Gasoline Prices

Well, the Family Day long weekend is upon us and gasoline prices here in Thunder Bay have spiked up again.  Last week, gasoline in Thunder Bay was about $1.17 a liter and right now it is about $1.30 though prices are a bit lower on the south side of town.  Thunder Bay's prices have been among the highest in the country for some time now. 

Like the rest of the country, they have been trending up dramatically since the latter part of the 1990s given the increase in the world price of oil.  On the one hand, we are not alone given that motorists particularly in Vancouver and Montreal seem to be sharing a similar fate.  On the other hand, our average monthly gasoline prices in Thunder Bay are easily 15 cents a liter more than nearby Winnipeg (at a day’s drive, Winnipeg is “near” when you live in Thunder Bay).  

I decided to do some urban comparisons on monthly gasoline prices (regular unleaded at full service filling stations) using Statistics Canada data for 18 Canadian cities for the period 1979 to 2011.  I calculated the “national average price” for these 18 cities and then the regional averages for the Atlantic, Quebec, Ontario, the Prairies and British Columbia.  The national average price per liter in 1979 was 23.6 cents and it rose to 59.2 cents in 1990, reached 63.6 cents in 2000 and was 126.2 cents in 2011.  In 1979, prices tended to be highest in Atlantic Canada, followed by Ontario, then Quebec, British Columbia and then the Prairies.  By 2011, prices tended to be the highest in British Columbia, followed by Quebec, then Atlantic Canada, Ontario and the Prairies.

I plotted the ratio of the regional average price to the national average price and present it below.  The graph shows much more dispersion in the ratios prior to 1993.  Prior to 1993, Quebec and the Atlantic provinces were often 10-20 percent above the national average while the Prairies seem to have been about 10-20 percent below.  Since 1993, the ratios of the regional averages to the national average have been in a much tighter band.  I guess my questions are as follows.  Without engaging in econometric testing for structural breaks, why would 1993 mark the start of such a visual break point?  Does a tighter range around the national average since 1993 mean that gasoline markets in Canada have become more “efficient” and eliminated some of the regional price differentials that existed with better distribution?  Or, does the tighter range mean that gasoline retailers have more market power and have eliminated price fluctuations due to regional market differences?  Perhaps there is another story.  I don’t have an answer. 

Comments

[Y. Msaid]

All I can find is that in 1992 petroleum production started off the coast of Nova Scotia http://www.geohelp.net/history.html
Doesn't seem big enough. Maybe it's NAFTA. There was the National Energy Program in the 1980's that could have reduced efficiency; although I don't know how it operated...

[Determinant]

There is a supply-side answer here. My family used to live in New Brunswick and when the grandparents visited from Ontario they always commented that gas was more expensive. Cars also got poorer mileage. The answer was that Ontario got its oil from Alberta while New Brunswick got its supply from the Irving Refinery in Saint John which imported crude from Venezuela. Different sources do have different barrel prices, for instance Brent (UK) and West Texas Intermediate have different prices.

The prices of Venezuelan and Alberta oil have converged and eastern oil refiners have lost pricing power.

Here's a somewhat nationalist take on oil from Sun Media showing the supply situation. Note we have never piped Alberta Oil east of Montreal.

http://blogs.canoe.ca/parker/general/how-oil-makes-canada-four-or-five-different-countries/

[Joel W]

My understanding is that the Brent-WTI spread is a relatively recent phenomenon due to limited pipeline capacity between the mid-west and the Gulf Coast.

I wonder if Provinces had some sort of trade barriers for gasoline in the 1980s to protect regional refineries. I am not sure, but I think there were more refineries in Canada in the 1980s. A combination of over-reliance on regional refineries and trade barriers could lead to less coherence in price between provinces. But I am obviously just speculating.

[Tim]

Petroleum distribution in Canada is quite convoluted to say the least. One key thing to remember is many of the places that have the cheapest gasoline have the most expensive diesel. In addition some markets such as Calgary have grown so much that they local distribution terminals are at capacity while others such as Thunder Bay are historically very isolated and thus more vunerable to price swings.

Going West to East Vancouver and Coastal BC are dependent heavily on imports of both diesel and gasoline often coming in from the US and Asia. Unique distribution challenges exist in getting petroleum to Vancouver Island and Northwestern BC which can cause locally high prices in those areas. BC "most" of the time is able to bring in excess Gasoline from the Alberta and Praries on the Trans Mountain Pipeline. The Kamloops/Kelowna area is completely dependent of the Trans Mountain Pipeline and thus should be considered in the Alberta/Praries area.

Alberta and the Praries most of the time have an excess supply of Gasoline but are increasing facing diesel shortages. Some of the oil sands upgraders in Fort McMurray do have the ability to "directly" produce diesel which can allieviate the problem in Northern Alberta. Calgary is dependent on a single relatively small refined product pipeline which has to serve Calgary itself, Calgary Airport(jet fuel), but also all of Southern AB and Southeastern BC(Cranbrook/Golden). Kamloops BC and all of SK and MB receive their refined product from Edmonton Refineries over shared pipelines used mostly to export Alberta crude thus demand spikes in these areas can be more easily mitigated by shifting outbound capacity from Edmonton from crude to refined product. The real problem is if you get refinery shutdowns in Edmonton diesel and gasoline shortages can appear quite quickly in the Praries and interior BC.

Thunder Bay is unique in that there is no good way to get product in. You can bring in refined product by rail from the pipeline terminus in Winipeg or direct from Edmonton year round or during the Great Lakes shipping season by barge from Sarnia. The rest of Ontario is served by truck basically from a series of terminals along with 401 corridor Sarnia, London, Nanticoke, Hamiliton, a bunch in the GTA, Belleville, Kingston, Ottawa/Nepean, and someplace else in Eastern Ontario I forget. Ontario especially as you get closer to Michigan and the US Midwest currently has relatively cheap Gasoline due to all the ethanol production in the US(although not as cheap of the Praries). Diesel is also cheaper the closer you get down the 401 to Michigan at a cheaper price than in Calgary but much more expensive than Edmonton(just goes to show you how bad the local supply issues are in Calgary especially for diesel).

Quebec in heavily dependent on imports now but requires Ice Class ships to make deliveries up the St Lawrence. The Maratimes especially Halifax has relatively low prices nowadays despite being fully exposed to world markets. Diesel in Halifax is quite low, more expensive only than in Edmonton and Saskatoon right now. The Maratimes also have the advantage being able to take in fully modern VLCC tankers unlike just about all of the US Ports and the Quebec St. Lawrence ports. The refineries in Atlantic Canada send much of their production down to Boston and New England which is fairly isolated from all of the US refineries due to the Jones Act and limitations in the pipeline network(none of the pipelines from the US Gulf Coast go past NYC).

Here are the current terminal rack prices from Suncor/Petro-Can if anyone wants to take a look.
http://www.petro-canada.ca/en/wholesalefuel/5531.aspx

[Robillard]

@Tim
So it really comes down to proximity to refineries, and the utilization of fuel transportation vectors. That was very informative. Thanks for posting your comment.

[Jean]

Great information! Sorry Joel! But ice-class for ships is not and never was a requirement for ships on the St-Lawrence. This same situation applies I believe to most other northen areas of the Gulf of St-Lawrence. As specified in the Transport Canada regulations.

Rather for winter months ships entering Canadian waters potentially covered by ice are required to pay for a icebreaker assistance fee . Direct assistance is seldom provided to ships but the icebreakers main duties remains to keep the channel and harbours open. Now some harbours if not all, subcontract the ice clearing to tug operators.