Understanding gas prices: an overview of competition in the gas sector

Introduction

Gas prices can be confusing and frustrating for consumers. Who hasn't filled up their tank on a Friday, only to see prices fall the following Monday? What causes these dramatic movements in price?

Sometimes, gas prices rise and fall with natural disasters and geopolitical events so large that their impacts are felt worldwide. Other times, price changes are an indicator of local disruptions, where normal gas supplies can't make it through a bad snow storm or a washed-out bridge. And, sometimes, these quick changes in price could be an indicator of competition in the marketplace.  

As an independent law enforcement agency, the Competition Bureau does not regulate the price of gas. However, in order to ensure that Canadian businesses and consumers see the benefits of a competitive gas sector, the Bureau does not hesitate to take action when there is evidence of anti-competitive behaviour. To help provide Canadians with a better understanding of the gas industry, and shine a light on how competition can affect pump prices, the Bureau developed this brief overview.  

Competition in the gas sector

In a competitive market, the supply and demand of a good will determine its price. Prices increase when demand for a certain product is more than what is available in the market. By allowing prices to respond naturally to changes in demand, economic benefits are maximized for Canadians. Suppliers are able to obtain the best value for their products, which are purchased by consumers who value them the most.

Canadian gas demand increases during the summer months as consumers spend more time travelling. This rising demand for gas often results in somewhat higher prices during these peak periods, creating what is called a "seller's market". As the summer driving season ends, and demand decreases, distributors do not need as much gas to meet demand. Gas inventories across Canada increase and the price that consumers generally pay at the pump falls as a buyer's market emerges.

The pump price is made up of four major components: the cost of crude, taxes, refining costs, and distribution and marketing costs. With the exception of taxes, supply and demand plays a role in determining how each of these factors influences the price of gas.

Crude oil:
Accounting for roughly 40% of the final pump price, the cost of crude oil is the largest factor in pricing gas. Crude oil is a globally traded commodity, which means that its price is generally a reflection of the global supply of oil and demand around the world. This price is set in US dollars, and varies depending on the type of crude being sold. Despite being a major producer of crude oil, Canada is responsible for only 5% of the world's crude supply and does not produce enough oil to influence global prices.
Taxes:
Both the federal and provincial governments apply taxes to the sale of gas. Taxes are the second largest factor in the cost of gas and make up about 35% of the pump price. Unlike other factors, gas taxes are set by government policy and are not impacted by competition. Each province is entitled to set gas taxes and as a result the pump price will vary from province to province.
Refining:
The process of transforming crude oil into various products for use by Canadians, such as gas and diesel fuel is called refining. The cost of refining crude into gas contributes to about 17% of the pump price.
Distribution and marketing:
Representing about 9% of the total pump price, this is the cost of transporting gas from the refinery to the wholesaler or service station. It also includes the marketing, overhead and profit for the wholesaler or service station. Once gas reaches a service station it is usually very similar to the gas offered by any other service station, which means many consumers decide which service stations they will stop at based on the pump price. Service stations clearly display the pump price for consumers, and their competitors, to see.

Factors that affect gas prices

Pump price influencers

Price fluctuation may be common as service stations competing for your business may drop their gas prices to match a competitor. In competitive markets, this push to match the lowest competitor can sometimes explain why Canadians see several service stations having the same price.  Service stations that increase their gas prices can push consumers towards other competitors, losing out on the potential profits driven by the sale of goods on the shelves and car washes.  

Gas prices tend to rise in the summer due to increased demand as consumers are travelling more. In the spring, these increases can be further exacerbated by refinery "turnarounds". This is like spring cleaning for refineries, and includes changing the recipe for gas to prevent it from evaporating during the summer, carrying out inspections, and replacing or upgrading equipment to improve environmental performance. During a turnaround, the refinery is not producing gas; this results in less supply, which typically increases prices.

Price regulation

Quebec and the Atlantic Provinces have implemented various types of price legislation to regulate the sale of gas. Quebec uses a price floor, which is the minimum pump price at which retailers can sell gas. On the other hand, New Brunswick and Newfoundland use a price ceiling, or a maximum price, that can be charged for gas. Nova Scotia and Prince Edward Island both use a combination of price floors and ceilings to regulate gas in their respective provinces.

The federal government does not have the constitutional authority to regulate gas prices outside of a national emergency. However, where there is illegal activity, like price-fixing, the Bureau can intervene to level the playing field between competitors.

Natural disasters and supply interruptions

Since crude oil and gas are scarce resources that must be extracted and refined into useable products, they are vulnerable to environmental factors that can disrupt production. Hurricanes and forest fires can disrupt the extraction of crude, damage refineries and slow-down distribution that results in decreased supply at a time when demand increases to power emergency services. The magnitude of the impact depends on the severity and duration of the storm or fire, as well as the amount of time required to recover, including clean-up, damage repairs, and bringing production and distribution systems back online.

For example, during the 2017 hurricane season millions of people were caught in the crosshairs between hurricanes Harvey, Irma, Jose, Maria and others. Hurricane Harvey, for example, was particularly devastating, battering the Gulf Coast and Texas' refining hubs. This resulted in the shut-down of regional oil platforms, refineries and pipelines, which significantly reduced gas and crude oil supply. Demand for crude oil and refined gas, however, does not drop significantly during these weather events. This means that pump prices may increase during weather events to reflect increased scarcity caused by a drop in supply. The Bureau will not hesitate to take action if gas prices fluctuate for other reasons that reduce competition, such as coordinating supply shortages by producers.

How the Bureau fights for healthy competition in gas markets

High prices, or examples where two or more gas stations charge the same price, are not by themselves evidence of illegal activity. This is because competition between service stations can also lead to prices that are similar or identical, and that makes identifying price-fixing cartels difficult. Price-fixing is an illegal agreement between competitors to set prices at a certain amount to deny consumers the benefits of competitive prices and choice. Cartels are also covert by nature and without sufficient evidence of collusion they cannot be prosecuted. Gathering this evidence becomes much more difficult without the help of consumers. 

The Bureau investigates price-fixing and similar anti-competitive behaviour in the gas sector that harms Canadian business and consumers. The Bureau has the power to investigate and recommend the prosecution of individuals and businesses who engage in these types of activities.

The Bureau's track record on enforcement

Starting in 2008, charges were laid against multiple individuals and companies for their role in a price-fixing conspiracy in Victoriaville, Magog, Thetford Mines and Sherbrooke. Additional charges were laid in 2010 and 2012. In total, 39 individuals and 15 companies were charged for their role in the price-fixing conspiracy. To date, 33 individuals and 8 companies have plead or were found guilty with fines totalling over $4 million including $1.85 million in fines against Ultramar Ltd. and $287,583 against Irving Oil.

On March 20, 2012, Pioneer Energy LP, Canadian Tire Corporation and Mr. Gas pleaded guilty to fixing the price of retail gas from May to November 2007 in Kingston and Brockville, Ontario. An extensive investigation by the Bureau uncovered evidence that competitors agreed among themselves to set the pump price at a specific amount. The Ontario Superior Court fined Pioneer Energy LP $985,000, Canadian Tire Corporation $900,000, and Mr. Gas $150,000.

In April 12, 2012, the Bureau secured a guilty plea from Suncor Energy Products Inc. for fixing the price of retail gas from May to November 2007 in Belleville, Ontario. The Ontario Superior Court sentenced Sunoco to pay a fine of $500,000.

The Bureau also pays close attention to mergers that could prevent or reduce competition in the retail gas market. If the Bureau determines that a merger is likely to lessen or prevent competition substantially, it can take action to prevent, dissolve or change the merger.

On March 29, 2016, the Bureau reached an agreement with Parkland Fuel Corporation to resolve litigation related to its acquisition of Pioneer Energy. The Bureau was concerned that Parkland's purchase of Pioneer Energy would reduce competition in certain Ontario and Manitoba markets. Under the Agreement, Parkland committed to sell gas stations in six markets in Ontario and Manitoba and surrender its ability to increase any margin that it earns on the sale of gas in two markets in Manitoba. This agreement ensured that consumers in those markets benefit from competition at the pumps.

In 2017 Couche Tard completed its purchase of CST Brands Inc, the owners of Mac's convenience stores. This acquisition raised concerns about the level of competition in Ontario, Quebec, Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador. As a result, the Bureau required Couche-Tard to sell 366 gas stations to Parkland Industries Inc. To maintain balance, Parkland was also required to sell 9 service stations to MacEwan Petroleum Inc. to ensure strong competition in Ontario. 

How Canadians can help

Canadian consumers play a valuable role in helping the Bureau gather enough evidence to uncover and prosecute price-fixing cartels. In 2005, the Bureau, through a Victoriaville newspaper, learned that a gas retailer was being pressured by his competitors to increase his prices. Through this information and subsequent investigation, the Bureau uncovered and successfully prosecuted a major price-fixing cartel operating in Victoriaville, Thetford Mines, and Sherbrooke, Quebec.

Canadians who work in the oil and gas industry are also protected when they come forward with information about a cartel. Whistleblowers can request to keep their identity confidential and they cannot be dismissed, disciplined or harassed by their employer as a result of providing information. It is an offence for employers to take disciplinary measures, or threaten to do so, against employees that have provided information to law enforcement officials.

The Bureau takes allegations of price-fixing or anti-competitive behaviour seriously and reviews all complaints and tips sent in by Canadians. The Bureau uses these tips and complaints to assist in determining if an illegal cartel is operating within Canada. If you have heard of or have evidence of anyone engaging in a price-fixing cartel, you can contact the Bureau any time at 1-800-343-5358 or write to us using our online form.

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