Gasoline,gasoline prices,global oil demand,energy demand,Russia,Europe,producing companies,oil refining

Why are gasoline prices going up?

From upstream production to refining to sales, the market sets the price – but many factors influence market price.

Gasoline prices across Canada (and elsewhere) are surging to record highs. According to Gasbuddy.com on March 9, 2022 the average price in Quebec for a litre of gasoline was $1.94, while the average in B.C. was $2.02.

While it might be easy to blame escalating prices on the ban on Russian oil imports, the effect of that ban is minimal because Canada hasn’t imported much oil from Russia in the past five years. While the ongoing conflict in Europe is influencing the global price of oil, banning Russian oil is not the direct cause of high gasoline prices in Canada.

How the price of oil influences gasoline prices

The price of gasoline is joined at the hip to the price of oil. And the price of oil has been trending upward for the past year due to increasing global demand as pandemic restrictions begin to ease. Travel, trucking and other forms of long-haul transport, manufacturing, construction – all these activities create demand for oil. Additionally, the current situation in Europe is making matters worse, as concerns over global oil supply are pushing the price of oil higher.

In Canada, the price of oil is subject to the same upward pressure as any other source of oil in the world, whether that oil is from Alberta, Saskatchewan or offshore Newfoundland and Labrador. As of March 9, 2022, Alberta’s benchmark crude called Western Canada Select (WCS) was trading at about US$105 per barrel. For comparison, in March 2021 the price was about $51, while April 2020 saw rock-bottom global oil prices due to a price war between Russia and Saudi Arabia. At that time, WCS sold for $3.50 per barrel.

Read more: COMMENTARY: Europe’s energy crisis set the stage for war in Ukraine

Also, it’s important to make a distinction between oil production and refining. Refineries don’t make oil: they make gasoline from the oil they buy from producers, at current prices. While some oil producers have their own retail arm (for instance, Imperial has Esso stations, Suncor has Petro-Canada) many oil companies do not – they produce oil and sell it to third-party refiners. Either way, the price of oil is set by current markets, not by oil companies.

The price of oil hasn’t been this high since 2013 and it steadily declined since then. We’ve become accustomed to low prices and those days are probably behind us. It’s simple economics: supply and demand.

Gasoline taxes vary across Canada

Layered on top of the price of oil are federal, provincial and municipal taxes applied at the pump. Taxes are different all over the country and fluctuate because taxes are often percentages based on the price of oil. According to the Canadian Taxpayers Federation, taxes in B.C. added up to 72 cents per litre when gas was $1.82, including provincial and federal carbon taxes of around 7 cents per litre (changing to 9 cents / litre on April 1 when the federal carbon tax increases). In September 2021, Ontario drivers paid more than 49 cents per litre in various taxes.

Read more: Russia strengthening hold on global oil prices with massive Arctic oil project

Oil revenues and Canada’s economy

It’s true that when the price of oil rises, oil companies make more money. However, producing companies don’t set the price of oil, the free global market does. And that carries through to fuel retailers, which are subject to considerable competition for your gasoline dollar and set prices accordingly.

A white car parked at a gas station fuel pump sitting in its tank, filling up.

With increased revenue, producers can pay down debt, improve their facilities, develop emissions-reducing technology, and yes, they drill more wells and increase production to meet expanding demand for the many products derived from oil, including gasoline, diesel, aviation fuel and more. This drives nation-wide economic activity, which means more jobs, income and growth for Canadians.

In 2020, the industry contributed $105 billion to Canada’s gross domestic product (GDP) and supported almost 400,000 jobs across the country.

Read more: Big jump in Canadian crude oil exports via U.S. Gulf Coast

Increasing revenue also means oil companies pay more taxes and royalties to local, provincial and federal governments. Every year, oil companies pay billions of dollars to various levels of government.

Corporate taxes, royalties and other sources of revenue mean governments can support education, health care, infrastructure repair and construction, social services and more. In short, these government revenues underpin the high standard of living we enjoy across the country.