What Drives the Price of Gasoline?

By: Tiffany Richmond

If you own a mobile vehicle, then you’ve been paying attention to the prices at the pump. Gasoline prices have been looming around $1.110 per litre with no future signs of relief. So what drives the price of gasoline?

I’ve taken this question to the experts at Energy Advantage. Here is what they had to say.

Why does the price of gasoline increase?
In order to answer this question it’s important to understand what is included in the price of gasoline. It includes three main drivers. The cost of crude oil (44%), refining and marketing costs (23%), and taxes (33%).

Since gasoline is made from crude oil, when the price of crude oil increases the prices of gasoline will also rise. Usually refining and marketing costs and taxes are fairly stable, however distribution lines can be disruption or down for maintenance and taxes can increase, like the recent harmonized sales tax in Ontario and British Columbia, which can make gasoline prices raise even when crude oil prices are down.

When does the price gasoline increase?
Gasoline prices are affected by supply and demand. More demand, like in the summer vacation season, drives higher prices. Typically demand is less in the winter, however some provinces see higher prices from heating oil demand, mainly in Eastern Canada.

Oil prices are also affected by oil prices future, which are traded on the commodities exchange. These prices fluctuate daily, depending on what investors think the price of oil will be going forward.

Does the price of the Canadian dollar affect gasoline prices?
It can be said that when the Canadian dollar declines the price of crude oil increases, therefore increasing the price of gasoline. This is explained further below.

Generally when the state of the United State’s economy declines, the price of crude oil will also decline, decreasing the price of gasoline. This affects the Canadian dollar because investors will view the United State dollar as a risk and turn to the Canadian dollar to buy, increasing the price. If the United States economy booms, it will push the price of crude oil up and the Canadian dollar down, as investor start buying more United States currency over Canadian.

What is the short term forecast of gasoline prices for 2011?
It’s forecasted that the average retail gasoline price will be in the area of CDN $0.95 to $1.05 per litre. Prices will remain around this level due to ample inventories, spare refining capacity, and lower seasonal gasoline demand.

The average price of crude oil will be between US $75 and US $85 per barrel. Oil inventory and spare production capacity remain at high levels due to an increase in production in 2010. Though there is a supply cushion right now, it will begin to disappear in 2011 as predicted demand growth will outpace production. This could then push the price of crude oil up as supply diminishes.

Tiffany Richmond is an enthusiastic marketing guru and is responsible for online marketing strategies at Energy Advantage Inc.

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