Gas should be cheaper given oil drop, BMO says
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Dec 15, 2015  |  Vote 0    0

Gas should be cheaper given oil drop, BMO says

The gap between oil and gas prices has widened in the past year, meaning consumers are not reaping the benefits of cheaper crude


Canadian drivers are paying a lot more at the pump than they should given the recent crash in oil prices, according to a Bank of Montreal analysis.

BMO’s Benjamin Reitzes finds a growing gap between gas prices and oil prices since the summer of 2014.

The senior economist said Tuesday he decided to study the correlation after noticing that gas rose last week, even as the price of Brent crude, which is imported for use in gasoline, fell below U.S. $38 ($55 Cdn.) a barrel.

The last time crude prices were that low, in 2008, gas prices fell below 80 cents a litre, so the current average at around $1 a litre seems “odd,” he found.

“Consumers don’t appear to be reaping the full benefit of lower oil prices.”

Seasonal factors – one oft-cited reason for variations in gas prices – are an unlikely explanation, since the gap has persisted since crude began its downward spiral more than a year ago, Reitzes said.

He believes the difference between oil and gas prices suggests that margins for either the intermediary refineries have expanded – meaning they’re not passing along savings to consumers – “and that’s keeping prices higher than they would have been.”

Some large producers are involved in all stages of the process - from crude extraction to refining to retailing and might be taking more profits from the gas prices to make up for lower crude margins, he said.

Wider refining margins are responsible for about 20 per cent of the lack of gas price savings, said Dan McTeague, senior petroleum analyst at

But the weak Canadian dollar, which has fallen alongside plummeting oil prices, is 80 per cent of the reason, costing Canadians about eight cents a litre in potential savings at the pump, he said.

Commodities such as oil and wholesale gasoline are priced in U.S. dollars, and with a loonie being worth just 72.79 cents U.S. Tuesday, it costs a lot more to fill up.

McTeague said Canadians shouldn’t expect greater relief any time soon, especially given that the U.S. Federal Reserve is expected to boost interest rates Wednesday, shoring up confidence in the greenback and putting further downward pressure on the loonie.

“What you see is what you’re going to get,” he said, adding that gas prices will likely stay around 99.9 cents per litre in Toronto until Christmas.

Crude is nly one determinant of pump prices and the markets don’t necessarily move in lock step in the short-term, said Spencer Knipping, crude oil advisor with the Ontario Ministry of Energy.

“But eventually changes in crude stock do show up at the pump but in the short term sometimes crude and gas prices diverge.”

Drivers questioning the cheaper prices south of the border can blame higher taxes and a smaller, less competitive market in Canada, he said.

The comparatively higher gas prices also stem from an increase in demand for gasoline ironically because of cheap oil, he said, as vehicle sales are on the rise and cheaper oil has many North Americans driving more.

Toronto Star

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