So how are Gas Prices at the pump determined?

As I was driving home yesterday I noticed that the gas priced at 72.9 cents a litre earlier in the day was now 92.9 cents a litre. Now I know that the dollar rose by .005 of a cent against the mighty US dollar and Oil was up by .21 cents yesterday but how does that make the price at the pump jump .20 cents a litre in a day.

To put the jump in price in perspective, that would mean a $15.00 difference when filling up my SUV, which has a 75-litre tank. So it does make a big difference for those who commute daily.

So how are Gas Prices at the pump determined?

Until recently the Oil companies were gloating over record profits. I realize this not to be the case now but when a barrel of oil was at record highs, gas was $1.50 per litre. Now that a barrel is at its lowest point in the last 30 years the price of gas does not seem to be following the trend at the pump. Yes, it is cheaper than it was but still expensive based on the price of a barrel of oil. Or is it?

In 1984 gas was 39.9 cents a litre and a barrel of oil was $28.75… Well, today a barrel of oil is $28.76 and gas is 89.9 cents a litre on average.

So why is there such a difference?

The break down at the pump is determined by the following factors

Crude oil – The cost of raw material for making gasoline, which accounts for 40% – 55%

Taxes – Federal, Provincial and Municipal tax  applied to the cost per litre, which accounts for 25% -35%

Refining costs – The difference between what it cost to buy crude oil and what refined gas sells for in the wholesale market accounts for 10% – 25%

Marketing Costs – This covers the retail margin for expenses and profits of 4% -6%

Distribution – Transportation to various regions is between 21% – 26%

US dollar – Crude is bought and sold in US dollars

Supply and Demand – Predictable impact on the price

So what affects the price range at the pump?

The explanation…

The price of crude oil is the main contributor to the general increase in retail gasoline. Generally, Crude oil prices depend on several factors including worldwide supply and demand, the stability of the distribution network, the value of the U.S. dollar, and the price speculation.

The Organization of the Petroleum Exporting Countries (OPEC), a cartel of 13 oil-rich countries, which produces about 40 percent of the world’s crude oil, exerts significant influence on prices by setting production limits on its members. The United States consumes more oil and refined products (such as gasoline, diesel, heating oil, and jet fuel) than any other nation in the world. 
The demand for crude oil in China has risen with their populations, increased trade, and a growing internal economy. Interruptions in the flow of crude oil through the distribution network can cause gasoline prices to rise, including natural disasters like Hurricane Katrina, the Gulf Coast-BP oil spill, political instability in countries like Iraq, Libya, Yemen, Saudi Arabia, Venezuela, Nigeria, or monetary instability. Oil is traded on the world market in U.S. dollars. When the value of the dollar drops compared to other major currencies, producers earn less and compensate by raising the price per barrel of oil.

Government taxes are the second largest part of retail gasoline prices at the pump.Then you have speculation in the commodities markets where crude oil is traded also drives up the cost. Financial speculators make money on the fluctuations in prices of commodities like oil by placing bets that the price will go up or down.

 Refiners lose money when plunging prices require them to sell gasoline for less than the crude oil they bought. Refining costs and profits vary due to the different gasoline formulation. Refiners blend formulas and such blends are more complex and more expensive to make. Many contain ethanol, an alcohol mixed with gasoline to create a cleaner fuel that can account for up to 15 percent of some gasoline blends.

Retail dealer’s costs include wages and salaries, benefits, equipment, lease/rent, insurance, and other overhead. An individual dealer’s cost of doing business varies depending on location and number of local competitors.

Stations next to each other may have different traffic patterns, rents, and sources of supply that affect their prices. Gasoline often costs more in wealthy neighborhoods, because stations pass along higher real estate costs. Credit card companies also earn 2.5 percent of the transaction cost as opposed to a flat fee, which impacts dealer margins.

Supply and demand creates a predictable impact on the price of gas. The supply of Oil does not come out of the ground in the same form from everywhere in the world. You have a Light to Heavy and Sweet to Sour crude, the price of Oil is quoted as Light / Sweet crude. This is in high demand as it has fewer impurities and takes less to refine into gasoline. But most of the Oil available throughout the world is heavy/sour crude. This is where the most money is for the refineries because they can obtain Heavy / Sour crude for a lower price due to the large supply meaning a higher return on investment but it is a lower quality of crude. Which again is why they mix gasoline with ethanol to help create a cleaner fuel at the pump. Although when you have too much oil on the market the return on investment is cut drastically.

The consumer creates the demand the more cars on the road the more demand for gas. Simple math if you oversupply then the price is lower if you undersupply the price is higher. The consumers will fluctuate based on price but by a very small percentage.

So what we are seeing is the perfect storm between supply and demand, the strong US dollar and a lower commodities market thus creating a lower price at the pump. The cost of doing business has gone up over the last 30 years creating a difference in price at the pump between 1984 and 2016 on the same cost of a barrel of oil. But based on recent profits made in the industry everyone with the exception of the consumer is now  experiencing a loss of revenue.

So I guess you have to pay attention to the price at the pump to make the most of your savings while you can. We all know that this will not last forever at some point there will be a reduction in production and the wheels of profit will start to turn again.

We still really don’t know why the price at the pump can fluctuate so drastically daily as in the image above.  All we can do is laugh and understand that supply would be up and demand would be down at this location.