The price you pay for gasoline at your local service station can vary quite a bit from the price in the next city. Price differences between cities and across Canada involve four key factors: taxes, competition and consumer choice, the amount sold, and the type and location of stations.
Why do you pay more or less for gasoline than your friend in another community? Differences in fuel prices are tied to several factors that can push prices up or down:
Factor 1: Taxes
Regional differences in provincial and municipal taxes are the most important factor affecting what you pay at the pump. There are two types of taxes:
Fixed tax – The federal government charges an excise tax of 10 cents per litre on gasoline and 4 cents per litre on diesel. Provincial governments also collect gasoline taxes and these vary considerably by province. Lastly, three municipalities in Canada also apply taxes on gasoline. Vancouver, Victoria and Montreal charge taxes of 9.0, 3.5 and 3.0 cents a litre, respectively (December 2011).
The federal government also taxes gasoline, but the amount is constant across the country: the excise tax is a fixed amount of 10 cents per litre for gasoline and 4 cents per litre for diesel.
Sales Tax – The federal Goods and Services Tax (GST) is 5%, (except in Nova Scotia, New Brunswick and Newfoundland/Labrador and Ontario where it is replaced by the Harmonized Sales Tax of 13%). In Quebec, there is an additional sales tax of 8.5% (which increased to 9.5% on January 1, 2012). Unlike flat taxes, the amount of sales tax can vary depending on the price of the fuel. GST/HST is charged on crude oil, refining and marketing costs and margins, the federal excise tax and provincial road taxes.
Factor 2: Competition and Consumer Choice
Station owners are competing for attention as drivers make their buying decisions from behind the wheel. Unlike other retailers, gas stations advertise their prices 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 – by lowering what’s called their retail margin, or the amount they earn from the sale of fuel – to avoid losing a customer. This can trigger a series of price changes by competing retailers over a period of several hours or days. At some point, stations end up selling at a loss and need to increase prices. At the end of such price competition, consumers frequently will see a uniform and large price increase as prices return to levels that represent more acceptable returns for retailers. Overall, this up and down cycle can sometimes lead to large differences in prices between neighbouring cities or different areas of the same city.
Factor 3: Amount of fuel sold
The amount of gasoline that can be sold by an individual station will affect its price. A station in a smaller community or neighbourhood with fewer sales may have to charge a higher price to cover its fixed operating costs. Plus, it may not be eligible for volume discounts from gasoline wholesalers. Likewise, if an area has many stations, each has less traffic and fewer sales, which may lead to higher prices. In communities where the station owners are satisfied with how much they sell, consumers tend to see more stable prices and fewer price wars.
Factor 4: Type of and location of gas stations
Type of stations – More and more, stations are offering car washes, fast food outlets and other services to increase sales. These conveniences draw more customers, which gives the retailer the opportunity to sell other products such as snacks and refreshments. This type of retailing reduces the station’s dependence on gasoline sales to cover operating costs. In fact, so-called “big box” retailers view low-cost gasoline retailing as a way to attract customers in order to increase their in-store sales.
Location of stations – Stations that are further away from their suppliers have to pay higher transportation costs. They may pass on these costs to their customers in the form of higher gasoline prices.