Why Are Gas Prices So High in Canada?

Gasoline prices in Canada are a frequent topic of discussion. The cost at the pump is influenced by a combination of interconnected factors, ranging from global market forces to domestic policies and infrastructure considerations. Understanding these components provides clarity on price behavior.

Global Crude Oil Market Influences

The price of crude oil represents the largest component of gasoline costs. Global supply and demand dynamics significantly shape crude oil prices, driving gasoline price volatility. A booming global economy typically increases demand for oil, leading to higher prices, while a slower economy can reduce demand. However, oil producers often cannot rapidly increase production to meet sudden demand surges, which contributes to price increases.

Geopolitical events can disrupt the flow of crude oil and petroleum products, causing immediate price reactions in sensitive oil markets. Major oil-producing organizations, like the Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+), influence global oil prices by coordinating production policies. OPEC+ decisions to cut supply can lead to an immediate spike in oil prices. International benchmark crude prices, such as West Texas Intermediate (WTI) and Brent Crude, reflect these global market conditions.

Canadian Taxation and Levies

Various taxes and levies imposed by different levels of government in Canada contribute significantly to the final price consumers pay for gasoline. The federal government applies an excise tax on gasoline, which is a fixed rate of 10 cents per litre. This fixed tax is applied irrespective of the gasoline’s price. Additionally, the federal Goods and Services Tax (GST) of 5% is applied to the cost of fuel, including the federal excise tax and provincial road taxes, resulting in a “tax-on-tax” effect.

Provincial governments also levy their own fuel taxes, and these rates vary considerably across different regions of Canada. For example, Alberta’s provincial fuel tax is 13 cents per litre. Some municipalities, such as Vancouver, Victoria, and Montreal, may impose additional local taxes on gasoline. These regional tax differences are a primary reason for price variations between cities and provinces.

The federal carbon pricing system, known as the “fuel charge,” is applied to fossil fuels like gasoline to reduce greenhouse gas emissions. As of April 2024, the federal carbon tax is set at $80 per tonne of CO2 equivalent. This tax increases annually and is typically passed on to consumers. Provinces and territories can implement their own carbon pricing systems, provided they meet federal minimum standards; otherwise, the federal system is applied.

Refining and Distribution Expenses

After crude oil is acquired, it undergoes a complex process of refining and distribution before it reaches the consumer. Refining crude oil into gasoline involves operational costs, maintenance, and the complexities associated with processing different types of crude. For instance, lighter crude oil is often easier to refine into gasoline, while heavier crudes require more intensive processing. Canadian refineries often use imported crude oil due to transportation costs and the availability of specific crude qualities.

Once refined, gasoline must be transported from refineries to distribution terminals and then to retail stations. Pipelines are generally the most cost-effective method for large volumes over long distances, but rail and trucks are also used. The costs of transportation can vary based on geographical factors and the existing infrastructure, influencing regional price differences.

Gas stations incur their own operating expenses, which include rent, utilities, labor, and a small retail margin. While these stations operate on thin profit margins for fuel sales, they often rely on ancillary sales from convenience stores or car washes to enhance overall profitability. These combined refining, transportation, and retail costs contribute to the final price consumers pay at the pump.

Impact of the Canadian Dollar

The value of the Canadian dollar relative to the U.S. dollar influences gasoline prices because crude oil is primarily traded and priced in U.S. dollars on international markets. When the Canadian dollar weakens against the U.S. dollar, Canadian refineries and distributors must spend more Canadian dollars to purchase the same amount of U.S. dollar-denominated crude oil. This effectively increases the cost of the raw material for gasoline production, leading to higher prices at the pump. Conversely, a stronger Canadian dollar can help mitigate price increases by making U.S. dollar-priced crude oil less expensive in Canadian currency. The exchange rate is a significant factor that contributes to the overall cost, reflecting the interconnectedness of global commodity markets and currency valuations.