Your questions about gas prices answered, part 1

May 05, 2016   | Categories: Canadian Fuels Association, Energy, Fossil Fuels, Fuels
With the summer driving season nearly upon us, we thought it would be helpful to answer some frequently asked questions about gasoline prices. Canadians often ask about gas prices at this time of year, as they plan their summer road trips and look forward to the May long weekend.
 
For those answers, we turned to Jason Parent, vice-president, consulting at Kent Group Ltd. The company provides independent data and analytics pertaining to the petroleum industry as well as consulting and other services.
 
Parent’s specialties include regulatory analysis, petroleum market and price/margin analysis, forecasting and performance benchmarking.
 
Here are some of the most frequently-asked questions, answered by the Kent Group expert.


Why do gasoline prices rise on long weekends?


The fact of the matter is that gasoline prices are no more likely to go up before a holiday weekend than they are any other day of any other week.
 
The Kent Group conducted a study that analyzed price changes preceding long weekends between 2006 and 2014 in nine of the largest markets in Canada, comparing these changes to a parallel measure of non-holiday weekends.
 
We tracked the frequency and amplitude of those changes and our data confirmed the fact that long weekends do not affect pricing in the markets studied, and that these price changes were primarily a function of local price dynamics and changes in the underlying wholesale price of gasoline.
 

Why do gas prices go up even when crude oil prices go down?


Retail gasoline prices generally follow movements in wholesale product prices far more closely than they do crude prices. This is because wholesale refined product prices and crude prices are determined in very distinct markets – each with their own supply and demand drivers. For this reason, it is possible to have gasoline prices rising while crude prices are declining.
 
Crude is a component cost of gasoline production, so averaged over time, the two prices tend to follow comparable trends; however, there is a fairly weak relationship between the day-to-day movement of crude and retail pump prices.
 

Why does the town down the road have cheaper gas than my town?


Distinct retail fuel markets can have varied pricing for a number of reasons including: taxation differences, distribution costs, the presence (and impact) of ‘big-box’ marketers, as well as the unique mix of operators within that market and their diverse pricing strategies. 
 
However, the strongest predictor of ex-tax intermarket price differences is often the average throughput for sites in the market (this means the average volume of fuel sold per site).  This has a significant impact on retail margin requirements in a market – selling less fuel requires higher margins to cover a site’s costs and provide a reasonable return.
 
Need more answers? Check back next week for part two of our fuel questions, answered.
 
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