Gasoline prices at the pump in Canada have climbed pretty much all winter, while in the United States they have risen for a remarkable 35 days straight, even as oil prices have see-sawed in recent weeks. The disconnect has enraged consumers, as they fork over nearly $4 (U.S.) a gallon or about $1.34 (Canadian) a litre to fill up their vehicles.
Blame it on the crack spread, industry experts say.
"People automatically point to crude oil as the reason why the pump price has changed or should change," said Michael Ervin, a petroleum industry consultant at Kent Marketing Services Ltd. But it's not always the most important factor. "The increases we're seeing now are entirely attributable to crack spreads," he said.
What are crack spreads?
The crack spread refers to the difference between the price of crude oil that refiners pay, versus the price of petroleum products such as gasoline that refiners produce and sell.
Why are crack spreads high now?
It's partly a seasonal issue. Demand for gasoline typically surges in the spring and summer, as drivers take to the roads more. The increased demand allows refineries to charge more for gasoline, even as oil prices remain relatively stable.
Which companies are benefiting?
The big winners are the refining companies - those like Valero Energy Corp. that transform crude into useable products such as gasoline, diesel and jet fuel. Valero said on Tuesday that it expects a "strong second quarter," as the company restarts some refineries and captures "outstanding margins" from the gap between sour crude prices and refined products. Canadian companies such as Suncor Energy Inc., Cenovus Energy Inc., and Imperial Oil, with refining arms complementing their oil production businesses, will also receive a boost. Profit tied to strictly to oil production, however, will be unaffected by what consumers pay to fill up their tanks because pump prices are not directly linked to oil prices.
Are there not ample supplies of gasoline?
In the United States, draws on gasoline inventories were the highest in 13 years in early April and an unplanned outage at a refinery belonging to Sunoco Inc. in Philadelphia also dented gasoline supplies, according to a note published by UBS Securities. Four per cent of U.S. refining capacity was shut down in Texas City, Tex., this week, including the country's third-largest refinery. Operations belonging to BP PLC, Valero, and Marathon Oil Corp. have all been hit by power outages and some by subsequent fires, owing to rough weather. Wholesale gasoline prices in the Gulf Coast refined-products market then opened 5 cents (U.S) a gallon (3.78 litres) higher on Tuesday.
Can't refiners just increase gasoline production?
Yes, but that takes time and many have recently switched to the flourishing market for diesel fuel as an alternative. Refineries are selling a great deal of diesel, and new refineries are being tailored to produce the product as consumers shift to the greener fuel. Further, growing Third World economies are powered by diesel, and with demand for that fuel outstripping gasoline, the latter can be in short supply, said Ian MacGregor, chairman of North West Upgrading Inc., a company with plans to build a merchant upgrader that would turn bitumen from the oil sands into diesel fuel. "That's a new restriction on gasoline supply," he said.
What are politicians doing about high oil and gasoline prices?
U.S. President Barack Obama, facing discontent south of the border, wants to yank $4-billion in subsidies for energy companies, which are set to roll out rich first-quarter profits. In a letter to congressional leaders Tuesday, Mr. Obama said: "While there is no silver bullet to address rising gas prices in the short term, there are steps we can take to ensure the American people don't fall victim to skyrocketing gas prices over the long term. One of those steps is to eliminate unwarranted tax breaks to the oil and gas industry and invest that revenue into clean energy to reduce our dependence on foreign oil."