From the Rack Price to the Price at the Pump: Relationship and Asymmetry

World oil prices are constantly fluctuating. However, these price variations are not necessarily reflected in the price paid by consumers at the pump. This is because in Canada, the price of oil makes up only about a third (36% on average in 2015) of the pump price, which is less than federal, provincial, territorial and sometimes municipal taxes (43% on average in 2015).

In fact, the rack price (the price paid by wholesalers) is a better indicator of the pump price, because the rack price includes refining margins and transportation costs, and because the time it takes for gasoline to move from the refinery to the pump is generally short.

Figure 1 – Price of Gasoline at the Pump in Joliette and Surrounding Area Compared to the Rack Price of Gasoline in Montreal, 2007 to 2014

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Source: Figure prepared by the author using data obtained from the Régie de l’énergie du Québec.

 

The various taxes make up one of the largest components of Canadian retail gasoline prices

As shown in Figure 2, there are four key components of Canadian retail gasoline prices:

  • the price of oil;
  • refining and retailer margins, including refining and retailing costs and profits;
  • various federal taxes (excise tax, goods and services tax (GST)); and
  • various provincial taxes, (provincial/territorial sales taxes, harmonised sales taxes and certain municipal taxes.

Figure 2 – Components of Canadian Retail Gasoline Prices, 2015

Infographic-A-Fuel-Gage-700px-v1-EN

Source: Figure prepared by the author using data obtained from Natural Resources Canada, Fuel Focus Report, Issue 24, 2015 Annual Review.

 

Figure 3 presents the various components of retail gasoline prices in Whitehorse, Yellowknife, Vancouver, Calgary, Regina, Winnipeg, Toronto, Montreal, Saint John, Halifax, Charlottetown and St. John’s.

For example, in Montreal, federal, provincial and municipal taxes accounted for 43% of the retail gasoline price in 2015. Only three Canadian cities—Vancouver (11.0 cents per litre), Victoria (3.3 cents per litre) and Montreal (3.0 cents per litre)—impose an additional tax on gasoline.

Figure 3 – Components of Canadian Retail Gasoline Prices in Selected Canadian Municipalities, 2015

chart02-e

Note: Data for the period between 19 April and 10 May 2016.
Source: Figure prepared by the author using data obtained from Natural Resources Canada, , accessed 13 May 2016.

 

Daily fluctuations in retail gasoline prices depend more on the rack price of gasoline

Crude oil prices, set on international markets, generally have a longer-term impact on pump prices. In other words, the pump price fluctuates as the commodity price makes its way down the extraction, transportation and processing chain to consumers. Figure 4 presents the various stages in the resource chain.

Figure 4 Infographic-B-Supply-Chain-700px-v1-EN

Source: Visual prepared per author’s instructions. Infographic developed by the Library of Parliament.

 

Value of the Canadian dollar cushions the impact of oil price fluctuations

Since Canada is a crude oil producer, fluctuations in world oil prices generally have an impact on the value of the Canadian dollar. As a result, a drop in the price of oil generally drives down the value of the Canadian dollar, while an increase in the price of oil generally has the opposite effect.

Since crude oil is traded in U.S. dollars and Canada imports 37% of its oil consumption, fluctuations in crude oil prices are cushioned by fluctuations in the Canadian dollar. For example, oil imports become more expensive when lower oil prices drive down the value of the Canadian dollar.

Rack price fluctuations result in equivalent, symmetrical fluctuations in pump prices

Empirical studies[1] confirm that fluctuations in pump prices are influenced by the rack price. As well, changing rack prices are shown to result in an equivalent change in pump prices. Lastly, it has been shown that there is no asymmetry in the setting of pump prices—rises and falls in pump prices occur in step with the same change in the rack price.

Author: Emmanuel Préville, Library of Parliament

[1] Competition Bureau, Gasoline Empirical Analysis: Update of Four Elements of the January 2001 Conference Board study: “The Final Fifteen Feet of Hose: The Canadian Gasoline Industry in the Year 2000”, March 2005.

Régie de l’énergie du Québec, Avis sur les écarts de prix de vente et des marges de commercialisation de l’essence entre Montréal et Québec, Avis A-2009-02, 14 December 2009 [in French only].

Library of Parliament, From the Rack Price to the Price at the Pump: Relationship and Asymmetry, In Brief, June 2016.