With this latest drop in the price of gasoline, it got me to thinking: If the gas stations still have the same gas in their reservoirs as they did yesterday, why is the price different today.
There are actually many different factors that go into the price of gas. Here are a few of the big ones:
- Cost of Crude Oil
- Supply and Demand
- Tax
- Competition
1. The Cost of Crude Oil
Gasoline is made by refining crude oil and the price of crude fluctuates constantly based on current supply and expected demand. Because the price of crude is a globally traded commodity and its prices are determined by the world market. This is why the price of crude in Alberta can be affected by hurricanes in Florida, shortages in Russia or, the biggest factor in our current price drop - high production and reserves or crude oil in Saudi Arabia.
2. Our Demand for Gasoline vs. Current Supplies
In 2013 Canadians purchased almost 43 billion litres of gasoline and 17 billion litres of diesel. About 14% (6 billion litres) of Canada's gas and 23% of its diesel was purchased in Alberta. This means that Alberta consumers demand around 16 million litres of gasoline per day.
Things like more fuel efficient vehicles, better transit and alternative forms of transportation have alleviated some of the demand over the past few years. Even with this decreased demand, this is still a pretty tall order, and doesn't even factor in the estimated 1.2 trillion litres the U.S. uses every year.
When you have demand, supply is never far behind. When current fuel stocks are high this can drive the prices down even with higher than average demands. Likewise, when demand is low and
3. Taxes
Taxes don't change the price of fuel regularly, but they do make up a big part of the price of gasoline. All Canadians pay a 10 cent / litre federal tax + 5% GST at the pump. In Alberta, we pay an additional 9 cent per litre provincial tax (the lowest provincial gasoline tax in the country). So if gasoline was listed at $1.00 per litre 24 cents of that would be federal and provincial tax.
4. Competition
As you'd find with any industry, competition definitely affects the price of gas. In order to remain competitive, gas stations will typically set their prices closely with other gas stations in the area. Because prices are posted on giant lit up signs, this can cause a price war between two nearby stations.
Conclusion
There are many complicated factors that go into determining the price we pay at the pump. We didn't even get into the costs to refine, transport, distribute and market the gasoline.
The dip we're experiencing right now is related to Saudi Arabia's production and current supply of Crude Oil. Because of changes in the market place, Saudi Arabia has become worried about losing market share and is allowing the price of oil go down to curve production in other parts of the world.
This looks great at the pumps of course, but has a strong negative effect on other parts of our economy, including the value of the Canadian dollar, which has been dropping rapidly. It is expected that this won't last, however, so for now we can at least take advantage of these low prices at the pump!
