As the cost of gas at the pump hit $2 per litre – and more – in recent weeks, drivers have asked why the price is so high, and different from station to station.
On March 11, the cost of regular gas in Vancouver hit the region’s highest recorded average since 2008, with 210.0 at the pump, according to GasBuddy. While prices have dipped since then, a number of factors contribute to the cost of gas, and there are some on the horizon that could drive it back up.
The four factors of fuel cost
Crude oil is the primary driver of cost and responsible for the vast amount of price increases. The second biggest contributor is taxes, followed by refining margin (the cost refineries charge wholesalers or marketers who then sell to retailers). Finally, there is the retail margin.
“Of all the four factors, the smallest one is the retail margin,” Vijay Muralidharan, the director of consulting for energy analytics firm Kalibrate, said. Only about eight per cent of gasoline prices is dictated by retail outlets, who have the least amount of price control out of the factors, he said. To stay in business, they pass cost increases on to the final customer, the drivers.
Why is B.C.’s gas more expensive?
B.C. is unique in Canada, Muralidharan said, because the province is a net importer of gasoline and diesel, and mostly doesn’t import from other parts of the country. While some supply comes to B.C. via the Trans Mountain pipeline, and there are in-province refineries, most of the barrels come from the refineries in Washington state.
That makes B.C. susceptible to paying a higher price upfront since, in the U.S., California and Washington have the highest prices for gasoline because of their “stringent policies.” Then B.C. itself has one of the highest tax regimes in Canada, Muralidharan added.
“So end to end, you have a higher price in Vancouver.”
The product comes into Vancouver, Kamloops and Kelowna. From there, additional transportation costs may be added for shipment to locations like the Sunshine Coast and Vancouver Island.
“The price of oil has gyrated almost in a violent way, swinging wildly, rising as much as $15 in one day and then declining by as much as $15 the next,” Patrick De Hann, the head of petroleum analysis at GasBuddy, told Coast Reporter. Since gas stations don’t refuel every day, the price at the pump depends on when a station buys its gasoline – which is part of what causes price differences between retail locations. (Such as between Gibsons and Sechelt on the Sunshine Coast.)
The price of politics and the pandemic
“If you look at historical evidence, even before the war started, the refining margins were about five to seven cents higher than their normal average would be. Meaning that the demand for gasoline was really strong in the U.S.,” Muralidharan said.
Usually winter months produce lower refining margins because there is less demand for gasoline. In general, prices went down even more in 2020, as travel restrictions decreased demand.
“But last winter was unique,” Muralidharan said. In the U.S., the demand grew as pandemic restrictions began easing. Those increases then flow to Canada, just as the supply chain switches to the more expensive summer gasoline (which can withstand higher temperatures).
Then Russia invaded Ukraine.
“That has been the primary driver for the market in the last month and a half, and that’s pushed the price of oil up considerably,” De Haan said.
Russia is one of the largest global producers of oil and gas. In February, Canada began banning the importation of Russian oil, and the U.S. followed. The cost of crude oil increased by between $30 and $40 per barrel (adding approximately 20 to 25 cents per litre at the pump) in the month of March.
In Muralidharan’s 20 years of forecasting, he’s learned the most difficult thing to predict is crude pricing. The second most difficult thing to predict is gasoline pricing. Drivers could see gas costs anywhere between 175 to 200 cents per litre, he said.
There are several influences to take into account for projecting funds. Canada and the U.S. have both banned the use of Russia’s crude oil, but Europe, China and India have not. If Europe imposed a similar oil embargo, it would have a “major impact on current pricing” because Russia would have to find a new market and Europe would need to find new supply. Crude oil prices would likely increase.
“Nobody can predict what Russia is going to do next,” Muralidharan said. “I’ve got to keep an eye literally 24/7 on where the policies are going because, while I'm sleeping, there could be a policy made in China that affects fuel pricing. There’s a COVID closure in China that’s impacting demand right now.”
The driving season in the U.S. has also just started. Refineries will produce more gasoline for drivers at this time of year, and traditionally, there is a lot of stock built up. But those stores are below a five-year average. If a refinery went offline for maintenance, they can’t rely on the stock that isn’t there.
“So this is the second big problem on the horizon. If a refinery goes offline anywhere in the U.S. or in Canada, we are in for a major increase in gasoline pricing. So there's a lot of uncertainty out there,” Muralidharan said. “We are moving into this uncharted waters, with less supply in the bag... This doesn't bode well for the summer.”
For now, prices have dipped from the highs of mid-March, in part because the American suppliers released oil from their strategic reserve.
“That’s why in some cases, we’re seeing relief. In many cases, some of that relief is still coming,” De Haan said on April 6. “Oil prices today are down at about $102 a barrel compared to the peak price of $135 a few weeks ago. So there's been a slide in the price of oil that is now going to start contributing to lower prices for the time being.”
While the average citizen does not have any control over external factors like Russia invading Ukraine, or countries’ policies on Russian oil, Muralidharan said the average Canadian will start thinking about what they can control: how to drive less. If consumers pull back on the demand, the prices will have to respond, he said.
According to B.C. Transit’s Jamie Weiss, anecdotally, there has been a recent noticeable increase in ridership in larger transit systems in the province, but statistics on 2022 BC Transit ridership for the Sunshine Coast were not available.
“It’s important to recognize that there could be many factors that can affect ridership numbers. Along with a response to higher fuel prices, this could include more people returning to work and regular activities, as well as less hesitancy around COVID-19,” Weiss said. “BC Transit will continue to monitor ridership data and trends to ensure our service continues to meet demand.”
Who’s keeping track?
On March 17, the British Columbia Utilities Commission (BCUC), the independent regulatory body that administers the province’s Fuel Prices Transparency Act, announced it will be “conducting additional monitoring of retail and wholesale price margins to ensure that fuel companies are not taking advantage of current market conditions.” Those market conditions being the Russian invasion of Ukraine, which has impacted the global price of crude oil.
As that report is pending, updates can be found on GasPricesBC.ca, which shows factors that make up the fuel price. On March 31, the BCUC issued its final report on the fuel retail pilot, recommending potential reporting requirements for the retail fuel industry in the province.
Another project the BCUC is undertaking is collecting information about gas and diesel prices in 12 cities – including Gibsons – between June 1, 2021 and June 30, 2022.