Ever wonder what makes the price of gas go up and down? These are the elements that go into determining your cost at the gas pump.
Locating and extracting crude oil
Refining crude oil
Meeting fuel standards
Operating a gas station
Supply and demand
Type and location of gas station
What’s the end result?
Before it gets to the pumps, petroleum has to be located in the Earth. The naturally occurring substance sometimes pools to the surface but is generally found underground. Geologists analyze seismic surveys, perform tests and use equipment like magnetometers in the search for the substance. It is estimated that crude oil costs make up 40 to 55 percent of the price you pay at the pump depending on where you buy your gas.
(Photo: Vincent Parsons)
After recovering the raw substance, the crude oil gets transported to a refinery where it’s distilled for consumer use. The petroleum is passed through a series of pumps, heaters and a distillation tower after which it’s separated for mass market use. The cost of refining crude oil is another of the biggest factors in determining gas prices. Anywhere from 10 to 25 percent of what you pay is the refiner’s margin, the difference between what it costs to buy crude oil and the price refined gasoline sells for wholesale (this includes all costs of refinement and the refiner’s profit).
If fuel is so expensive, why can’t they just make more of it so it’ll be cheaper? Like anything mass produced by an industry, fuel is held to certain standards. Meeting these standards translates to slower and longer production. These standards include the maximum amount of concentrated lead in gasoline or the amount of sulphur in diesel fuel.
Once crude oil is refined, it’s then transported to the pump that we’re all so familiar with. The cost of transporting the fuel, in addition to the gas station’s running costs and maintenance fees, play a role in the cost of gas. About four to six percent of what you pay at the pump is considered retail margin, which includes all of the operating costs of a gas station as well as station profit.
(Photo: Pete Zarria)
Ever wonder why a trip across the border yields a pretty noticeable drop in gas prices? It’s due to taxes. Here in Canada, we pay more tax on gasoline than our friends down south. Federal, provincial and municipal taxes in Canada make up about 25 to 35 percent of what you pay at the pump depending on your location. In 2012, Canadians paid an average of 39.3 cents per litre in tax (31 percent of the price). And according to a 2007 study by MJ Ervin and Associates, this means we pay nearly 20 cents more per litre more than consumers in the U.S.
Have you noticed during certain times of the year, gas prices seem to spike? The timing usually seems pretty consistent, too. What gives? During the summer months we tend to drive more. Road trips, drives to the cottage, etc. Gas companies anticipate this and tend to jack up the costs as the weather gets hotter. Anticipated demand is another major factor in setting gas prices.
Fuel is one of the few products consumers can shop around for while driving at 50 kilometres per hour. The large iconic gas station signs with their visible pricing attract buyers. If one station in an area lowers their price, the rest of the stations in the area tend to follow suit. Sometimes this means stations will sell gas at a loss just to attract customers. After which, prices will go right back up.
Gas stations that are situated farther from their suppliers will tend to rack up a bigger transportation bill. Typically, to help offset that, the price of fuel is raised. You’ll also see differing prices in different types of gas stations. Stations that are attached to big box stores, or stations that offer other services like car washes or mechanical assistance, might use lower gas prices to lure in customers to shop further.
At the end of the day, selling gasoline is a business, and in order to remain a sustainable business, those involved in the industry need to make a profit. If profits are low, gas prices might rise. And on the flip-side, if profits are high, prices may dip. This is certainly not set in stone, however.
(Photo: Philippe Put)
No matter what happens, the fuel must flow. But sometimes, events that happen around the world or right in our backyard can hinder that flow. If fuel is harder to deliver to the customer, it’ll end up costing more. These events can include natural disasters, wars, political turmoil or industrial accidents. In the U.S., for example, gas prices soared in the wake of Hurricane Katrina.
(Photo: Thomas Geiregger)
With all of these factors in mind, we can determine the cost of fuel in Canada. Compared to the rest of the world, we tend to rank towards the middle of the price scale—a normal range for a developed nation. Within the country, prices, according to Statistics Canada, ranged from as low as 63.1 cents per litre in Edmonton to as high as 105.9 cents per litre in Vancouver in February 2016.