Metro pumps

Motorists filling up a tank of gas in Metro Vancouver get skewered by five different taxes that add a big chunk to the bill.

TransLink gets the biggest piece – 15 cents in fuel tax for transit and roads charged on every litre of gas sold in Metro’s boundaries.

The provincial government collects another 8.5 cents.

The federal government then dings drivers a 10 cent excise tax, half of which it sends to TransLink.

Then there’s the 4.45 cent carbon tax.

Finally, the five per cent in federal Harmonized Sales Tax (the provincial portion is rebated at the pump) is added on top of everything else.

When pump prices are $1.36, the tax-on-tax federal HST is worth 6.5 cents.

Total taxes work out to about 44.5 cents a litre.

For a 60-litre fill that means $26.70 out of the $81.60 cost are taxes, with about $12 ending up with TransLink.

Motorists can look forward to the tax bite getting a bit bigger on July 1.

That’s when B.C.’s carbon tax rises by another 1.1 cents.

Ottawa should follow Victoria’s lead and stop charging HST (GST in other provinces) on gasoline, said Canadian Taxpayers Federation B.C. director Gregory Thomas.

Since the federal HST is charged last on top of all other taxes, it has the effect of compounding them.

“It’s like a Dr. Seuss book,” Thomas said. “It’s a tax on a tax and a tax and a tax.”

He said the lower tax burden in Alberta is why motorists there pay about 20 cents less.

 

Vancouver Historical Gas Price Charts Provided by GasBuddy.com