The retail gas industry is very complex, in large part because gasoline is a global product and is subject to regulation and taxes.
The costs for crude oil, refining, distribution and marketing, as well as taxes all affect the price. The chart below shows how much each of these costs contributes (on average) to the price of gas.
Figure 1: The Average components of the price for a Litre of Gasoline at the Pump in Canada
- Crude oil: 40%
- Taxes: 35%
- Refining: 17%
- Distribution and marketing: 9%
In addition, the gasoline supply chain has several levels, and each one affects prices because each stakeholder adds an amount to cover costs and generate profit. There are four main stakeholders, each of which has a specific role:
- exploration and development companies extract crude oil out of the ground
- refineries turn crude oil into useable forms, like gasoline or diesel fuel
- marketers and wholesalers collect gasoline from refineries, store it, and transport it to retailers
- retailers sell gasoline to Canadians.
The Canadian supply chain
Upstream market
The upstream market is made up of oil and gas exploration and development companies. These businesses explore for, extract, and produce crude oil (also known as petroleum), natural gas, and natural gas liquids.
Crude oil is the primary input for making gasoline and diesel fuel. The quality of crude oil can differ greatly from one oilfield to another. For example, light low-sulphur crude is the easiest to process, so it typically sells at a higher price than heavy high-sulphur, which costs more to extract and process.
Downstream market
The downstream market includes the refining, supply and distribution, and selling of petroleum products.
Refiners. Refining is the manufacturing process that turns crude oil into gasoline, diesel fuels, heating fuels, and other marketable products. Some refineries can process only light crude; some can process heavier crude, but the process is more costly. Once it has been processed, refiners transport the gasoline by ship or pipeline to large storage tanks called terminals.
Wholesalers. Wholesalers bring the gasoline to smaller terminals by truck or rail car, or to major buyers, such as aviation companies, and then to retail gas stations by tanker truck.
Retailers. Retailers sell gas at the pumps.
How the different parts of the supply chain influence price
The table below explains what stakeholders pay to obtain their product, and the factors influencing what they charge when they sell it. Like all businesses in a supply chain, each one adds its own markup, which affects the final price of gasoline at the pumps.
| Stakeholder | What do they pay? | What do they charge? | What factors influence the price charged (in addition to profit margin)? |
|---|---|---|---|
| Oil and gas exploration and development companies | Cost to remove crude oil from the ground | Crude price |
|
| Refineries | Crude price | Rack priceFootnote 1 |
|
| Marketers and wholesalers | Rack priceFootnote 1 | Wholesale price |
|
| Retailers | Wholesale price | Retail price |
|
| End customers | Retail price |
Retail models
The Canadian gasoline retail market is varied in its ownership structure and players. In some cases, refiners sell their gasoline through their own branded retail gas stations. These companies, such as Petro Canada and Shell, are known as integrated refiner-marketers.
In other cases, companies buy gas from refiners and market it under their own brands or a refiner’s brand. These companies are known as non-refiner marketers. Some of these companies are big-box and grocery stores with separate gas bars that use gasoline to attract customers to their stores, often reducing gasoline prices to do so. The following table presents the four most common relationships between marketers and retailers.
| Type of station (and business model) | Prevalence of this type in Canada (2017) | Who owns the station and sets the pump price? |
|---|---|---|
| Independent retailer (retailer buys gas from marketer) | 46% | Retailer |
| Station with commissioned operator (retailer receives a commission [cents per litre] from the marketer on gas that is sold) | 40% | Marketer |
| Marketer-operated (marketer owns and controls the station) | 13% | Marketer |
| Leased (retailer leases outlet and buys gas from marketer) | Approximately 1% | Marketer owns the station BUT retailer sets the pump price |
Supply and demand
Like any commodity, gasoline is subject to the forces of supply and demand. Prices often rise when global supply drops (for example, when oil refineries shut down for maintenance or to wait out a hurricane). Conversely, prices tend to go down when gas supplies increase. Consumer demand also causes swings in gas prices. For example, prices typically go up when demand is higher (for example, in the summer, when more people travel) and go down when demand is lower.
Market differences
Wholesale and retail prices can differ by market, depending on the level of competition. Generally, more competition means lower prices. However, there are many factors that can influence gas prices, such as transportation costs. Without knowing all the facts, it is difficult to know if you’re comparing apples to apples when looking at gasoline pricing in different geographic areas.
Crude oil prices
Depending on their needs, refineries buy different grades of crude oil (also known as petroleum), which impacts prices. For example, if a refinery in western Canada were using a higher-priced crude than a refinery in eastern Canada, the western refinery would likely charge more for its gasoline.
Refinery capacity
Refineries each have a limited capacity to produce their products. When demand nears this limit, bidding in the market will cause the refinery’s supply price (known as the rack price) to rise, because the gasoline becomes harder to get.
Taxes
Within Canada, provincial governments apply different taxes to gasoline sales. These differences contribute to price variations from province to province.
Exchange rate
Canadian wholesalers compete for supply with their US counterparts. Thus, when the Canadian dollar is worth less than the US dollar, Canadian wholesalers will have to pay relatively more for gasoline, causing rack prices to be higher in Canada than in the US.
Distribution costs
Typically, the greater the distance from the refinery or terminal to the retailer, the greater the distribution costs.
Volume sold
Gas stations that sell more, such as those in cities, have lower per-litre operating costs than do those in more remote areas. These lower costs can result in high-volume gas stations offering lower prices.
Additional revenue sources
Gas stations with convenience stores can use profits from non-gas sales to subsidize the cost of wholesale gasoline (or diesel), allowing lower pump prices.