June 24, 2022

What you need to know as Canadian gasoline prices soar

Economist Trevor Tombe discusses the factors behind fuel pricing — and if there's any hope of relief on the horizon
Trevor Tombe

With soaring gasoline prices across Canada, many drivers have found themselves emptying their wallets to fill up their tanks, or opting for other means of transportation.

These prices have put a strain on vacation plans, ride sharing services, delivery fees, and much more.

To get a better understanding of what caused the price spike and when Canadians can expect to see some relief, UToday sat down with University of Calgary economist Trevor Tombe. Here’s what he had to say:

Understanding fuel pricing

Q: What’s the main contributor to gas prices?

A: Not surprisingly, the most important input into the production of gasoline is crude oil. Here in Calgary, that single item contributed an average of nearly 95 cents per litre to the price of gasoline in the second week of June. That cost is up from just over 50 cents per litre one year ago.

In addition, there are costs to refine crude oil and then further costs to ship the gasoline to retail stations for consumers to buy. Currently, this adds another 67 cents per litre and is also up significantly since last year.

Finally, there’s taxes. Gasoline taxes are levied by the provincial and federal governments (although Alberta recently suspended the provincial portion). There are also carbon taxes and, of course, the GST. All together, taxes in Calgary have averaged 30 cents per litre this month.

Q: Why have prices jumped so quickly and drastically?

A: As of the middle of June, gas prices are up nearly 60 cents per litre compared to the same time last year. And almost all of that increase has hit within the past four months thanks in large part to Russia’s invasion of Ukraine, which removed much of their production from the global supply. World oil prices are up significantly as a result. And since this is the single-largest input into the production of gasoline, when crude oil prices are high, so too will gasoline prices be high.

Overall, higher crude oil prices account for nearly 75 per cent of the increase that Calgarians have seen at the pump. This leads to significant short-term pain for drivers, but we must not forget the massive windfall to the government that we as residents and taxpayers will indirectly enjoy. We may be on track for a double-digit provincial budget surplus this year.

Many blame carbon taxes for the rising price of gasoline, and while it’s true that carbon taxes are rising from one year to the next, this adds only a little over two cents per litre to the price we pay at the pump. Reasonable people can agree or disagree over the merits of carbon taxes, but they just aren’t a big factor behind recent price increases.

Q: Why do prices vary from province to province?

A: Crude oil prices are set on the global market, so it might appear puzzling why gasoline prices vary across provinces. There’s a few factors that lead to these differences. First, refining costs vary. In British Columbia this month, for example, the refinery costs add nearly 70 cents per litre to their gasoline prices. But in the other large provinces of Alberta, Ontario, and Quebec, this is closer to 50 cents per litre.

Taxes are another large reason why gasoline prices vary. Taxes in Alberta this month have averaged 30 cents per litre, for example, compared to nearly 60 cents per litre in Ontario. Even without the recent temporary suspension of Alberta’s provincial gasoline tax, total taxes paid per litre were roughly 40 cents per litre back in March. Ontario’s taxes are higher because they have higher gasoline taxes, but they also have a larger sales tax (their 13 per cent HST compared to only five per cent GST in Alberta).

What to expect

Q: How high do you foresee gas prices going?

A: Since world oil prices are the biggest factor, what happens to gas prices will depend entirely on global developments that few can foresee. Even in the best of times, world oil prices can be nearly impossible to predict, and these are far from the best of times. That being said, markets seem to be pricing in a gradually declining oil price.

The latest data suggests investors are betting oil prices fall below $90 per barrel within the next year. If that happens, gasoline prices will fall too. In addition, there are some disruptions to global markets for refined products, which is part of the reason refinery margins are higher now than a year ago. As these effects dissipate, I suspect margins will fall back to normal levels — potentially shaving 20 cents per litre off of gasoline prices.

Q: How do you see these prices affecting the average Canadian household?

A: How much these prices affect individuals depends entirely on how much they drive. Those who use public transit, walk or bike to work will be affected far less than those with longer commutes or those in remote communities.

On average, though, a typical family buys between 150 and 200 litres of gasoline per month. With prices up as much as they have been recently, this translates into roughly $100 in additional expenses per month — a challenge for many.

But even for those who do not drive, or do not drive much, the rising cost of fuel can be indirectly costly as it cascades through the supply chain and affects the price of many other goods and services. This is tough to estimate, but my own work suggests that food prices, for example, might be one to 1.5 per cent higher in Canada as a result of the high gasoline prices recently.

Moving forward

Q: Can the government offer any sort of relief for drivers?

A: In Alberta, the provincial government suspended its gasoline taxes until global oil prices fall. It recently extended this through to at least September. It’s tough to precisely estimate the effect this has had on gasoline prices, but my own estimates strongly suggest that the entire 13 cents per litre tax reduction was passed through to consumers. Other researchers have found the same. But there is an important trade-off to consider: it costs the Alberta government over $100 million each month in foregone revenue.

There are potentially cheaper alternatives to help families, such as providing targeted cash transfers to those in need. Higher-income individuals don’t need the support, but lower-income ones may. Boosting income support programs to those families can go a long way, and this is the route the federal government has taken recently by inflation-adjusting many income support programs.

Q: Is there anything that can be done to protect drivers from drastic price increases like this in the future?

A: Like any good or service, prices serve as an important mechanism to co-ordinate buyers and sellers. When demand rises or supply falls, prices will increase. It’s often best to allow these market forces to work. High prices encourage consumers to change behaviour or find alternatives, and they also encourage producers to increase production.

We should perhaps think less about how to prevent prices from changing and instead think more about how to help those families in need of support. Over the long run, though, programs to encourage greater adoption of electric vehicles will mean individuals and families will be less exposed to gas price swings.