You Don't Have to Drive to Care About Oil Prices

If you filled up at the end of May, that was the most expensive time to drive all year. But now it looks like they’ll remain low for the rest of the month, maybe even longer. There are a lot of reasons behind this, but the most important is the fact that the benchmark price of US unrefined petroleum (West Texas Intermediate, known as WTI) saw its price tumble last month by about 30 percent from heights we haven’t seen in years.

Many people have no idea what drives the price posted at the gas station. This leads to confusion and frustration when price swings don’t seem to make sense. It’s important to understand that the cost of the raw material for making gasoline--which is crude oil--is the single biggest thing that dictates how much you pay to fill up your vehicle. It varies depending on where you are in Canada, but here’s how it breaks down:

40-55 percent: crude oil costs (this is what is currently dropping)
25-35 percent: taxes (federal, provincial, municipal and sales)
10-25 percent: refiners' margin (the difference between what refiners pay to buy crude and what they sell it for on the wholesale market, which is influenced by supply and demand)
4-9 percent: retail margin (what it costs to run the gas station, process credit card statements and the retailer’s profit)

There’s a seasonal factor at play as well, which helps to keep prices a little lower in the Winter months. Every year for the past 30 years or so, like clockwork, the federal government has mandated that gas stations have to switch from a Spring/Summer blend at the pumps to a Fall/Winter blend. This switch to a climate-appropriate formulation happens twice a year, on April 15 and again on September 15.

Dan McTeague is a Senior Petroleum Analyst at Gasbuddy.com and he says the cold climate gas formulation is cheaper by about 4 cents a liter because it’s not as pure and contains less expensive additives like butane. This helps you to start your car on the first try even on the coldest days. “In the winter, things are cold and it makes starting a car very difficult so you want to make sure that you have gasoline that’s more volatile and more likely to ignite with less resistance.”

The warmer weather formulation is harder to ignite at higher temperatures and has a higher evaporation point. McTeague says this decreases the “likelihood of volatile organic compounds of low-level ozone creating untold implications for the environment.” In other words, smog. Another bonus to this Spring/Summer blend is better vehicle performance.

McTeague has made a career of keeping tabs on gas prices and offering predictions on where they’re headed in the short-term. He says he doesn’t see anything that would boost the price at the pumps until early next month. The catalyst for that could be the OPEC meeting on December 6, which is when the cartel of oil-producing nations will likely announce a reduction in petroleum production in the hopes of boosting prices.

For readers who don’t drive and don’t follow the ups and downs of the price of oil, he suggests they start. “It will affect them in other ways because a higher or lower price on fuel is an important input cost, and affects the price for just about everything,” he says. “For example, a company transporting food from the food terminal to the grocery store or moving any kind of product. As their prices vary, there has to be a reflection of that input cost to the consumer.”

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