CALGARY - Oil prices have doubled from where they were a year ago, surpassing yet another record of US$133 on commodities markets Wednesday.

Yet the prices at the pump - while painfully high - have not risen in tandem. According to this week's pump price survey by energy consulting firm MJ Ervin, Canadians paid on average $1.27 to fill up their gas tanks. Last May the average price was about $1.12 per litre.

It's a significant increase, but not nearly as dramatic as that of crude oil, which was only worth US$66 a barrel last May.

"There are other costs involved in the processing of fossil fuels into gasoline. You wouldn't get a one-for-one increase in prices," said Derek Burleton, an economist with TD Bank Financial Group.

The increasingly expensive raw product is an important part of the equation for gasoline. But taxes as well as refining and marketing costs are also key factors in the final pump price.

The fact that the Canadian dollar is around parity with its U.S. counterpart also helps keep pump prices relatively tame, since oil is denominated in American currency.

While it may be cold comfort for drivers sick of spending a fortune to fill up their tanks, gasoline retailers have not hiked their pump prices higher because they have to stay competitive.

"In today's market, they're not free to keep pushing up prices forever. At some point you will get some demand destruction," Burleton said.

Most gasoline in Canada is sold by integrated oil companies - players that have interests in the production, refining and marketing segments of the industry.

Companies like Petro-Canada (TSX:PCA) and Imperial Oil Ltd. (TSX:IMO) have made weak margins on their downstream - or refining and marketing - business this past quarter. But those declines have been offset by the fact that the products they produce have been grabbing such a high price.

"They're benefiting from their upstream operations and that makes it a little more palatable. Overall their financial performance is still in excellent shape," Burleton said.

"The downstream operations are obviously struggling at the moment."

Every May, Petro-Canada posts a gas-price pie chart at its stations across Canada explaining to consumers the breakdown of the final pump price.

This year's recently-released posters say 48 per cent of the price was from crude oil; 32 per cent was taxes; 17 per cent was refining costs and the three per cent left over was profit. The charts are developed based on last year's figures.

When Petro-Canada first started posting the gas price pie chart in 2000, the breakdown was quite different. Crude costs only took up 30 per cent of the pie, while taxes were 51 per cent, according to the company's "Pump Talk" blog.

"We are in a competitive business. There are thousands of people out there retailing gasoline on any given day," said Petro-Canada spokesman Jon Hamilton.

"While there's upward pressure from crude oil bringing the price up, there's also pressure at the retail level to be as competitive as possible."

Over the past 10 to 15 years that pressure has really "whittled away" at the profits to be made on gasoline, he added.

"It's still a profitable business and otherwise we wouldn't be in it. But the cost of the raw commodity going up and up has really pinched anyone that's in the retail gasoline business whether you're big or you're small," Hamilton said.

TD's Burleton said there's no real fundamental reason to support crude oil's 50 per cent ramp up since February, and that prices will likely recede in a few months.

"I do think the market is getting ahead of itself. Even though the U.S. dollar has fallen, I just think the market's climbed too far too fast and I would be looking for an adjustment," he said.

"The trigger could be just seasonal. At this time of year, there's anxiousness about the summer driving season and the impact on supplies but once we move into the summer I think there's a good chance that we're going to get quite a correction."

Toronto-area Liberal MP Dan McTeague said that if the price of crude oil were riding on supply and demand fundamentals, it would be worth much less - between US$50 and US$75 a barrel.

"There is no doubt that the supply situation is stable. And demand may very well have tapered off a slight bit with these prices," said McTeague, a long-time gasoline price watchdog.

"The problem is not supply. The problem is a distortion that originates from various and sundry hedge funds and investors who are basically chasing the idea that oil is king."

LIKE IT?  LET OTHERS KNOW

Thanks for participating!

Be the first to recommend - Sign in now


See what other people are recommending - Popular Stories