Why gasoline prices go up and down?

Why am I paying so much for gasoline?

Much of the volatility in gasoline prices in recent months has been the result of the steady increase in crude oil prices. Crude oil prices have nearly doubled in the last year, an increase equivalent to about 35 cents per litre. While the cost of crude oil represents only one portion of the retail price of petroleum products such as gasoline, rising crude oil prices are the single most important factor behind recent increases in petroleum product prices.

There are many factors, apart from the price of crude oil, that also affect the price of retail gasoline. These include, but are not limited to: transportation costs incurred to deliver gasoline to retail outlets, refining and marketing costs and margins, inventory levels and local supply problems. Higher demand, particularly in the summer months, can also drive up prices. Any of these factors can result in temporary fluctuations or regional differences.

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

Gasoline is made in refineries which transform crude oil into useable fuels like gasoline and diesel oil. Factors that can have an impact on the amount of gasoline being refined include:

  • Refinery utilization rates - current production at most North American refineries is at or near maximum capacity
  • Temporary closures while refineries install new equipment or conduct maintenance
  • Fuel standards that result in lower outputs
  • 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 over the last two decades
  • 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 gasoline?

The price you pay for gasoline 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 to operate the local station (retail margin), and
  4. Taxes to provincial, federal, and sometimes municipal, governments.

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

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 oil 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

Crude Oil and Gasoline Prices: A Timeline

Interactive version

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

Need more information? See How World Oil Markets Work.

Why do gasoline prices vary from region to region?

Gasoline 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 gasoline 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 consumer products, 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 business.

This sometimes leads to several successive price changes. During these periods of increased competition (often referred to as 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.

Do gasoline prices rise before a long weekend?

Gasoline prices go up and down every week in response to how much 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 gasoline is at its highest level.

What makes gasoline prices go up and down?

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

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

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.

The refiner-marketers, those companies involved in both the refining and retailing of gasoline, control the prices at 17% of the retail outlets in Canada. In the other 83% of the stations, the pricing decisions are made by the independent businessmen and women who own the outlets.

Where can I get more information on gasoline prices?

There are a number of public web sites that offer information about gasoline prices.

Who profits from higher gasoline prices?

Between 2001 and 2007, the average Canadian gasoline price rose by almost $0.34 per litre. The biggest share of that increase (approximately $0.24 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, along with governments of the producing provinces who earn royalties.

Also, when the price of gasoline goes up, governments collect more tax revenue. Between 2001 and 2007, that increase was about $0.02 per litre shared between the federal and provincial governments. Finally, for the same period, refiners and retailers also received an additional $0.07 per litre. Some of this added revenue would have gone to cover the higher costs associated with producing and transporting cleaner fuels as a result of federal environmental regulations over this period.

Canadian Average Gasoline Price (Cents per litre)
  2001 2002 2003 2004 2005 2006 2007 +/- Change 2001- 2007
Crude cost (estimated) 24.6 25.2 27.3 33.2 43.5 45.8 47.6 arrow23.0
Federal excise tax 10.0 10.0 10.0 10.0 10.0 10.0 10.0 0.0
Goods and Services tax (GST) 4.5 4.4 4.8 5.2 5.9 5.8 5.6 arrow1.1
Provincial taxes 15.6 15.9 16.3 16.7 16.9 16.9 16.8 arrow1.2
Refining, marketing costs, and margins 13.7 13.4 14.8 16.3 16.0 19.2 21.8 arrow8.1
Total pump price 68.5 68.8 73.2 81.3 92.3 97.7 101.8 arrow33.3